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A route to avoid service provision changes under TUPE on the purchase of a building and changeover of contractors?

30 September 2014

Landlords, managing agents and contractors have for years grappled with uncertainty and potentially significant employment liabilities arising from the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). 

Recent decisions have opened up the possibility of avoiding TUPE applying on a "service provision change" or changeover of contractors, such as those appointed to provide cleaning or security.

TUPE protects employees when the business in which they are employed transfers from one employer to another. TUPE also triggers information and consultation obligations on employers, breaches of which can lead to punitive compensation.

Sale of property

Property owners, landlords or managing agents often outsource cleaning, security or other services.

The application of TUPE means replacement contractors inherit employees and employment liabilities and may seek indemnity protection in respect of those risks or negotiate a contract price to reflect those risks.

Contractors and their clients who appoint them may benefit from avoiding the application of TUPE.

Assuming the property will be used in the same way after it has been sold, possible options on the sale are:

  • Option 1 - the buyer could continue to use the same cleaning and security contractors as the seller or the seller's agent (ie assign or novate contracts to the buyer or the new managing agent), or
  • Option 2 - the seller could terminate its contract with its managing agent and other contractors and the buyer may appoint a new managing agent who uses different cleaning and security providers or bring the cleaning/security services in-house.

No TUPE issues would arise with Option 1 as the same contractor would be continuing to provide the same cleaning and security services at the property.

The service provision change at Option 2 used to give rise to a TUPE transfer between the old and new cleaning and security providers.

Recent case law [1] (including a Court of Appeal decision) suggests that there would be no TUPE service provision change on the sale of a property where the identity of the managing agent or landlord or property owner (ie the client to whom the services are being provided) changes at the same time as the identity of the cleaning or security provider.

Liability for redundancies or other employment costs will therefore stay with the old service provider (although this is not usually an issue for the seller in the sale contract).

Changeover of contractor but no property sale

More recently and in a different case, the Employment Appeal Tribunal has held [2] that even if there is no property sale the same principles apply. A local authority (LA) owned a business centre. It engaged a managing agent who contracted with a third party to provide security at the centre.

The managing agent later terminated its security contract and the LA entered into a new contract with a different security company to guard the site. There was no TUPE transfer as the identity of the client had changed (ie from the managing agent to the LA) at the same time as identity of the security company.

Such decisions are welcome news. As long as the client and service provider changes at the same time, it should be possible to avoid a service provision change under TUPE. It is, however, important not to rest on your laurels just yet:

  • even if there is no service provision change under TUPE, there could still be a normal business transfer under TUPE and therefore it is important to double-check this with your legal adviser to either rule out such a possibility or ensure appropriate employment provisions are included in the sale contract, and
  • double-check the fine print in contracts entered into directly with service providers; even if there is no TUPE transfer, they may still require you to indemnify them against any redundancy or employment costs which arise as a result of the security or cleaning contract being terminated.

[1] McCarrick v Hunter [2012] EWCA Civ 1399andTaurus Group Ltd v Crofts and another UKEAT/0024/12

[2] Horizon Security Services Ltd v Ndeze and another UKEAT/0071/14

This article was written by Jessica Shemmings.

For more information contact Jessica on +44 (0)20 7427 6499 or jessica.shemmings@crsblaw.com