opinion: an irritant in the tendering process

Buying a business has just become a bit more complicated - there is less flexibility when restructuring the workforce than was previously thought.

The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) form the English legislative interpretation of the European acquired-rights directive. The underlying purpose of the directive is to ensure that when a business is disposed of as an identifiable unit its employees' rights are protected.

Since the regulations were introduced, the scope of the transactions caught has mushroomed. The regulations were first believed to apply to only commercial ventures. However, the ambit has been widened to include almost any entity which, following disposal, retains its identity.

Although employees are automatically transferred to the new employer on the same terms and conditions of employment, until now it has been thought that the new employer could, with the employees' consent, introduce binding changes to their contracts of employment. A recent decision of the Employment Appeals Tribunal, which followed a European Court ruling, held that where employees agree to changes to their contracts of employment, for a reason connected with the transfer of the venture, those changes will not bind them.

In this particular case the employees in question were deemed by conduct to have accepted changes to their pay structure. However, because the changes had been introduced as a result of a transfer, those employees were not bound and were able to pursue Wages Act claims. The claims related to the reduction in their salaries resulting from the introduction of the new terms of pay.

The ruling will make the rationalisation of a business more complex for purchasers. Changes are often necessary in working practices and pay and benefit structures in order efficiently to integrate the new employees into the expanded workforce. Transferred employees often receive a financial incentive in return for agreeing to such changes. These now appear to be ineffective.

The full implications of this decision may not be apparent for some time. However, it is safe to assume that the indemnities section of most business sale agreements is about to undergo an expansion.

Ian Hunter

Ian Hunter is an employment law specialist with the City law firm Bird & Bird.