Buying a business – the potential pitfalls

You probably already know that employees have a number of rights under TUPE laws.

However, you may not be aware that employers face a number of pitfalls when buying a business, which could result in huge fines if ignored.

What is TUPE?

Transfer of Undertaking (Protection of Employment) Regulations 2006/2014, commonly referred to as TUPE, applies when there is a transfer of business or services from one employer or service provider to another.

TUPE applies regardless of the size of the transferred business, whether it is in the public or private sector and whether or not it has any profit motive underlying the activities.

• Employer: Transfers from transferor to transferee all employees assigned to the business being transferred.
• Employee: Transfers all the transferor’s rights, powers, duties and liabilities under or in connection with employment contracts of transferring employees.

What do employers need to do?

1. Information and consultation

Under TUPE,  there are significant information and consultation obligations for both the transferor and the transferee.

The outgoing and incoming business must inform on certain matters such as changes affecting the employment relationship or matters relating to collective agreement.

The penalty for non-compliance is up to 13 weeks’ pay per affected employee.

2. Employee liability information (ELI)

As well as the requirement to inform and consult, the old employer must give information about the transferring workforce to the new employer.

The information must include:

• the identity and age of the employees who will go across,
• their main contractual term
• any relevant collective agreements
• any disciplinary action or grievances instigated within the preceding two years
• any legal proceedings brought by the relevant employees in the preceding two years
• any legal claims which the old employer has reasonable grounds to believe an employee may bring.

This information must be supplied at least 28 days before completion of the transfer.

The old employer’s obligation to provide information about the transferring workforce does not always give the new employer all the information it needs.

So, in practice, the incoming employer ought to make specific enquiries at an early stage in order to acquire comprehensive details of the operation, the employees and any liabilities.

What protection is there for new employers?

It is important that the new employer protect itself by use of the outsourcing contract or business sale agreement -whichever is relevant.

This protection could be in the form of:

• A “warranty” – a legal statement that particular facts are correct. If a warranty turns out not to be true, a claim for damages could be brought.
• “Indemnities” – a contractual promise to compensate the other party for specific losses or damage suffered.

If the transfer is a business sale, this type of agreement or information may be readily available, but what if the transfer comes about through a change in contractors or the outsourcing of activity/services?

In this situation, a new company bidding for the contract is in a more difficult position to obtain the information.

The potential out-going contractor may not have any incentive to provide the information and, as it is in danger of losing the contract, it may refuse or it may it may provide the information too late, or it places its difficulty employees on the ELI list.

Is there anything else new employers can do?

Where there is a failure to inform or consult that a tribunal can award up to 13 weeks’ pay for each employee.

In addition if the old employer fails to comply with the rules on providing the necessary information, an employment tribunal may order it to pay compensation, taking into account any loss sustained by the new employer. However this is not always as straightforward as it sounds.

Refusing to allow employees to transfer in the belief that they were not assigned to the transferring contract is fraught with difficulties.

Except for the protection mentioned above, there is little subsequent protection available to the new employer.

Therefore, it is crucial that following a successive bid that the new employer takes great care and remains vigilant throughout the process.

Moorepay is always available to advise and support on such matters. You can book a consultation or have a look at our employer resources if you would like to know more.

By Francis Scoon