Understanding TUPE Regulations

Introduction

The application of European Communities Protection of Employees on Transfer of Undertakings Regulations 2003, (the “TUPE Regulations”) is a complex area of law. The TUPE Regulations have not been amended since their introduction in 2003 and are not detailed or prescriptive in content. The legal position in Ireland is still primarily derived from case law from the courts and tribunals both at European and national level.

Before proceeding with any transaction where any business is sold or transferred, or, as discussed further below, where a business or part of a business is transferred out of a business back into another business, or where a contract is being insourced or outsourced – legal advice should be taken on the specific circumstances of the transaction. However, in this Insight we will aim to give practical advice and guidance on situations in which the TUPE Regulations were held to apply by the Labour Court.

The legal position

TUPE Regulations were enacted for the purpose of protecting the rights of employees in the event that the business, or part of the business, in which they were employed is transferred to a new employer.

For TUPE Regulations to apply, the business or part of the business being transferred must constitute an economic entity (i.e., an identifiable, organised grouping of resources or people that performs a particular function). There must be a legal transfer of the business to another party and the business must retain its identity after the transfer. The provider must therefore continue or resume the same or similar economic activities post transfer.

The Spijker test

The Labour Court has followed what is considered the cornerstone of the jurisprudence of the European Court of Justice (“ECJ”): Spijkers v Gebroeders Benedik Abattoir CV et Alfred Benedik en Zonen BV Case 24/85:

Below are the questions the Labour Court will likely ask when considering the application of the TUPE Regulations. These derive from the Spijkers case and have been applied recently by the Labour Court in the following cases:

• Department of Social Protection v Mary Dunne TUD174,
• Overpass Limited v Susan Clancy TUD1713
• Euro Car Parks (Ireland) Limited v O’Hanlon TUD1810
• Bidvest Noonan v Lynch TUD203

Will the entity retain its identity post transfer?

• Is the entity a stable economic entity?
• If yes, will the essential characteristics of the economic entity be maintained?

Will the operation be continued or resumed with the same or similar activities? Factors to be considered in overall assessment (not to be considered in isolation):

• The type of undertaking or business;
• Whether or not the business’s tangible assets such as buildings and movable property are transferring;
• The value of the business’s intangible assets;
• Whether or not employees are transferring;
• Whether or not customers are transferring;
• Degree of similarity between the activities carried out before and after the transfer;
• The period if any for which those activities were suspended.

Will the entity retain its identity post transfer?

There are two parts to this question below.

1. Is the entity a stable economic entity?

‘Economic entity’ is defined in the regulations as “an organised grouping of resources which has the objective of pursuing an economic activity whether or not that activity is for profit or whether it is central or ancillary to another economic or administrative entity”.

In the decision of Suzen v Zehnacker Gebaudereinigung Krankenhausservice(C-13/95), the ECJ held the term ‘economic entity’ as interchangeable with the term ‘undertaking’. The ECJ said that to be stable the activity must not be limited to performing one specific works contract. This appears to be a reference to a once off piece of work rather than one user or customer. It went on to say that “the term entity thus refers to an organised grouping of persons and assets facilitating the exercise of an economic activity which pursues a specific objective.”

In some labour intensive businesses, a group of workers engaged in a joint activity on permanent basis can constitute an economic entity.

In Francisca Sanchez Hidalgo and others C-173/96, the ECJ referencing ‘entity’ as set out in the Suzen case noted that an organised grouping of wage earners could in some circumstances amount to an economic entity, provide it was a “sufficiently structured, and autonomous entity”. It said its identity emerges from “its management staff, the way in which the work is organised, its operating methods or indeed, where appropriate, the operational resources available to it.”

Consider whether the group is an economic entity. Does it have its own structure? A high level of autonomy?

In relation to whether it is a stable economic entity; is it loss-making or does it stand on its own two feet?

Another consideration is whether the individual roles in the grouping could be considered individual economic entities themselves and be capable of transferring in their own right. This will depend on the internal structure of the group and the division of tasks and duties.

2. If yes, will the essential characteristics of the economic entity be maintained?

When looking at the essential characteristics of the economic entity, the ECJ in Hidalgo said to look at “its management staff, the way in which the work is organised, its operating methods or indeed, where appropriate, the operational resources available to it.”

The essential characteristics of an entity are how the work is done, who is responsible for the day-to-day operation of the group and who the team members report to.

Will the operation be continued or resumed with the same or similar activities? Factors to be considered in overall assessment (not to be considered in isolation):

To answer this question, we must examine the individual factors set out below:

• The type of undertaking or business;

The fact the group is not a legal entity in its own right would be a factor which has to be considered, perhaps not a determining factor.

• Whether or not the business’s tangible assets such as buildings and movable property are transferring;

In the Suzan decision, the ECJ drew a distinction between businesses that are asset-reliant on the one hand, and those that are labour-intensive, on the other. It found that in certain sectors in which the business is based essentially on the workforce, there can be a transfer within the meaning of the Regulations where the group continues to exist after the taking over of an essential part of the workforce.

In the O’Hanlon decision, the transfer of a carpark triggered the application of the TUPE Regulations.

Where there are limited tangible assets, this would be persuasive evidence that the TUPE regulations do not apply.

• The value of the business’s intangible assets;

The two main categories of intangible assets are usually; the employees and intellectual property. Employees are considered below in the next point.

As regards intellectual property, where staff are creating IP rights, the position is that this usually belongs to the employer. A grey area could be where the work is undertaken on behalf of another entity.

The impact of the value of any intangible assets on the application of the Regulations is likely to be minimal unless the value of the intangible assets is particularly high. This is something that the Workplace Relations Commission / the Labour Court would have to investigate if a case is ever brought.

• Whether or not employees are transferring;

This would only be relevant where it is agreed that some employees, such as those with expert knowledge, would be transferring with the assets.

It has been suggested that the TUPE Regulations can be avoided by simply refusing to take any employees engaged in the business – a chicken and egg scenario. The Labour Court in Dunne Case commented that this proposition is ‘illogic’, quoting the Irish Employment Appeals Tribunal case of Cannon v Noonan Cleaning Services Ltd[1998] E.L.R. 153 which held:

“There is no doubt that it in a service undertaking the workforce and its expertise constitute a major part of the undertaking, but it is difficult to understand how, where an employer refuses to take on the workers of the previous contractor, he can escape the rigours of the Directive, while a contractor who takes on a major part of the workforce, perhaps out of magnanimity, will be caught by it. It would seem that the Directive, in the former instance, has not addressed the mischief in the law that it was intended to do.”

• Whether or not customers are transferring;

Another situation to consider is where customers, their files and data are changing hands. This was an influential factor in the Dunne case where a Social Welfare Office was being converted into an Intreo office. The Labour Court said the following:

“The key to the continuation of the provision of social welfare services in question was in fact the availability of the service users’ files (or more precisely, the data therein) to the staff in the Intreo Office. That data was the key operation asset and access to it transferred from the Branch Office to the Intreo Office.

• Degree of similarity between the activities carried out before and after the transfer;

This will be the key question to consider and will involve a degree of predictions from both parties to the transaction. In terms of how far to look, there is no guidance in this regard.

• The period if any for which those activities were suspended.

Obviously, the longer the period of suspension the less likely the Regulations are to apply.

Consequences of the Regulations

There are serious consequences for, and legal obligations on, both transferors and transferees where the Regulations are triggered, such as:

• Both the transferor and transferee have joint obligations to provide certain information about the transfer to the employees and to consult with them no later than 30 days in advance of the transfer.
• The employees transfer to the transferee and are entitled to retain the same terms and conditions as applied before the transfer. The employees retain their continuity of employment;.The transferee becomes liable for obligations which accrued to employees before the transfer but were not discharged.
• Occupational pension arrangements do not have to be continued by the transferee although it is expected that legislation may be introduced in the future to amend this exclusion.
• Dismissal may take place for economic, technical, or organisational reasons involving changes in the workforce (e.g. genuine redundancies). The transferee may lawfully dismiss for economic, technical, or organisational reasons (e.g. redundancies).

Conclusion

As can be seen from the above, the application of TUPE in Ireland is a complex legal issue. However, the RDJ Employment Team has extensive experience in advising on transactions and potential TUPE implications. Working closely with our colleagues in our Corporate and Tax Teams, we ensure that our clients are fully cognisant of the employment law implications of any transaction and understand how to navigate the legal obligations imposed by the TUPE Regulations so a transaction can proceed without interruption.