Employees can be one of the most important considerations when buying or selling a business. Depending on how the transaction is structured, employees may automatically transfer to the buyer with their existing employment rights protected.
Understanding whether TUPE applies, which employees will transfer and what information and consultation is required can help buyers and sellers manage employment risks and avoid unexpected liabilities.
Does TUPE apply when a business is sold?
TUPE can apply where a business, or part of a business, transfers from one employer to another and retains its identity. It can also apply to certain changes in service provision, such as outsourcing, bringing a service back in-house or changing contractors.
Whether TUPE applies depends on the circumstances and the structure of the transaction.
For example, TUPE will not generally be triggered simply because the shares in a company are sold. The company remains the employer even though its shareholders have changed.
Where the assets and activities of a business are transferred to a different employer, however, TUPE may apply.
This distinction should be considered at an early stage of any business sale or acquisition.
What happens to employees when TUPE applies?
Where TUPE applies, employees assigned to the transferring business will generally move automatically to the new employer on the transfer date.
Their continuity of employment is preserved and their existing contractual terms and conditions generally transfer with them. The new employer can also inherit certain employment liabilities relating to the period before the transfer.
This means a buyer needs to understand the employment arrangements it is taking on before completing the transaction.
Which employees will transfer?
Identifying the employees who are assigned to the transferring business can sometimes be straightforward. In other cases, particularly where employees work across several parts of a business, the position can be more complicated.
The parties may need to consider factors such as:
- Where the employee spends their working time
- Which part of the business they primarily support
- How their role is organised
- Whether they form part of a team dedicated to the transferring activities.
Determining the transferring population early is important for due diligence, consultation and transaction planning.
What information must the seller provide?
Where TUPE applies, the outgoing employer must provide the incoming employer with specified employee liability information.
This includes information about transferring employees such as their identity, employment terms and certain recent disciplinary, grievance and legal proceedings. The information must normally be provided at least four weeks before the transfer.
However, a buyer will often want considerably more information than the statutory minimum as part of its employment due diligence.
This could include details of salaries, bonuses, benefits, absence, holidays, family leave, restrictive covenants, disputes and potential redundancy costs.
Do employees need to be informed and consulted?
Yes. Both the outgoing and incoming employers have responsibilities to inform affected employees about the transfer.
Employers must provide information about matters including the fact that the transfer is taking place, when and why it is happening, and the implications for employees. Where changes or measures are proposed in connection with the transfer, consultation may also be required.
Depending on the workforce, consultation may take place through recognised trade union representatives, employee representatives or directly with employees. Current rules allow direct consultation in certain circumstances where there are fewer than 50 employees in the organisation or fewer than 10 employees transferring and no existing representatives are in place.
There is no fixed statutory consultation period, but employers must allow sufficient time for meaningful consultation before the transfer.
Can the buyer change employees’ terms after the transfer?
TUPE restricts an employer’s ability to change contractual terms where the reason for the change is the transfer itself.
Certain changes may be possible where there is an economic, technical or organisational reason involving changes in the workforce or workplace, often referred to as an ETO reason, and the employee agrees to the change. It should be noted though that consent alone is not enough where the reason is the transfer: an employee cannot waive or contract out of rights that transferred with them, even if the new package is favourable overall.
Buyers should therefore be cautious about plans to immediately harmonise the terms of transferred employees with those of their existing workforce.
Any proposed changes should be reviewed before they are communicated or implemented.
What about redundancies?
A business acquisition may result in duplicated roles or wider plans to reorganise the workforce.
However, employees cannot simply be made redundant because they have transferred under TUPE.
Redundancies connected with the transfer generally require a genuine redundancy situation and an ETO reason involving changes in the workforce. The usual requirements for a fair redundancy process will also apply.
Where 20 or more redundancies are proposed, additional collective consultation requirements may apply.
Why is employment due diligence important?
For a buyer, employment due diligence can identify liabilities before the transaction completes.
Potential issues could include:
- Historic employment claims
- Unpaid bonuses or commission
- Holiday liabilities
- Ongoing grievances or disciplinaries
- Long-term sickness absence
- Unusual contractual benefits
- Redundancy exposure
- Missing employment documentation.
Once these risks are understood, the parties can consider how they should be allocated within the sale agreement.
How can buyers and sellers allocate TUPE risk?
Business sale agreements often include warranties and indemnities dealing specifically with employees and TUPE.
These provisions can determine who bears responsibility for particular employment liabilities, failures to inform or consult, or actions taken before and after completion.
Their precise wording matters, particularly because TUPE can transfer legal liability even where the commercial agreement between buyer and seller says who should ultimately bear the cost.
Plan employment issues early
TUPE should not be left until the final stages of a business sale.
Identifying whether TUPE applies, determining which employees transfer, carrying out due diligence and planning consultation early can help avoid delays and reduce the risk of claims.
DTM Legal’s Employment & HR team advises employers on the employment aspects of business sales, acquisitions and transfers, working alongside our Corporate & Commercial team to provide joined-up support throughout a transaction.
If you are buying, selling or transferring a business and need advice on TUPE or your responsibilities towards employees, contact DTM Legal’s Employment & HR team to discuss how we can help.