What Happens To Employees On A Business Sale? - Jonathan Lea Network

What Happens To Employees On A Business Sale?

When a company sells its underlying business (instead of a share sale when all assets and liabilities are transferred) by way of an asset sale then it is extremely likely that the Transfer of Undertakings (Protection of Employment) Regulations 2006 will apply (otherwise known as “TUPE”). TUPE acts as a form of protection for employees whereby their contracts of employment are automatically transferred to the buyer.

When does TUPE apply?

TUPE applies to a “business transfer” which involves an economic entity being transferred and retaining its identity post-transfer.

TUPE applies to employees of businesses (of any size) in the UK. The business could have its head office in another country, but the part of the business that’s transferring ownership must be in the UK.

When TUPE applies:

  • the employees’ jobs usually transfer over to the new company (although an exception might be if they’re made redundant).
  • their employment terms and conditions transfer.
  • continuity of employment is maintained.

The impact of TUPE

If TUPE applies, TUPE introduces three main requirements into the asset sale process:

  • The employees will be automatically transferred to the buyer, who takes on the employees rights, liabilities and any obligations.
  • The protection of the employees from being dismissed in connection with the TUPE transfer.
  • An obligation to inform and consult the affected employees and/or their representatives.

Automatic transfer

Under this principle the employees contracts of employment will be automatically transferred to a buyer under their existing terms (except pension rights). In addition other connected policies will also be transferred, as long as those policies are connected with the employees contracts.

The buyer steps into the shoes of the seller upon completion and all of the seller’s rights, powers, duties and liabilities in connection to the transferring employee contracts are passed to the buyer. In addition, the seller’s acts or omissions are passed on and treated as being done by the buyer. This may include liabilities which can involve potential claims such as equal pay and accrued debts owed to the employee.

If the seller at any point prior to completion recognised a trade union, that recognition usually transfers to the buyer as long as the group of employees maintain an identity distinct to that of the remainder of the seller’s undertaking after the transfer. There isn’t a set definition regarding what a distinct identity is but the ECJ has given guidance that it would be where the assets being transferred (including the employees) have the power to organise work independently within the entity. It is always open to a buyer to not recognise any trade union, although this will leave them open to industrial action.

If the employees are involved in profit share or share schemes then these may not be transferable. However, if any such schemes are regularly used over a long period of time and form a significant part of an employees benefits package, then this may point towards the scheme being transferable.

The buyer will not be able to make any changes to the employees terms of employment unless:

  • The reason for the changes is an an economic, technical or organisational (“ETO”) reason (see below for what exactly that may involve); or
  • The reason for the changes is the transfer, but the terms under the contract allow the new employer to make the change.

Protection against dismissal

Any dismissals will be automatically unfair if the sole or principal reason for the dismissal was the transfer itself. If the reason behind the dismissal was instead an ETO reason, then the dismissal will instead be deemed potentially unfair. In order to establish the fairness of such a dismissal the following factors must be considered:

  • Whether the sole or principal reason for the dismissal was as a result of the transfer.
  • Whether the employer can establish an ETO reason behind the dismissal.
  • If an ETO reason is established, whether the employer has acted reasonably and can use the ETO reason to justify the dismissal.

An ETO reason must result in changes to the workforce whether that is:

  • A change of location (still capable of being potentially unfair);
  • The employee’s duties and responsibilities (for example due to differences between organisational structures; or
  • The number of employees (if they are genuine redundancies).

Examples of successful ETO reasons include:

  • Where there is no way to pay the workforce under the company’s assets, reducing the workforce prior to a transfer is an ETO reason.
  • Dismissals with a view to enable the business to continue trading will also be an ETO reason.

Examples of unsuccessful ETO reasons include:

  • Dismissals in order for a sale to go through, where those dismissals have nothing to do with the running of the business.
  • Dismissals to make a business more attractive for investment if the business is under administration.

Protection against dismissal also applies to the situation where an employee resigns as a result of a repudiatory breach or of substantial changes to the employee’s working conditions to their detriment.

A repudiatory breach could involve the buyer’s intention to make significant changes to the terms of the employees’ contract.

Substantial changes to the employees working conditions to their detriment is very fact-dependent but involves a variety of situations other than simply changing terms and will usually have to involve the major relocation of the workplace resulting in significant expense to the employees. Please note that a minor relocation will now likely qualify as an ETO reason.

The special protection against dismissal under TUPE applies to all employees under the transferor and transferee, both before and after the transfer. The one necessity in order to claim unfair dismissal as a result of the transfer and for the special protection to apply is that an employee must have had a continuous period of employment, with either the transferor or transferee, for at least 2 years.

In the event of an employer establishing an ETO reason then the dismissal will be viewed as potentially fair and the normal laws surrounding unfair dismissal will apply.

Obligation to inform and consult

Both the buyer and seller are obliged to inform (and in some cases consult) with recognised trade unions or any elected employee representatives (if no trade unions are recognised) over who may be affected and what actions could affect them in connection with the transfer. If there are no recognised trade unions or elected employee representatives then the obligation to inform (and, if appropriate, consult) must involve new employee representatives specially elected for the transfer, who must be elected following detailed rules and regulations.

The duty to inform applies to every TUPE transfer and involves:

  • Providing information regarding the facts of the transfer.
  • Providing information regarding the legal implications of the transfer such as the employees legal rights and whether TUPE is likely to apply.
  • Providing information regarding the economic implications of the transfer such as any impact on the employees pay.
  • Providing information regarding the social implications of the transfer such as a change in working hours.
  • The measures and actions that are expected to be taken by both the buyer and seller in relation to the transfer.
  • The information must be delivered or sent by post to the appropriate representatives, or the trade union’s head office. It is best practice to deliver any information in writing.
  • The duty to provide information only applies to the representatives, not to the employees personally.

The obligation to consult the appropriate representatives with the view to seeking agreement to any intended measures only applies where an employer envisages that they will take measures in relation to an affected employee, in connection with the transfer. In practice this means the employer must negotiate with the appropriate representatives in good faith to reach agreement over any intended measures or proposed redundancies.

The Department for Business, Energy & Industrial Strategy has guidance as to who qualifies as an affected employee and states that the categories of affected employees can involve:

  • Employees that will be transferred.
  • Employees who aren’t being transferred but whose jobs may be affected.
  • Employees whose jobs may be affected due to the transfer.

Please note that if your business has fewer than 10 employees, the rules are relaxed and you may inform (and , if necessary, consult with) employees directly.

If these obligations aren’t complied with then both the buyer and seller may in certain circumstances be held jointly and severally liable to pay compensation of up to 13 weeks uncapped pay to any affected employees. Those who can claim include affected employees, employee representatives and trade unions depending on the failure.

Any claims for such a failure must be brought within three months of the relevant transfer.

What happens when TUPE doesn’t apply?

If TUPE isn’t applicable to an asset sale then employees won’t automatically transfer, although a new owner may agree to taking them on should the employee wish to transfer, in which case their current employment will continue.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2023. 

About Jonathan Lea

Jonathan is a specialist business law solicitor who has been practising for over 18 years, starting at the top international City firms before then spending some time at a couple of smaller practices. In 2013 he started working on a self-employed basis as a consultant solicitor, while in 2019 The Jonathan Lea Network became a SRA regulated law firm itself after Jonathan got tired of spending all day referring clients and work to other law firms.

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