The return of the tendering trap

Outsourcing is big business, with the European market alone reputedly worth pounds 400bn. Organisations across Europe are tendering out everything from catering facilities to information technology. Financial planning has not been helped by the constantly evolving interpretation of the Acquired Rights Directive (ARD) which completed yet another twist with the European Court decision in the Suzen case on 11 March.

The decision, which has just been followed by the Court of Appeal in a case involving Brintel helicopters, has created fresh uncertainty for both employees and contractors.

The directive was introduced in 1977 with the aim of protecting employees' rights when their company is transferred to a new owner. On the sale of a company's shares, the employees' terms and conditions remain unaltered because, although the major shareholder changes, the legal entity employing the work-force - the company - does not. By contrast when a business is disposed of through an asset sale, employees do not have the same protection as a purchaser could avoid responsibility for employees by buying everything but the company's shares. The directive was introduced to close that gap.

In broad terms it says that when an economic entity retains its identity after transfer, employees are transferred with the same terms and conditions. The only rights that do not transfer are pension rights. So the purchaser can inherit significant employee-related liabilities which go to the heart of the contract price. Each EU state has incorporated the directive into its legislation, the UK in the form of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe). Initially the directive was believed to extend only to commercial ventures and not to non-core activities such as catering or information technology and many out-sourcing contracts were negotiated in the belief that Tupe would not apply.

A flurry of European case law has since shown that reasoning to be premature. The European Court held that the activities of a single cleaner were capable of constituting an economic entity and in 1993 Tupe was amended to make clear that it was not restricted to commercial ventures.

One problem created by the constant shift in interpretation relates to out-sourcing contracts negotiated some years ago which are coming up for re-tendering. The likelihood is that if there is a change in contractor there may be an automatic transfer of staff, though, as a result of the Suzen decision, the position is not as clear as it was. Previously the test was whether it could be shown that there is a distinct economic entity that retains its identity before and after the transfer. Now the court is saying that the directive will not apply on re-tendering if no assets are transferred and a substantial part of the work-force is not transferred.

The problem is that as many of the contracts were negotiated on the assumption that the directive would not apply and thus staff would not transfer, those contracts do not provide for the release of employee-related information to any rival tenderers.

Anyone bidding for a contract will want to know the size of the work- force he may inherit and the associated liabilites. But the old contractor is not under any statutory obligation to provide that information and there is little commercial incentive to do so given that he stands to lose the contract.

Customers have few options. They can try to renegotiate the outsourcing agreement by relying on a break clause or they can apply commercial pressure to the contractor by threatening to exclude him from re-tendering if he refuses to supply information to rivals.

Potential contractors' worries will not be confined to lack of work- force information. There may also be concerns about the outgoing contractor's ability to manipulate the work-force size and quality. There is nothing to prevent an outgoing supplier transferring sub-standard staff into the entity at the end of the contract or redeploying key employees that the incoming contractor was relying on inheriting.

The real advice for those who have out-sourced non-core activities is to address the problem now rather than wait until the contract expires. If commercial pressure is unable to resolve the problem legislation may prove the only answer. But if the drafting progress of the successor to the directive is anything to go by, legislation may be some time coming.

Ian Hunter

The writer is an employment law specialist at Bird & Bird.

Suggested Topics
peoplePaper attempts to defend itself
voicesWe desperately need men to be feminists too
Life and Style
food + drink
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
Have you tried new the Independent Digital Edition apps?
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Account Executive/Sales Consultant – Permanent – Hertfordshire - £16-£20k

£16500 - £20000 Per Annum: Clearwater People Solutions Ltd: We are currently r...

KS2 PPA Teacher needed (Mat Cover)- Worthing!

£100 - £125 per day: Randstad Education Crawley: KS2 PPA Teacher currently nee...

IT Systems Manager

£40000 - £45000 per annum + pension, healthcare,25 days: Ashdown Group: An est...

IT Application Support Engineer - Immediate Start

£28000 per annum: Ashdown Group: IT Software Application Support Analyst - Imm...

Day In a Page

Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits