The law of unintended consequences: TUPE service provision changes

What happens if an outsourced contract expires and is brought back in-house to be run as a skeleton service, pending a new contractor being appointed to take over the outsourced contract? Would this amount to a ‘service provision change’ under TUPE, despite the fact that the client had never intended to run the service itself? Sarah Lamont considers this question in the light of a recent decision from the Employment Appeal Tribunal.

19/12/2012

What happens if an outsourced contract expires and is brought back in-house to be run as a skeleton service, pending a new contractor being appointed to take over the outsourced contract? Would this amount to a ‘service provision change’ under TUPE, despite the fact that the client had never intended to run the service itself?  Sarah Lamont considers this question in the light of a recent decision from the Employment Appeal Tribunal.

The background

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) are designed to protect employees, so that when there is a change in employer, employees’ employment passes to the incoming employer without any adverse effect on employment rights. 

This covers two broad situations:

  • a traditional ‘business transfer’: where one organisation is transferred into the hands of another organisation; and
  • a ‘service provision change’ (SPC):
    • where services are transferred between contractors, including reassigning such a contract, whether by contracting out, outsourcing or re-tendering; or
    • ‘insourcing’ whereby a contract ends and work is brought back ‘in-house’, to be carried out by the client on their own behalf.

In order for TUPE to apply, it is not necessary for the activities pre and post transfer to be identical; but caselaw has established that the activities must be “fundamentally or essentially the same” as those undertaken by the outgoing party.

In London Borough of Islington v Bannon the Employment Appeal Tribunal (EAT) considered whether an unplanned assumption by a local authority of certain statutory duties, which came about when negotiations with an independent contractor foundered, amounted to a SPC for the purposes of TUPE.

The facts

Under the Children Act 1989, local authorities are obliged to appoint Independent Visitors (IVs) for certain children in their care. IVs, who are volunteers, befriend and advise children to whom they are assigned. From 2005, the London Borough of Islington contracted out the provision of its IV service to a charity, CSV.  The Claimant, Ms Bannon, was employed by CSV as its project co-ordination manager. In 2011, Islington proposed awarding the IV contract to another charity, but Ms Bannon was subject to disciplinary proceedings and the new charity was unwilling to take on the project with her in place. The contract with CSV expired on 31 March 2011, and Islington was left, on 1 April 2011, with no provision to meet its statutory duty to appoint IVs.

Islington, therefore, had to do the best it could to carry on the service, in order to meet its statutory duty; Islington acknowledged, in the course of this case, that its provision of IVs was unresourced and unsatisfactory.  It effectively operated a skeleton service with no dedicated staff and as a result could only manage the service reactively. Some of the functions of the service were neglected; and no positive steps were taken to recruit new IVs.  Islington struggled on with providing the service for five months, and the contract was finally taken over by a new provider from September 2011. Ms Bannon was dismissed by CSV by reason of redundancy on 31 March 2011. She claimed that there had been a service provision change under regulation 3(1)(b)(iii) of TUPE 2006, arguing that she had been automatically unfairly dismissed by reason of the transfer.

The question for the tribunal to determine was: would TUPE be disapplied given the different way in which Islington, out of necessity, had performed the IV functions when compared with CSV?

An employment tribunal said, no, TUPE would apply - and Islington appealed to the EAT.  It argued that the tribunal had failed properly to consider the activities which were being carried out by Islington after April 2011 against those which had been carried out by CSV before its contract expired.  Islington argued that the focus should have been on the activities that were not carried out during the post-transfer skeleton service (recruitment and training of IVs, matching of IVs to children, publicity and promotion of the service and monitoring of IVs). 


The decision

The EAT dismissed the appeal, and agreed with the tribunal that there was an SPC because the activities ‘matched-up’, before and after the transfer.

The EAT noted that, although it had been both unwelcome and unplanned, Islington did take over the service that had previously been provided by CSV. The fact that there were aspects of the service which were not replicated did not prevent the insourcing from occurring. The Council had carried on the “work in progress” of maintaining the existing ‘visitors’ service for children in their care. 

The EAT took the opportunity to review the recent case law on the meaning of ‘activities’ pre and post transfer, and confirmed that the question of whether the activities are the same will be a question of fact and degree.

The EAT rejected the argument that the Employment Tribunal should have gone through of each of the activities in turn in order to analyse whether the activities were sufficiently similar for TUPE to apply.

A more broadbrush, common sense and pragmatic approach was approved.  The activities pre and post transfer do not have to be identical; minor differences can, therefore, be disregarded.
 
Applying that approach to the particular facts of this case, the EAT said that, although a lack of dedicated staff and resources meant that Islington could not provide a comprehensive IV service, it ensured that there was a continuous provision of the service and maintained existing relationships with IVs.  Importantly, nobody other than Islington was performing any of these activities, so there was no fragmentation; there was still a SPC, notwithstanding that Islington was providing a limited service.

What does this mean for me?

It is helpful that the EAT has confirmed that a common sense and pragmatic approach should be taken to the question of whether the activities undertaken in a SPC are the same before and after a transfer.  The EAT has said that employment tribunals should be looking for an ‘essential service or activity’.  It is not the case that the parties need to go through a mechanical exercise of comparing individual activities and checking whether they are mirrored either side of the transfer date.

It is, however, difficult to go further than the general principle set out above and say that a case with similar facts to Islington would be decided in the same way.  Because this type of appeal is based on the factual circumstances, as long as an employment tribunal has sensibly applied the law to relevant factual scenario, it will not be for the EAT to “second guess” (as the EAT put it) its decision.  So, confusingly, if a tribunal were asked to look at a very similar case but unexpectedly came to a different conclusion, it would be difficult for the EAT to interfere with that decision, provided that the employment tribunal had considered the correct law and applied it to the facts in a sensible manner.

We can illustrate this difficulty by way of a real life example.  In another decision on similar facts to Islington, decided earlier this year, the EAT said that there had been no SPC where the incoming contractor had operated a reduced service (by 15%) and the service had been split post transfer (Enterprise Management Services v Connect-up). 

Perhaps the key difference between Islington and the Enterprise Management Services case is that, with Islington, there had been no conscious decision to reduce the insourced service; and the service was not split between incoming providers.

This is not to say, however, that there will never be an SPC where a contract is fragmented post-transfer and a service has reduced.  It will be a matter of fact and degree for an individual tribunal to decide, using previous case law as a guide.

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