How does TUPE apply in an administration process?

Transfer of Undertakings (Protection of Employment) Regulations in Company Administration

The Transfer of Undertakings (Protection of Employment) regulations, also referred to as TUPE, are intended to protect employee rights when a failing company is sold on. A pre pack administration is the term used when the underlying business is purchased by third party buyers, or by the existing directors or shareholders, and trade continues under a new company name.

The rules of TUPE cover employee contracts, including their rights in terms of receiving overdue wages and other outstanding payments, their working hours and other benefits that applied when employed by the old company.

Begbies Traynor is the leading corporate recovery firm in the UK, and is available for appointment as administrator.

When do TUPE rules apply?

TUPE rules apply to ‘relevant’ insolvency proceedings. These are generally proceedings under the control of a licensed insolvency practitioner, implemented with a view to rescuing or selling on part or all of the business as a going concern. 

‘Terminal’ insolvency procedures that involve liquidation of company assets are not regarded as ‘relevant’ where TUPE is concerned. There has been dispute in the past about whether or not pre pack sales in administration were, in fact, ‘terminal’ procedures.

The position was clarified in 2012 by the Court of Appeal, however, when confirmation was provided that pre pack administrations are indeed ‘relevant transfers’ and TUPE rules do apply.

Who is liable for outstanding employee payments prior to a transfer?

If there are insufficient funds available for unsecured creditors from the sale of the company, monies owed to members of staff prior to transfer can be claimed from the National Insurance Fund.

Payments are subject to the current weekly limits, and those covered by the fund include:

• Up to eight weeks’ wages
• Up to six weeks of holiday pay
• Statutory notice pay if an employee has worked their notice period but hasn’t been paid
• Unpaid contributions to a workplace pension

Arrears of statutory sick pay or maternity/paternity/adoption pay are claimed from the Department of Work and Pensions and HMRC, rather than the National Insurance Fund.

Liability for any payments above the current statutory limits are inherited by the purchasing company, as is responsibility for all employment-related payments from the date of transfer.

Permitted variations to employment contracts

Variations of employment contracts are permitted within TUPE regulations, but they must be implemented with the agreement of employees or their representatives. The reason for making a variation must be to maximise the chances of business survival, i.e. sale of the business as a going concern.

If business survival is put forward as the reason for variations to an employment contract, the decision needs to be backed up by the provision of a clear business case and evidential proof.

Positive changes to employment contracts by the new owner are permitted on agreement of the employees/their representatives. This might include an increase in holiday pay, for example.

As far as employee pension rights are concerned, they are protected only up until the date of transfer. There is no obligation by the new company to continue with the same arrangements once the purchase has gone through.

On purchasing the new company, directors need to provide updated written terms and conditions of employment for each member of staff.

Communication with affected employees

An obligation exists for both the old and new companies to communicate in detail with trade unions, or elected employee representatives regarding the transfer. Information must be provided on:

• The reasons why the transfer is taking place
• When it will happen
• How employees will be affected under TUPE
• Whether or not the new company will be restructured

If fewer than 10 people are employed, the company can communicate directly with employees.

Care should be taken with regard to the dismissal of any employees around the time of the sale, as unless it is for a specific reason it could be regarded as unfair. If a member of staff is dismissed by either the old or new company primarily because of the transfer, and the reason is not ‘economic, technical or organisational’ (ETO), a case for unfair dismissal could be brought via an employment tribunal.

What does ETO mean in practice?

• Economic: performance of the company, financially and commercially
• Technical: refers to the company’s systems and processes
• Organisational: how the company is structured

Employees who do not want to be transferred over to the new company can resign, and the usual notice arrangements are waived. They simply need to inform their employer before the transfer takes place, and the date of resignation will be the same date as the transfer.

As the market leader in corporate recovery, Begbies Traynor can provide the professional advice you need on employee rights in administration, and your responsibilities as a director.