The different challenges presented by the application of TUPE in insolvency situations is covered in our article here. In this Q&A we aim to delve a little deeper into the rules on consultation, as well as changing terms and conditions of employment of transferring employees, where the outgoing employer is in administration or subject to insolvency proceedings.
All of the answers below, unless otherwise stated, assume that the business is being bought by way of an asset purchase and is already in administration with administrators having been appointed.
Do I still have to inform and consult with transferring employees where the business being bought is insolvent?
Yes. The rules set out in TUPE requiring that information and consultation is carried out with representatives of affected employees apply in exactly the same way where the business being bought is subject to ‘relevant insolvency proceedings’ (meaning, generally, insolvency proceedings such as administration which are not instituted with a view to the liquidation of the assets) as it would were the business not insolvent.
The sale needs to complete quickly, what is the risk if I don’t undertake any consultation?
TUPE sets out that representatives of affected employees (or the affected employees themselves if no representatives are appointed or in place) can bring Employment Tribunal proceedings claiming up to 13 weeks’ gross pay per employee if there is a failure to comply with the information and consultation requirements set out in TUPE. There is no requirement that employees have to suffer any loss in order to make this claim. They may well be happy that the business has been saved but they would still have the right to bring this claim.
There is a defence if it can be shown that there were special circumstances making it not reasonably practicable for information to be given or for consultation to take place. However, the fact that a business is insolvent and the commercial pressures that go with such a situation is unlikely, on its own, to be regarded as ‘special circumstances’. The defence is narrowly construed. The Tribunal will always take account of what has been done and this can be important in limiting liability so, even if time pressures do not allow for as full a process to be followed as would be hoped, all efforts should be made to do whatever is able to be done in the timeframes allowed.
Where I am buying a business out of administration and TUPE applies, am I allowed to change the terms and conditions of employment of transferring employees?
The rule under TUPE is that changes to terms and conditions of employment which are by reason of the transfer will be void regardless of whether the employees in question agree to them. This leads to an on-going risk that they could be challenged in the future. Changing terms and conditions in such circumstances is, therefore, fraught with risk. Any attempt to dismiss and offer re-engagement as a means of implementing changes risks not only a future argument that such changes are void in any event but also that employees will refuse the offer of re-engagement and claim automatic unfair dismissal on the basis that their dismissal is by reason of the transfer.
This rule has, however, been relaxed in recent years where the transferring employees are employed in a business which is the subject of relevant insolvency proceedings. TUPE states that changes can be made with the agreement of trade union or employee representatives if a set process is followed, provided that the sole or principal reason for the change is the transfer itself and must be made with the aim of safeguarding employment opportunities by ensuring the survival of the undertaking or business or part of the undertaking or business.
What process do I need to follow if I want to change the employment contracts of transferring employees in these circumstances?
Any changes must be agreed with appropriate representatives of the employees. If an independent trade union is recognised for collective bargaining for any of the affected employees, then the change must be agreed with them. In other cases non-union employee representatives can agree the changes. If there is no recognised trade union then there are additional procedural steps which must be followed as the agreement which records the changes must be in writing and signed by each of the employee representatives and, before the agreement is signed, the employer must provide each employee with a copy of the agreement and a guidance document providing them with enough information to understand it.
Does each individual employee need to agree to the changes to terms and conditions for them to be effective?
No. These are collectively agreed changes. They are agreed and effective without individual consent being required. If there is no recognised trade union then individual employees must be provided with a copy of the agreement to vary terms and conditions before it is signed by the employee representatives but they have no right to object to the changes. They are provided for information only.
Does the purchaser have to be the one to make these permitted changes or can they be made by the seller and/ or insolvency practitioner?
The relaxed rules applicable to changing terms and conditions of employment in an insolvency situation apply whether the changes in question are made by the out-going employer, an appointed insolvency practitioner or the purchaser.
When buying a business from an administrator who has made changes to the T&Cs of the employees, what should I be aware of?
You are right to be wary about changes which have been made to terms and conditions of employment by the appointed administrator. If the changes have been made by reason of a transfer (or an intended transfer) then they would generally be void under TUPE. However, if the administrator has followed the relevant rules which allow for changes to terms and conditions by reason of a transfer in circumstances of insolvency then any risk is significantly reduced as you would be inheriting genuinely collectively-agreed varied terms. As part of your due diligence you should ask for the agreement reached and, if there is no trade union, for evidence that copies were circulated to employees (along with guidance) prior to the agreement being signed.
In practice, how often are these relaxed rules used in sales out of administration?
In our experience, the procedural formalities required to enact collectively-agreed changes to terms and conditions coupled with the urgency which often accompanies sales out of administration means that these relaxed rules are not often used. However, it is important to note that they apply to changes which are made following a transfer and not just at the time of a transfer (provided they are by reason of the transfer). Therefore, any purchaser should take the time post-sale once the dust has settled to consider whether they wish to undertake a process of collective variation before the passage of time means that reliance on the changes being ‘by reason of the transfer’ becomes more difficult.