When a business is transferred, the Regulations state that the employees who work in the business must be viewed as if they are employed, and have always been employed, by the new employer. In effect, the new employer steps into the shoes of the old one.
This means that the new employer must respect the pre-existing terms of the contracts of employment of the transferred employees and their length of service with the old employer. The employees in their turn continue to be bound by the terms of their contracts of employment. (There are special rules on how employees’ pension rights are protected on a transfer (see Pensions, below ) and where the old employer is insolvent (see Special rules for insolvent employers, below ).)
Transfer of contract terms
The new employer needs to be aware of the possible legal and practical problems that may be raised by the wording of the employment contracts it inherits.
For example, an employee may have a contractual term restricting his or her ability to work for a competitor after leaving the company. After the transfer, this restriction will not change in scope, so it will continue to relate only to the competitors of the business that is transferred. It may therefore be inadequate to protect the new employer’s interests.
Problems can also arise in relation to pay. The employee may be entitled to a bonus, commission or profit share that is calculated in a way that is integral to the old employer’s financial systems or working arrangements. A profit share scheme might, for example, involve allocation of shares in the old employer’s company making it impossible in practice for the new employer to apply it. Where insuperable practical problems of this sort arise, it is sufficient if the new employer provides a benefit that is substantially equivalent to the old one. If the employee’s contract states that his or her rate of pay is set by negotiation between certain parties, such as a national negotiating committee, the new employer must respect that term, even if it is not one of the negotiating parties. It may therefore be obliged to pay rates that it has not set itself. The case law is uncertain but it seems likely that the obligation does not apply to increases negotiated subsequent to the transfer. For more information contact your Association.
As explained below (see Transfer-related contract changes, below), it may be difficult and costly for the new employer to change the terms of transferred employees’ contracts, even if they are obviously inappropriate in the changed circumstances.
Transfer of other liabilities
As well as inheriting the employees’ contractual terms, the new employer takes over any legal liabilities that the old employer had towards them, other than liabilities under the criminal law. The new employer could find itself legally responsible, for example, for unlawful discrimination to which the employee was subjected before the transfer or for personal injuries the employee sustained at work. The new employer does, however, inherit the benefit of any employer’s liability insurance policy the old employer held that covered the employee.
The law is currently unclear on whether the new employer inherits any liability that the old employer had for failure to consult on large-scale redundancies ( Collective consultation ), although the prevailing view appears to be that liability does transfer. A company that may be affected by this issue should contact its Association for advice. If the old employer failed to consult on the transfer itself ( informing and consulting ), then both the old employer and the new employer are legally liable for that failure.
Employee liability information
Because of the employee liabilities that a company may inherit if it acquires a business or secures a contract where the Regulations apply, the law requires the old employer to provide it with certain information about each employee who will be transferring.
The information that must be provided is set out in the box below. The information must be accurate at a specified date not earlier than 14 days before it is supplied. If any of the information changes, the old employer must notify the new employer in writing.
Employee liability information
- The identity and age of the employee.
- The main terms and conditions of the employee, as required by Section 1 of the Employment Rights Act 1996 ( Documenting the contract ).
- Information about any disciplinary procedure taken against the employee or grievance procedure taken by the employee within the past two years, in circumstances where the statutory minimum discipline and dismissal or grievance procedures apply (Minimum grievance procedure and Minimum dismissal procedures). (As the statutory discipline and dismissal procedure does not apply where an employer is considering giving an employee an oral or written warning or suspending the employee with pay, there is no need to provide details of this type of disciplinary action.)
- Information about any court or tribunal claim the employee has brought against the old employer in the past two years, or which the old employer has reasonable grounds to believe the employee may bring against the new employer, arising out of his or her employment with the old employer.
- Information about any collective agreement that will transfer under the Regulations ( Transfer of collective agreements ).
The information must be provided in writing or be made available in a readily accessible form, and be given no less than 14 days before the transfer, or, if that is not reasonably practicable, as soon a reasonably practicable after that. It may also be provided indirectly through a third party, as where an outgoing contractor provides the information to the client business, which passed it on to the incoming contractor.
If the old employer fails to provide the required information in relation to one or more of the employees transferred, an employment tribunal may award the new employer compensation of whatever sum it considers just and equitable. In assessing compensation, the tribunal will have regard to any loss the new employer suffered as a result of not receiving the information, and the terms of any contract between the old employer and the new providing for compensation for failure to give the information. Compensation will not, however, be less than £500 in relation to each employee involved, unless the tribunal considers it just and equitable to award a smaller sum.
Due diligence
In practice, a company that is thinking of purchasing the whole or part of a business or tendering for a contract would be well advised to ask the existing employer for this employee liability information, in advance of a sale or contract being agreed. If these enquiries reveal that the new employer might inherit costly legal liabilities, it will then have the opportunity to include provision for this in the terms of the sale agreement or contract. The new employer might, for example, be able to negotiate a change in the price of the sale or contract, or get the old employer to agree to meet the costs of any legal claims that might materialise.
Liability for breach of duty to consult
Although there is currently uncertainty as to whether the new employer inherits legal liability for the old employer’s failure to inform and consult its workforce about large-scale redundancies, the prevailing view is that liability does transfer. Further, the Regulations provide that the new employer shares legal responsibility with the old employer for any failure by the old employer to consult about the transfer. It would therefore be advisable for the new employer to check that the old employer has taken adequate steps to meet all its information and consultation obligations.
Transfer-related contract changes
In normal circumstances, an employer can alter the terms of its employees’ contracts, provided they agree to the change. (The legal issues that arise when changing contracts are discussed elsewhere (changes to contracts).) However, the law prohibits any alteration to transferred employees’ contracts, even with their consent, if the reason for the change is the transfer or a reason connected with it. This principle applies regardless of the lapse of time between the transfer and the change: if the change is causally connected with the transfer, it is not legally enforceable unless the change benefits the employee.
There are only two exceptions to this principle. The first is where the old employer is insolvent, in which case transfer-related changes of any kind are permitted, provided certain conditions are met ( Special rules for insolvent employers ). The second exception is where the reason for the contract change, although connected with the transfer, is an economic, technical or organisational reason entailing changes in the workforce (usually referred to as an ‘ETO’ reason). In that case the change, if agreed by the employees, will be legally enforceable .
Unfortunately, the decisions of the courts and employment tribunals have not given a clear picture of what amounts to an ETO reason. They have confirmed, however, that it must entail changes in the size and make-up of the workforce, rather than merely changes in employees’ contractual benefits. For example, the need to make major changes to the content of employees’ jobs may be an ETO reason, but harmonisation of a workforce’s terms and conditions after a transfer would not.
This can pose considerable problems for a company that wants to change the terms and conditions of the employees it has inherited after a business transfer. There could be a variety of reasons why the company needs the change. The current terms may, for example, be too expensive, or not appropriate to the new employer’s circumstances, or the company may want to harmonise the transferred employees’ terms with those of its existing workforce.
Introducing valid contract changes
One possible answer to this problem would be for the company to introduce the changes when it next reviewed and revised all of its employees’ contracts. It could then argue that the general review, rather than the transfer, was the reason for the changes. Another option would be to dismiss the transferred employees and offer them fresh contracts on new terms. If the employees accepted the new contracts, the terms would be legally enforceable, but at a price. Dismissing an employee in these circumstances could be automatically unfair as being for a reason connected with the transfer ( Protection from dismissal ). The company would therefore end up paying the employee compensation for unfair dismissal. If the reason for introducing the new terms was to save costs, this would defeat the point of the exercise. A company considering this course of action may therefore wish to contact its Association for advice.
Which employees transfer?
It is only those employees who are part of the business or work on the contract that is transferred who go over to the new employer. If the transfer involves the sale of part of a business, it will be only those employees who are assigned to that part who will transfer, and in the case of a service provision change, it will be only those employees who are assigned to the organised grouping of employees involved in carrying out the activity concerned who will go over to the new employer. This covers all the employees who normally work solely in that part of the business or on those activities, or who do only a minimal amount of work elsewhere. Employees who are only temporarily assigned to the part or activity will not transfer. If a company wants to retain some employees who would otherwise transfer, it should ensure that it moves them out of the part of the business to be transferred or off the contract that is changing hands before the transfer takes place, assuming that it has the right to do so under their contract of employment or can obtain their agreement to the move.
The new employer also inherits legal responsibility for any employees who were dismissed by the old employer before the transfer took place but for a reason connected with it, unless there was an economic, technical or organisational reason for their dismissal. As explained below ( Protection from dismissal ), it is automatically unfair to dismiss an employee for a reason connected with the transfer, so the new employer inherits liability for the employees’ unfair dismissal as well as any other legal liabilities that the old employer had towards them.
Objecting to the transfer
The employees who work in the business or on the contract that is being transferred cannot be forced to work for the new employer. If an employee indicates clearly to the new employer or to the old one that he or she refuses to be employed by the new employer, then his or her contract ends when the transfer takes place. The employee can object by word or deed, but it must be clear that he or she is refusing to work for the new employer rather than merely being unhappy about the transfer. An employee who refuses to transfer is in the same legal position as if he or she had resigned. That means that the employee cannot claim a redundancy payment from the old or the new employer, or bring a claim of unfair dismissal.
The position is different if the employee decides to resign because the transfer will involve, or has involved, a substantial change for the worse in his or her working conditions. In these circumstances, the employee is entitled to claim unfair dismissal and, as explained below ( Protection from dismissal ), the dismissal may well be automatically unfair.
The employee will need to lodge a written grievance before making such a claim ( Minimum grievance procedure ). The employee’s claim will be against whichever company was employing him or her when he or she resigned. Therefore, if the employee resigned before the transfer took place, his or her claim would be against the old employer, even if the change that prompted the resignation was made by the new employer.
Pensions
There is one exception to the principle in the Regulations that employees retain their rights with the new employer: any rights the employees have to belong to an occupational pension scheme do not transfer (although any rights they have accrued under the old employer’s scheme are protected under the Pension Schemes Act 1993). This exception relates only to benefits paid at the end of an employee’s normal working life, as defined in the scheme rules. So, for example, if the old employer’s scheme gave employees the right to an early retirement pension if made redundant before normal retirement age, that right transfers to the new employer. Any pension rights that do not relate to membership of an occupational pension scheme, such as the right to have the employer make contributions towards a personal pension, also transfer.
While transferred employees may have no protection for their pension rights under the Regulations, they may have some rights under the Pensions Act 2004, if they were in, or eligible to join, the old employer’s occupational pension scheme. The Act does not require the new employer to match the old employer’s pension arrangements, but it does require the new employer to make a certain minimum standard of pension provision.
The new employer can do this in one of three ways. The first is to offer the employees access to a stakeholder pension scheme and, if the employees take this up, match their contributions to the scheme, up to a maximum of 6 per cent of pay. Alternatively, the new employer may choose to provide a money purchase occupational pension scheme and match the employees’ contributions up to a maximum of 6 per cent. The third option is to provide a final salary occupational pension scheme that satisfies the Reference Standard Test in the Pension Schemes Act 1993 (which qualifies the scheme for HM Revenue & Customs approval) or meets a minimum standard specified in regulations.
Even if the transferred employees had no pension rights with the old employer, the new employer may be obliged to offer them access to a stakeholder pension in any event, if it is required to do so by the stakeholder pension legislation ( Stakeholder pensions ).