Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE Regulations’) a transferee, that is a business receiving employees, will be responsible for any accrued liabilities that the transferor incurred in respect of its employees. This may include debts to employees and employment tribunal claims.
For this reason, the TUPE Regulations also require that transferors inform the transferee about any such liabilities at least 28 days before the transfer takes place (‘employee liability information’). Before May 2014, the information only had to be provided 14 days before the transfer.
E&J Ltd (‘E&J’) and GVS Ltd (‘GVS’) had both been contracted by the Food Standards Agency to undertake veterinary and meat inspections at slaughterhouses. Towards the end of their contracts, E&J and GVS were both invited to tender for new contracts. Only E&J was successful and it was acknowledged that this would give rise to a TUPE transfer of employees from GVS to E&J.
GVS was already in a precarious financial position prior to the transfer; earlier in 2012 HMRC had threatened legal proceedings for unpaid tax and the Company proposed a Companies Voluntary Arrangement. On 27 March 2012, GVS wrote to its employees to advise that payment of their March salary would be delayed until 5 April 2012.
On 30 March 2012 E&J learnt of GVS’ proposals to delay payment of its employees but by then it was too late for anything to be done. After the transfer E&J paid all arrears of pay to the former GVS employees, but sought to recover these costs from the now insolvent GVS. E&J issued proceedings against GVS in the employment tribunal for failure to provide employee liability information. E&J argued that had they known about GVS’ precarious financial position, it would have asked the Food Standards Agency to exert pressure on GVS to pay its employees.
The tribunal held that by 19 March 2012, the date by which the employee liability information was due, GVS should have known that it was contemplating insolvency procedures which would affect its ability to pay its employees. As such, GVS had reasonable grounds to suspect that claims might be brought against E&J for arrears of pay.
In the absence of any special circumstances, GVS was responsible for compensating E&J. Whilst the TUPE Regulations generally require that the transferor should compensate the transferee for its loss, the tribunal noted that E&J would have been unlikely to put in place a mechanism for obtaining the salary payments from GVS. As such, E&J was limited to recovering only its administrative and directly consequential expenses, such as the costs of putting in place financing to cover unanticipated costs.
As the TUPE Regulations provide a minimum amount of compensation fixed at £500 per employee, the Tribunal awarded E&J £65,500.
Claims by a transferee for a failure to provide employee liability information are rare. Although only a first instance decision, this case is a useful reminder of the need to provide the information required under the TUPE Regulations in a timely fashion and the potentially costly consequences of failing to do so.
Employers need to be keenly aware that when receiving employees as part of a TUPE Transfer they are not only inheriting future costs such as pay, but also historic liabilities incurred by the former employer. Whilst the provision of employee liability information is a useful tool, it may simply be too late by the deadline under the TUPE Regulations for transferees to avoid significant financial exposure.
It is therefore of the greatest importance to undertake, where possible, effective and early due diligence and to seek appropriate indemnities in any event. In outsourcing arrangements, access to information from the incumbent supplier may be difficult so an indemnity should be sought from the customer. If this is not possible, the transferor must adapt its bargaining approach accordingly.
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*The information provided in this article is designed to provide useful information on the subject, not to provide specific legal advice.