Due diligence under TUPE

Those who intend to buy a business, or who are bidding for a contract to provided services from a competitor (a service provision change), must undertake due diligence before completion of the transfer!

When buying a business, the buyer will normally inherit the employees of that business under TUPE. Before the transaction takes place, the buyer should know exactly what terms and conditions of employment they enjoy as he will be obliged to honour them post transfer.

Under the TUPE regulations, the transferor (seller) is obliged to provide the transferee (buyer) with certain information about the transferring of employees, known as “Employee Liability Information” (ELI). The ELI includes “those particulars of employment that an employer is obliged to give to an employee pursuant to Section 1 of the Employment Rights Act”. This is commonly known as a Section 1 Statement or Particulars of Employment and includes “the scale or rate of remuneration of the method of calculating remuneration”.

However, Section 1 of the Employment Rights Act does not state whether the particulars of employment are confined to contractual elements or not. The TUPE regulations do not clarify the position either.

In a recent case, the transferor provided copies of the transferring employees’ terms and conditions to the transferee that defined some terms as contractual and some terms as non-contractual. It was stated, under the non-contractual heading, that each employee was entitled to a Christmas bonus.

Following the transfer, it became apparent that the bonus was a contractual bonus and some employees brought in claims at the tribunal which concluded that the bonus was in fact contractual.

The transferee sued the transferor in the Employment Tribunal seeking £100,000 in compensation for providing them with incorrect ELI.

The transferee argued that the particulars required in a Section 1 Statement were to set out the employer’s contractual remuneration, and by inaccurately stating that the bonus was non-contractual meant that the transferor had failed to provide the required ELI particulars and thereby breached the TUPE Regulations.

The transferor argued that the transferee had made a claim for something which it should have become aware of had it carried out the correct due diligence. Both the Employment Tribunal and the EAT agreed with the transferor.

This case is a warning to transferees that relying on the ELI provided by the transferor is not enough. Those who intend to buy a business, or who are bidding for a contract to provided services from a competitor (a service provision change), must undertake due diligence before completion of the transfer. Copies of relevant documents must be sought and the relevant questions asked. It is prudent to require indemnities from the transferor should any loss occur because the information provided is incorrect.

If you have any queries regarding the above, please do not hesitate to contact Reggie Lloyd, our specialist in our Colchester office on 01206 217347 or email reggie.lloyd@birkettlong.co.uk

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.