I work as an in-house lawyer and one of my particular specialities is advising on the implications of employee transfers in the context of large outsourcing contracts. I have found that the complex matrix of legislation and cases which govern this area of the law often results in misunderstanding over the law and its practical application to the drafting in the contract. Sometimes, due to the technical nature of the drafting, the provisions in a contract governing staff transfer matters are not properly understood and do not reflect the commercial and legal protections that a party otherwise thought it had the benefit of. This can lead to risks that are not truly understood by the supplier and customer of the outsourcing services. I am therefore attempting in this article to (a) identify some of the common risks and issues with the language in commonly used staff transfer provisions and (b) set out a practical approach to the application of the law to the drafting of the contracts.
Legal Background
The Transfer of Undertakings (Protection of Employment Rights) Regulations 2006 (most commonly referred to as TUPE) has the principal purpose of protecting employees if the business in which they operate transfers either as a result of (a) the sale or purchase of a business or (b) a ‘service provision change’. For the purposes of the TUPE regulations, a service provision change may occur when:
– a service is outsourced from a customer to a supplier (outsourcing)
– the provision of a service changes hands (re-tendering)
– a customer takes a service back in-house from a supplier (in-sourcing).
Where the TUPE regulations are to apply, employees from the newly-acquired business or service will transfer automatically to the incoming employer. Terms and conditions (apart from occupational pensions) and continuity of service will transfer with them and employees will receive certain protections around dismissal and redundancy. Therefore, understanding the impacts of TUPE is of critical importance when negotiating IT contracts. A failure in understanding can lead to an organisation inheriting costs and liabilities that had not been anticipated (which can be extremely expensive) or result in an organisation falling foul of TUPE legislation (which can also have significant cost implications).
Whilst ‘contracting out’ is prohibited so that a customer and supplier are unable to prevent TUPE legislation from operating (given that the principal purpose of the legislation is to protect the interests of the employee), the parties are nevertheless able to agree provisions in a contract to reimburse one another in respect of liabilities a party incurs. This is normally achieved by agreeing appropriate warranties and indemnities in the contract (which are often set out in a separate ‘Staff Transfer’ schedule). As with any contractual provision, accurate and clear drafting is of key importance in ensuring that the provisions set out in a Staff Transfer schedule properly reflect the intentions of the parties. The remainder of this article considers and identifes some of the common pitfalls and issues that can arise from the drafting in standard ‘boiler-plate’ TUPE provisions.
‘Wrong pocket’ or ‘Woodwork’ provisions
When negotiating IT outsourcing contracts for which TUPE regulations will apply, the new supplier will often want to spend time agreeing with the customer (or incumbent supplier) a list of individuals that it believes to be in scope to transfer from the customer (or the incumbent supplier) to the new supplier on commencement of the services (this is often referred to as a Transferring Employee List). Despite having agreed such a list, one of the key risks for the new supplier will be inheriting staff that were not envisaged as transferring and whose details were therefore not included on the Transferring Employees List. The usual way of covering off this risk is through a provision which entitles the new supplier to be fully indemnified against all employment liabilities incurred with employing and dismissing those individuals that were not included on the Transferring Employees List. This is often referred to as a ‘wrong pocket’ or ‘woodwork’ indemnity (as it relates to individuals that have literally ‘come out of the woodwork’). An example of a typical woodwork indemnity is set out below:
The Customer will use reasonable endeavours to ensure that no individual employed by the Customer other than a Transferring Employee transfers to the Supplier. If it is found or alleged that the employment of any individual employed by the Customer other than a Transferring Employee (any such individual to be referred to as an ‘Unexpected Employee‘) transfers to the Supplier pursuant to TUPE as a result of the arrangements anticipated by this Agreement:
the parties will notify the other of that finding or allegation as soon as reasonably practicable after becoming aware of it;
The Supplier may terminate the employment of any Unexpected Employee forthwith; and provided that notice of dismissal is given within five Business Days of the Supplier becoming aware of the Unexpected Employee, the Customer shall indemnify and keep indemnified the Supplier against all employment liabilities it incurs in respect of the employment and dismissal of any Unexpected Employee. This indemnity shall not apply to any claim that the termination of employment was unfair because the Supplier neglected to follow a fair dismissal procedure.
(Transferring Employee means those employees of the customer or the incumbent supplier to whom the Regulations will apply on or around the Services Commencement Date. Regulations means Transfer of Undertakings (Protection of Employment Rights) Regulations 2006 as may be amended from time to time.)
On first glance, the indemnity above appears to give the supplier reasonable protection from inheriting employees that were not envisaged at the outset. However, there are three fundamental flaws with the above drafting:
1. The provisions relate only to those employees employed by the customer and so do not cover the risk of secondary TUPE if employees of the incumbent supplier transfer to the new supplier. In some cases, this will be deliberate as the customer will not want to provide protections in respect of the incumbent supplier. However, in other cases, this may simply be a drafting flaw which doesn’t represent the intentions of both parties. Therefore, rather than refer to ‘no individual employed by the Customer’, it would be better from the new supplier’s perspective for the woodwork indemnity to cover not just individuals employed by the customer but also any incumbent supplier.
2. The definition of Transferring Employees is circular. The above clause gives the new supplier protection against inheriting any individual that is not a Transferring Employee. However, because Transferring Employee is defined as ‘those employees of the customer or the incumbent supplier to whom the Regulations will apply on or around the Services Commencement Date‘ any individual that transfers to the new supplier will always be caught by the definition of Transferring Employee and will never be categorised as an ‘Unexpected Employee‘ (whether or not their transfer was envisaged by the new supplier). So, in theory, the woodwork indemnity affords the new supplier no protection. Therefore, it would be better for the new supplier if the definition of Transferring Employee was extended to refer to a list that contained the names (or job titles) of the individuals that the parties believe to be in scope for a transfer to the new supplier. That way, any individual not listed that transfers to the new supplier will be categorised as an Unexpected Employee (therefore giving the new supplier the protection it seeks).
3. The indemnity is limited in that it does not offer protection if a dismissal is unfair. This may appear to be a reasonable limitation. However, given that the new supplier has to give notice of dismissal within five days of becoming aware of the Unexpected Employee, the dismissal is always going to be unfair as the new supplier will not be afforded the opportunity to follow a fair procedure and thus the employee in question may initiate a claim against the new supplier for unfair dismissal. Customers will often want a short time frame in which the new supplier is entitled to dismiss such employee in order to try and mitigate the potential costs incurred in continuing to employee an Unexpected Employee. However, this is likely to result in an unfair dismissal claim. It would therefore be better for the supplier for this limitation not to be included in a woodwork indemnity.
Warranties in relation to Staffing Information
When negotiating the TUPE provisions that will apply on commencement of the new services, the new supplier will often seek warranties with regards to the accuracy of the staffing information being provided. Whilst this will often be subject to extensive negotiation, if a customer is willing to grant this, a typical clause within the TUPE provisions of an IT contract would read as follows:
1.1 At least twenty-eight (28) days prior to the Service Transfer Date, the Customer shall provide (or procure that the Incumbent Supplier shall provide) Staffing Information in respect of individuals listed on the Transferring Employees List.
1.2 The Customer warrants that all information provided pursuant to clause 1.1 is accurate in all material respects at the time of providing the information.
Assuming that there are no issues with any of the above defined terms and Staffing Information contains all of the data that the new supplier will need for budgetary purposes (eg salaries, pensions rights, redundancy costs, liabilities, benefits), the above warranty would appear to be very helpful to the new supplier.
The issue here is with the timing of the provision of the information. At the point in time when the new supplier receives the Staffing Information, it is likely that the IT contract in question will already have been signed by the parties and the new supplier would have already committed to delivering services at a fixed price. Prior to contract signature, whilst the terms of the deal were being negotiated, the new supplier is likely to have already received initial Staffing Information in respect of the Transferring Employees during due diligence and such information would have been used in determining the charges for the services. If there is a difference between the Staffing Information provided during due diligence and the Staffing Information being provided pursuant to Clause 1.1, the new supplier may well be out of pocket notwithstanding the warranty it has the benefit of pursuant to clause 1.2. It would therefore be better for the new supplier to avoid this pitfall by ensuring that the warranty at clause 1.2 is also linked to the Staffing Information provided during due diligence prior to contract signature.
No TUPE
When negotiating an IT contract, the parties may believe that TUPE regulations will not operate as a result of the nature of the services which are to be provided by the new service provider. The IT contract may therefore remain silent with regards to the operation of the TUPE regulations on service commencement or it may contain a provision along the following lines:
The Parties agree that on the commencement of the Services (or any part thereof) by the Service Provider or any relevant Sub-contractor neither the Acquired Rights Directive nor the TUPE Regulations shall apply in such a way so as to transfer the employment of any person to the Service Provider (or a Sub-contractor).
However, such a clause will not protect the new supplier in the event that the parties were mistaken and the TUPE regulations applied to the commencement of the Services. The parties are unable to agree that the TUPE regulations do not apply as this is a matter of fact to be determined by the provisions of the TUPE regulations. In order for the new supplier to be protected against the operation of the TUPE regulations, it would need to ensure that the above clause was linked to a ‘woodwork’ provision which would grant the new service provider the ability to dismiss any employees it unexpectedly inherits and be indemnified against any employment liabilities it incurs as a result of employing or dismissing such employees.
Provision of Staffing Information
TUPE provisions in I.T. contracts will often require the customer to provide (or procure that the Incumbent Service provider provides) certain staffing information in respect of those employees believed to be in scope for transfer to the new service provider. It is also a statutory requirement of the TUPE regulations (reg 11) that a transferor provides the transferee with certain employee liability information at least 28 days before the transfer date.
The contractual provisions with regards to Staffing Information are often fairly standard and similar in nature and require the provision of details regarding an employee’s age, job title and role; salary and other benefits; and details of outstanding contractual as well as statutory or other employment related claims or litigation. The contractual provisions in respect of the provision of Staffing Information often mirror the requirements set out in reg 11. However, one important detail which is not required under reg 11 (and is often not included in contractual provisions in a Staff Transfer schedule) is details of an employee’s sickness and any permanent health insurance schemes of which the employee may have the benefit. Such information can be important for a new supplier.
If the supplier is to inherit employees who are not fit to work due to long-term sick leave, it may incur costs in back-filling such person’s role and it is best to know about it up front (so that this can be taken into consideration for budgetary purposes).
Restrictions in relation to Supplier Personnel
A typical TUPE provision concerning the exit of a contract (where a supplier’s employees may transfer out to the customer itself or to a replacement supplier) will impose restrictions in what the supplier can do with its personnel in the build up to the expiry of the contract. This is often referred to as a ‘standstill provision’. An example of a typical standstill provision is as follows:
In the period twelve months prior to the expiry of this agreement (or upon the Customer issuing a terminating notice in respect of this Agreement), the Supplier shall not, other than in the ordinary course of business:
-materially vary or agree to materially vary the terms and conditions of employment of any of its Supplier Personnel or transfer, replace, reallocate or dismiss any of its Supplier Personnel.
(Supplier Personnel means those individuals employed by the Supplier who are engaged in or wholly or mainly assigned to the provision of the Services or any relevant part of the Services which it is envisaged as at the date of such list will no longer be provided by the Supplier).
The restrictions set out in the clause above may be reasonable in relation to those individuals that are in scope to transfer back to the customer or a replacement supplier pursuant to the TUPE regulations but the definition of Supplier Personnel does not cover just those individuals, it catches all supplier personnel engaged in the services (regardless of whether or not they are in scope for a TUPE transfer). It would not be reasonable to apply such restrictions to those individuals that, whilst being ‘engaged’ in the services, are clearly not in scope for staff transfer. It may therefore be beneficial to ensure that any ‘standstill’ provisions are limited to those individuals that are in scope for transfer.
Conclusion
Having agreed a set of commercial terms and principles in an outsourcing deal, it is clearly important that the TUPE provisions set out in a contract accurately reflect what a party believes it is signing up to. A number of the sample clauses considered in this article may on first glance appear reasonable to a party and reflect a position that is commercially acceptable. However, the nature of the drafting flaws and pitfalls that can be found in commonly used ‘boilerplate clauses’ may result in a party not being protected in the way it envisaged when signing a contract. Just like the legislation itself, TUPE provisions in a Staff Transfer schedule remain complex and are often misunderstood and so extra care and diligence is often needed when reviewing and agreeing such provisions.
Simon Hill is a currently a lawyer at Fujitsu Services Limited. The views expressed are those of the author and not necessarily those of his employer.
