TUPE, an acronym for Transfer of Undertakings (Protection of Employment), is United Kingdom–derived legislation that has a fascinating effect on U.S.-headquartered, global companies’ legal, human resources, and business functions. In particular, TUPE laws are designed to protect the rights of employees of companies that are being sold as asset sales. Many other countries have enacted their own equivalent of TUPE.
TUPE laws are triggered when there is a sale of a business whose employees are based in a country with TUPE protections. An underappreciated feature, however, is that TUPE also may come into play in transactions that involve the outsourcing of functions, bringing functions back in house, or re-tenderings (i.e., moving a function from one external provider to another). The impact of noncompliance with any applicable TUPE legislation can be significant and, in some cases, can negate the commercially driven benefits of a transaction. As a result, in a world where global organizations are increasingly contemplating outsourcing and similar transactions, it is important to assess any employee-related impact before a definitive decision is made. Failing to do so may result in either party to the transaction facing the prospect of defending employee claims in foreign tribunals.
TUPE legislation was born out of the European Union’s Acquired Rights Directive, which was passed in 1977 to protect ongoing employment rights within a business unit that was being sold. The Acquired Rights Directive required that workers were entitled to maintain their jobs in the sale of a business under the same terms and conditions as those agreed upon with their original employer. Per the Acquired Rights Directive, all European Union countries were required to adopt their own equivalent of TUPE. The United Kingdom did so by enacting the TUPE legislation initially back in 1981 and renewed it in 2006. The United Kingdom’s TUPE legislation is widely regarded as the benchmark not only for the European Union countries but also for other countries that have decided to implement similar protective legislation.
The Acquired Rights Directive was not very prescriptive or detailed in terms of what constituted a relevant transfer of business assets for these purposes or how to determine which employees will be impacted or covered. Because the Acquired Rights Directive provided only minimum protective standards, these questions were, by and large, left to each European Union country to decide. Despite these country-by-country differences, there are five fundamental elements that apply consistently. Having a basic understanding of these five elements, together with a grasp of the purposes underlying them, will help lawyers avoid protracted and costly litigation for their clients in foreign labor courts.
The Five Fundamental Elements
First, when the transaction in question is complete, the relationship (including all terms and conditions) of all employees who are assigned to the business being sold will be transferred automatically from the seller to the buyer. Typical TUPE provisions assign an employee to the business unit if the employee spends 50 percent or more working hours within such business unit. Employees who meet or exceed the 50 percent threshold are regarded as in-scope for a TUPE transfer. Employees who don’t meet the 50 percent threshold are considered out-of-scope and would remain in employment with the seller.
Second, the seller must provide certain information about the impacted employees to the buyer ahead of the closing of the contemplated transaction so that the buyer has an adequate opportunity to assess what it needs to put in place to be able to continue with the employment of those it is about to inherit.
Third, both the seller and buyer are required to engage in an information and consultation session prior to closing with representatives of the employees who are going to be impacted by the transaction.
Fourth, impacted employees must have an opportunity to object to having their employment relationship transferred to the buyer. This usually occurs as part of the information and consultation exercise. The consequence of an employee objection differs significantly from country to country. Some countries’ legislation provides for employment to continue with the seller while other countries’ TUPE laws provide that there is a mutual termination of employment between the objecting employee and the seller.
Fifth, the impacted employees’ terms and conditions remain largely the same, and the buyer’s ability to alter them is extremely limited. For example, changes to key terms and conditions like salary and working hours by either buyer or seller in connection with the transfer are prohibited unless specific exceptions apply. Similarly, it is very difficult for either buyer or seller to alter the terms under which an employee can be discharged if such alterations are deemed to be in connection with the transfer.
What Trips Up Lawyers and Human Resources
Since the Acquired Rights Directive was enacted, most lawyers, human resources practitioners, and business leaders have become accustomed to the notion that employees assigned to a business being sold automatically will be transferred to a new contract so long as the buyer intends to continue to operate that business. What continues to catch such professionals unaware are transactions other than a permanent sale of a business unit that also may fall within the remit of a particular country’s TUPE laws. For example, the United Kingdom’s TUPE laws expressly cover outsourcing, bringing functions back in house, and re-tendering to a different external provider as conferring employee rights.
The scope of liability for TUPE noncompliance also differs by country. Consequences can be significant, wide-ranging, and, in some cases, serious enough to negate any commercial benefits of the transaction itself. For example, liability for failing to provide the required information to an impacted employee or for failing to meet the information and consultation obligations could result in fines on a per-employee basis. The larger the number of employees whose TUPE rights are violated, the larger the amount of potential fines. Liability also lurks in potential unfair dismissal or reinstatement claims, in which employees can lodge TUPE claims in the country’s labor court against either the buyer or the seller. Potential remedies include the forced rehire of workers that the buyer or seller did not expect or intend to employ.
TUPE laws loom among the issues faced by any company conducting business outside the United States. It is therefore vital to be aware of whether your client’s operations or transactions may be implicated by TUPE legislation.