Many businesses change hands through the sale of shares in the company. This type of transaction does not have any effect on the employment rights of the workforce, since it does not involve any change in the identity of the employer, which was and remains the company itself. Although a change in the identity of the person or organisation that owns the shares in a company may have great practical significance for the future terms and conditions and job security of its workforce, the Regulations do not apply.
The Regulations do potentially apply in two types of situations. The first is where the whole or part of a business is sold. The second is where a business contracts out or contracts in some of its activities, or changes the contractor it uses to provide those services, which the Regulations refer to as a “service provision change”. (Additional considerations apply to Government contracts, see Government contracts )
Sales of the whole or part of a business
It is important to note that not all sales of the whole or part of a business are necessarily covered by the Regulations. The Regulations will apply only where the sale involves an identifiable ‘economic entity’ that retains its identity. An economic entity is an organised grouping of resources that has the objective of pursuing an economic activity. The resources could be tangible ones, such as employees, buildings and machinery, or intangible ones, such as goodwill and know-how.
In order to find out whether the Regulations apply to a proposed sale, a useful first step is to decide whether it is possible to identify an economic entity that will be the subject of the transaction. It does not matter whether the entity has a separate existence prior to the time of the transfer, provided it can be identified as a separate entity at the point of the transfer. The entity could be, for example, ‘the heavy duty plastics division of ABC plc’. In order to identify the entity, it will be necessary to identify the people and assets that are involved in it. These could include, for example, employees, premises, buildings, equipment, work-in-progress, know-how, goodwill and customer base. If the proposed sale will involve the new employer taking over all or the major part of these tangible and intangible assets, then that is a strong indicator that the transaction is covered by the Regulations.
Transfer as a going concern
In order for the Regulations to apply to a sale of the whole or part of a business, the transaction must involve an economic entity being transferred as a going concern. The more similar the activities of the entity are before and after the transaction, the more likely it is that this condition will be met. Likewise, if the operation of the entity is continued or resumed by the new employer with little or no interruption, that points towards there being a transfer covered by the Regulations. On the other hand, if the operation stops for a substantial period, that could indicate that there has not in fact been a transfer of an economic entity as a going concern, but rather a closure of a business or part of one, and the launch of a new business.
If the economic entity retains its identity at the point it is transferred, the Regulations will apply, even if the entity is subsequently integrated into the new employer’s business.
Contracting out, contracting in and changing contractors
As mentioned above, the Regulations also apply to a service provision change. This is where a business that had been carrying on an activity “in-house” decides to contract with another business to carry out that activity on its behalf (often called “contracting out”), or to change the contractor that carries out that activity on its behalf, or to bring the activity “in-house” (usually referred to as “contracting in”).
A service provision change is covered by the Regulations, if there exists, immediately before the change, an organised grouping of employees (which could be only a single employee) which has as its main purpose the carrying out of the activities concerned on behalf of the client business. The contract must involve more than a single specific event or task of short-term duration. The grant of a one-off contract to provide catering services for a promotional event would not, for example, be covered, whereas a contract to run a company canteen might well be.
Contracts that are wholly or mainly concerned with supplying goods for the client’s use, such as a contract to provide raw materials, are not covered.
Further advice
In most cases it will be clear whether the Regulations apply, but there may be some where it is difficult to decide. Companies that are in any doubt as to whether the transaction they are contemplating making is covered by the Regulations may wish to contact their Association for advice.