Beware a break in the chain
Beware of transfers as they could prove costly if you lose a contract, says Steven Lorber, partner at Lewis Silkin
In broad terms, the law on transfers of undertakings (TUPE) applies in two circumstances:
- Where there is a transfer of an organisation between two parties, for example on restructuring within a group or on the merger of two social landlords
- Where there is a more complex tripartite arrangement, for example where a social landlord outsources its IT function or where a commissioning body contracts for support or care services and there is then a change of provider
Two-party transfer
A two-party transfer is normally done by agreement and, as a result, both parties are in a good position to allocate costs and risks equitably. It is more difficult in a three-party transfer.
Typical problems are that the commissioning body may not be able to provide details of staff working in the service or, on a change of provider, that the incumbent services provider cannot control what happens after the change.
These issues are likely to become more prominent with the current focus on expenditure as a result of government cuts.
Tripartite transfer
In a tripartite transfer, a service provider will normally operate on the assumption that staff engaged in the service will, in effect, ‘pass through’: so transfer to the service provider when it wins a contract and on to a successor service provider if it loses the contract.
If staff do not transfer on to a successor, the service provider will be left with the staff but, having lost the contract, may have no work for them. It faces what may be significant redundancy costs, particularly if staff have enhanced rights on severance.
Recent cases
Recent TUPE cases have highlighted the risks faced by a service provider where an existing service is split up or ‘fragmented’ into a number of different services after a tender process. To take a simple example of fragmentation, a repairs and maintenance service provided in one region might be split into four different areas, each with its own contractor.
Unless staff were originally assigned to a particular area, it might not be possible to say to which of the four contractors an employee transferred. In one case in 2008 - Kimberley Group Housing v Leena Homes and others - a provider of accommodation and other services for asylum seekers commissioned by the Home Office lost the contract.
The services were taken over by two new providers. The court said that, although there was a transfer of an undertaking, one could not tell to which of the new providers staff were assigned - so no staff transferred.
In a second case last year, also involving asylum seekers - Clearsprings Management Ltd v Ankers and others - the National Asylum Seekers Service awarded contracts for provision of accommodation to various service providers. It later carried out a fresh tendering process and awarded contracts to a range of different providers.
Asylum seekers were allocated to the new providers, but in no discernible pattern. The employees of one of the providers that had lost the work tried to argue that they transferred to a new provider. They were unsuccessful because the activity being carried on had been so fragmented that they were unable to point to any particular TUPE transfer.
Fragmented services
Where services are fragmented in this sort of way, as mentioned above, the incumbent provider may have no option but to make them redundant.
That can be expensive, particularly where staff are or were members of public sector pension schemes such as the Local Government Pension Scheme with rights to take early retirement on redundancy.
A service provider tendering to provide a service should consider to what extent the service might be fragmented if it lost the contract.
A contract for outsourced IT services or finance services is unlikely to be fragmented; in contrast, contracts for support and, to a lesser degree, care services are relatively easy to fragment.
If fragmentation seems possible, the would-be service provider should consider asking the commissioning body to underwrite any redundancy costs of staff who do not transfer on under TUPE.
It is a reasonable that it should bear those costs because it controls the shape of services on re-tendering and can, in effect, choose whether or not the service provider bears them.
Although redundancy costs are something to address, there is of course a danger in any tender competition that other, less cautious (or less well-advised) service providers will ignore the risk and put forward a more attractive bid.
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