Naomi Sansom: Employment law in outsourcing: TUPE or not TUPE?

Global outsourcing has become an established pattern in many companies’ approach to effective cost cutting and resourcing, particularly in the technology sector. During the 2000s, the trend went from strength to strength as an increasing number of companies found outsourcing overseas to be a cheap and effective means of manning their operations, usually functions such as services and infrastructure, e-business processing and customer call centres.

So how has employment law kept up with this increased trend of migrating employees? Outsourcing in an employment context immediately summons to mind TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006).  A recent trend in employment law has seen TUPE applying to fewer outsourcing arrangements and this article will explore why and the effect of this. It will also consider some of the employment law issues surrounding multi-sourcing and off-shoring.

TUPE in outsourcing: A brief overview

When a business outsources a function, the relevant employees’ employment transfers from the business (the transferor) to the new provider (the transferee). The application of TUPE means that the employees’ employment rights are maintained and can be enforced post-transfer against the transferee.

Parties cannot opt out of TUPE so it cannot be avoided and any attempts to subvert its protections by making changes to the employment contract whether pre- or post-transfer will be void so like it or not, under TUPE, the transferee takes on the employees and, broadly speaking, everything that comes with them.

In an outsourcing context, TUPE will operate where there is an organised grouping of employees carrying out the same activities before and after the transfer.

TUPE in decline – no TUPE if activities are not ‘fundamentally the same’

Last year, TUPE was amended to stipulate that the ‘same activities’ meant activities that are ‘fundamentally the same,’ in line with earlier case law.

In OCS v Jones UKEAT/0038/09, the IT services provided to schools were deemed to be 85 percent the same after they were outsourced to a third party provider (with the remaining 15 percent not being carried out at all after the transfer). In this case, TUPE did not apply as the arrangement fell foul of the ‘fundamentally the same’ test. This may be a relevant consideration in offshoring arrangements where it might be more feasible to argue that, following a change of location and other associated changes, the services are no longer fundamentally the same.

If a difference in the substance of the post-transfer services (even when this is as little as 15%) is sufficient to avoid the application of TUPE, then can these services be arranged deliberately to circumvent its application?  The simple answer is ‘yes’ and this is exactly what businesses can do in order to mitigate the TUPE risk. Of course, in practice an incoming provider may want to take on the employees if it wants to save the time and effort of recruiting and does not have its own bank of employees. There is also the benefit of know how moving across in a TUPE transfer with the existing (experienced) employees.

A note of caution

The EAT case of Qlog Limited v O’Brien UKEAT/0301/13 looked at how far the meaning of ‘fundamentally the same’ could be stretched.

Here, the EAT held that TUPE applied even though Qlog (the incoming service provider) carried out the warehousing and cardboard distribution services differently to the way in which they had been carried out by the previous provider. The outgoing provider owned lorries and hired drivers as part of the provision of the services.  The incoming provider did not own any vehicles so this division of the services was sub-contracted to a third party.

The EAT considered that the change in the manner in which the services were carried out was not sufficient to avoid TUPE, the services were ‘fundamentally the same’ after the transfer. This case is therefore a reminder that each case will turn on its facts and businesses should not assume blindly that a change in the post transfer services will prevent TUPE applying.

The rise of the blanket indemnity

Given this background of an overall decreased TUPE risk and a desire for increased certainty, it is perhaps unsurprising that there has been a rise in the use of the blanket indemnity in outsourcing agreements. The agreement will provide that the parties consider that TUPE does not apply, and the outgoing provider agrees to indemnify the client (or subsequent provider) in the case that it does.

The effect of such a blanket indemnity is that the outgoing provider is saddled with the cost of making the workforce redundant.  Alternatively, it may redeploy the employees once the services have ended, assuming it has the contractual flexibility in the employment contracts to do this.

This may of course have an impact on the outsourcing fee charged by the provider which may consider that a higher fee will better reflect the level of risk.  Similarly, outgoing providers may also ask the client to mitigate the risk by agreeing to share the redundancy costs when the time comes.

In practice however, the value of any contractual protection may be limited in an offshoring scenario where it might be difficult to take action against an entity which is in breach but based overseas.

Multi-sourcing and the effect on service provision changes

Multi-sourcing has become increasingly popular in recent years.  Allocating multiple service providers allows companies to cherry pick the best from each and gain a degree of flexibility and cost effectiveness that might not otherwise be possible.

The case of Kimberley Group Housing v Hambley UKEAT/0488/07/RN clarified the point that where services are transferred to multiple providers and one of the incoming providers takes the lion’s share of the services, this provider may take on all the employees under TUPE.  However, it will not be so clear cut where the services are fragmented in a more dispersed way, with multiple providers each taking on a small portion of the services.

Off-shoring

TUPE only applies to transfers where the employees are based in Great Britain immediately before the transfer but will apply even if the service provision change is governed by the law of a country outside Great Britain.

Holis Metal Industries v GMB UKEAT/0171/07 was the first and only reported case to consider the extra-territorial application of TUPE.  The case involved the transfer of part of a business from the UK to Israel and the EAT indicated that TUPE might apply to transfers out of Great Britain, including outside of the EU.  In spite of this indicative judgment, there remains little guidance on this point so the position remains nebulous.  The safest approach in such scenarios is therefore to proceed as if TUPE does apply and to carry out appropriate consultation.  Companies may also wish to consider whether there might be TUPE equivalent laws overseas and gain local advice where appropriate.

Employment benefits of global outsourcing

Although TUPE is applying in fewer and fewer instances, it can be seen from the case law that there are no guarantees.  Businesses would do well to consider the impact of TUPE at an early stage in the context of any outsourcing and be mindful that there may also be implications under local law where offshoring is involved.

There is no doubt that the outsourcing trend will continue to flourish in our increasingly globalised economy.  Companies should keep a watchful eye on the legal backdrop both domestically and overseas as employment legislation and case law struggle to keep up with the fast developing commercial landscape.

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