Transfer test

It is critical that local authorities do not forget employment law obligations – and particularly TUPE and TUPE-Plus – when outsourcing, writes Graham Richardson.

As the government considers ways of making savings to tackle the deficit, local authorities will inevitably come under increased pressure to cut costs. There have already been a number of headlines about local authorities coming up with innovative ways to reduce their spending, and this is a trend which looks set to continue.

One of the ways in which authorities are looking to save is through outsourcing. Indeed, over the last few weeks we have seen news reports of Suffolk County Council’s plans to slash its budget by almost 30% by outsourcing most of its services. The press has also reported equally radical plans from a north London primary school to outsource some of its maths teaching to India, with teachers based over 4,000 miles away providing one-to-one tuition to pupils.

Outsourcing is likely to be increasingly used by local authorities as a way of providing a public service more economically, although doubtless many of the schemes devised by authorities will not be as attention grabbing as those described above.

However, there are key aspects of employment law that councils will need to consider before undertaking to outsource services. For example, outsourcing a service is likely to trigger the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) with important employment law implications for local authorities and staff, as well as contractors.

How is outsourcing affected by TUPE?

TUPE applies to protect employee rights upon a “service provision change”. This occurs, subject to a few exceptions, where there is an organised grouping of employees situated in Great Britain which has, as its principal purpose, the carrying out of the activities concerned on someone’s behalf, and one of the three situations described below applies:

1. activities cease to be carried out by that person (“a client”) on his own behalf and are instead carried out by another person (“a contractor”) on the client’s behalf, or
2. activities cease to be carried out by a contractor on a client’s behalf and are instead carried out by another person (“a subsequent contractor”) on the client’s behalf, or
3. activities cease to be carried out by a contractor or subsequent contractor on a client’s behalf and are instead carried out by the client on his own behalf.

Therefore, TUPE frequently applies not only to an initial outsourcing situation, but also to a subsequent generation outsourcing situation, where a service contract transfers from contractor A to contractor B. In addition, TUPE frequently applies to an insourcing situation where a service is taken back in-house by the authority.

Where TUPE applies, the transferred employees have all their employment terms (with few exceptions) transferred to the new employer, including their continuous employment and the new employer will inherit almost all pre-transfer employment liabilities, even where it had no involvement in the pre-transfer legal breaches.

“TUPE plus” and public sector outsourcing

Where a local authority is engaged in an outsourcing process, the Cabinet Office Statement of Practice – Staff Transfers in the Public Sector (revised 2007) and the Code of Practice on Workforce Matters in Local Authority Service Contracts (2003) are likely to apply in addition to TUPE. As these documents are considerably more onerous than the normal requirements of TUPE, they are often referred to as “TUPE plus”.

Among other things, TUPE plus provides added pension protection for staff and added protection for new joiners who work alongside the transferring workforce. It often requires public authorities to act as if TUPE applies (and to require contractors to do the same) even if it does not apply as a matter of law.

The Code of Practice states that its terms should form part of the service specification and conditions to all outsourcing contracts to which it applies.

It is possible that some or all of TUPE plus may be withdrawn or watered down by the government in the future, but at the time of writing it remains fully in place.

What should local authorities be watching out for?

• Where TUPE applies to an outsourcing situation, the employment of staff caught by the regulations will transfer automatically on the transfer of the services, together with employment liabilities in connection with those staff.
• Ensure that information and consultation with employee representatives pre-transfer is properly dealt with in compliance with TUPE and TUPE plus. Compensation for failure to inform and consult can be very expensive.
• Bear in mind when outsourcing a service that there are likely to be at least two TUPE transfers – one when the service starts and one when it ends. It is important to address both TUPE transfers in any outsourcing agreement.
• Make sure that you fully understand any pensions liabilities that you may incur on or after a TUPE transfer, and that where necessary, appropriate protection is included in the outsourcing agreement. Pensions liabilities can be very substantial.
• Be aware that if an employee resigns or objects to transferring pre-transfer in protest at plans that the contractor has post transfer, they may have a claim for constructive unfair dismissal, and liability for such a claim may remain with the authority rather than transferring to the contractor. Consider requesting an indemnity from the contractor in relation to any claims arising out of their post-transfer plans.
• If you take a service back in-house when the outsourcing agreement terminates, it is likely that staff will transfer back to you. If you engage a new outsourced provider instead, then the staff are likely to transfer to that provider. However, the new provider will probably look to you for indemnities. By then it may be too late for you to obtain indemnities from the outgoing contractor, so ensure you obtain them in the outsourcing agreement.
• If you are outsourcing a service, consider whether to restrict the contractor’s conduct of staffing issues in the final period of the contract. It has been known for contractors, once they know that they are losing a contract, to take their best staff off that contract and put ‘unwanted’ staff onto it instead, in an attempt to offload them cheaply to a competitor. Therefore, consider including provisions in the outsourcing agreement preventing changes to the workforce or employees’ terms and conditions of employment in the final period of the contract without your consent.
• If the contractor may assign or subcontract some or all of the services, consider ensuring that they continue to be required to give indemnities under the outsourcing agreement. You may also wish to include a provision in the outsourcing agreement requiring the contractor in such circumstances to procure that any new provider has the same obligations to the authority as the contractor, including the obligation to give indemnities. It is important to avoid a situation where the authority loses its contractual protection in relation to employment liabilities as a result of the contractor having subcontracted all or part of the services.
• You may also wish to include provisions in the outsourcing agreement requiring the contractor to provide specified information about staff engaged in the services on request, and to warrant its accuracy. This information may be essential for retendering purposes.
• Be aware that fragmentation of a service may prevent staff from transferring under TUPE. Where a service is transferred to a number of providers rather than to one, it may be the case that it is not possible to say which of the new providers any given member of staff should transfer to. In such a situation it is possible that staff will not have a right to transfer and instead there may be a redundancy situation. If possible, such issues should be identified and addressed in advance.
• Obtain legal advice at an early stage so you are clear on your organisation’s potential exposure and how its position can be best protected. In many cases, it will be essential to have appropriate legal provisions regarding employment liabilities included in the outsourcing agreement.

What if local authorities don’t comply with TUPE?

If you fail to comply with TUPE, ignore it or overlook it, various legal claims may be brought by employees or their representatives. For example:

• to establish that their employment has automatically transferred to the new service provider, with their existing terms and conditions in place
• against the new service provider in relation to pre-transfer legal breaches committed by the authority or previous service provider
• against either or both of the previous or new employer for unfair dismissal
• against either or both of the previous or new employer for failure to inform and consult in accordance with the requirements of TUPE, or
• against the authority in the event that the authority takes the service, or part of it, back in-house at some later date.

Where TUPE applies in an outsourcing situation, the old employer has a legal obligation to provide specified information to the new employer in relation to any staff who have a right to transfer. This must be provided in writing at least 14 days before the transfer, and there is no maximum liability for failure to comply. This obligation under TUPE exists even where there is no contractual relationship between the old and new employer.

Although outsourcing is frequently introduced as a cost-saving measure, there is a risk of it becoming quite expensive for an authority if it does not properly consider the employment law issues and take appropriate steps, including having the necessary legal protections in place in an outsourcing agreement. Local authorities should ensure they fully understand all of the employment law implications before embarking on an outsourcing process.

Graham Richardson is a Director in employment law at national law firm Dickinson Dees LLP (www.dickinson-dees.com). He can be contacted on 0191 279 9456 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..