TUPE Podcast Series – TUPE and Commercial Contracts

Join us for the tenth and final episode of Clarkslegal’s TUPE Podcast series, featuring Katie Glendinning, a Partner in our employment team. In this episode, Katie will delve into the intricacies of commercial contracts within the context of service provision changes.

Key topics include:

• Types of service provision change:
  • Outsourcing 
  • Change of contractor 
  • Insourcing
• Types of contracts:
  • An overview of various contracts that may be involved
• Common terms in commercial contracts:
  • Information requirements 
  • Warranties
  • Indemnities for actions
  • Specific issues related to TUPE
  • Restrictions on promises and staff transfers
• Entry and exit considerations

If you have any questions or require assistance regarding TUPE, please don’t hesitate to contact our expert employment lawyers. 

Transcript

Hi, my name is Katie Glendinning, and I'm a Partner in the employment team here at Clarkslegal. 

This is the tenth and final podcast in Clarkslegal’s TUPE Podcast series, focusing especially on commercial contracts in a service provision change context.  

Let’s start with a reminder of the types of service provision change. You’ll recall from our earlier podcasts that there are three types of service provision change, or SPC, under TUPE.

1)   Outsourcing – This is known as a first-generation outsourcing and is when the client decides to outsource work for the first time to a contractor. 

2)     Change of contractor – This is known as a second-generation outsourcing and is when the client decides to change its contractor; and

3)     Insourcing - this is when the client decides to bring services back in-house  

Let’s move on to consider the types of contracts that may exist in these three scenarios.

In a first generation outsourcing the client decides to outsource work to a contractor; we’ll call them Contractor 1.  

The Client will typically enter into an outsourcing contract with Contractor 1 for the provision of the services. This contract will usually have ‘entry provisions’ covering what happens when the services commence and ‘exit provisions’ covering what happens when the services terminate. 

This situation, from a TUPE perspective, is relatively straightforward: The client is the Transferor and Contractor 1 is the Transferee. As they are both a party to the contract they can, in theory, agree to insert terms relating to TUPE and could include indemnities. 

Now let’s consider the position if the Client subsequently changes contractor; a second-generation outsourcing.  

 In this instance, it would be highly unusual for the current contractor, Contractor 1, and the new contractor, which we’ll call Contractor 2, to have a direct contract between them as they are not providing services to each other. Instead, each contractor will have a contract with the Client.  

Contractor 1 already has a contract with the Client, which the Client will now be looking to terminate. This will trigger any exit provisions in that contract. The Client will also enter into a new contract with Contractor 2, usually with entry and exit provisions, and the entry provisions will be triggered at this stage.

The difficulty here is that, in a TUPE context, the transferor is Contractor 1 and the transferee is Contractor 2. They have no direct contract with each other and so they will not have agreed anything contractual with each other relating to TUPE. However, they may have contractually agreed something in their contracts to the Client. 

Finally, what if the client decides to bring the services previously outsourced back in-house?  Typically, here, it would just terminate its arrangement with Contractor 2. It would not enter into a new contract with anyone and the exit provisions of the contract with Contractor 2 would come into play. Contractor 2 is the transferor and the client is the transferee, and so, like in the outsourcing we saw initially, they are both parties to the contract and may have agreed clauses on TUPE. 

Whichever situation you are in, it is important to remember to check the commercial contract to see if it contains TUPE provisions. 

So, let's move on to some common terms that might be included within these commercial contracts.

TUPE applies as a matter of law and parties cannot contract out of it, however, it is possible for parties to reach agreements on how they will handle this which may alter the effects of TUPE in practice.

For example, under TUPE, liability for the transferor’s acts largely pass to the transferee – this will be the case regardless of what the parties contract, however, the transferor may agree a a term, through which, they commit, contractually, to reimburse the transferee for any losses they sustain as a result of the transferor’s acts and omissions.  Therefore, whilst the transferee will remain liable under TUPE, it will have a mechanism available to it to recover its financial losses.  

 It's important to remember that parties will not always have equal strength in bargaining negotiations.  Often the client is in a stronger position and will seek to apply its standard terms.  This is because of the freedom it usually has to withdraw and find another contractor, contrasted with the loss of work for the contractor if the deal falls through. This should not stop the transferee from properly considering those terms and the potential implications of accepting them. Also, the grass is not always greener for clients who seek alternative contractors, as they may have invested a lot of time and money getting to the negotiating table and issues raised by one contractor may well be raised by others if they do decide to move on. 

Let’s look at some of the common types of clauses that you might expect to see (or want to request, depending on which party you are) in a commercial contract relating to TUPE:

Information

TUPE requires the transferor to give the transferee certain information about transferring employees, known as ELI data. This information is limited and is rarely sufficient to be able to conduct full due diligence and assess risks and liabilities. 

Therefore, it is common for a transferee to seek more information. The contract with the client may therefore state that more information will be provided to the transferee and set out what this information should consist of and specify timeframes for the provision of that information.

In a first-generation outsourcing or insourcing, the position is simple as the contract is with the parties involved and can include these provisions. In a second-generation outsourcing, the client will usually be asked to ensure that the current provider provides this information to any new provider. If it agrees to this, the client will want to make sure it has something in its contract with the current provider to obligate them to provide this. 

Warranties 

It is common to seek warranties from other parties to the agreement. 

A warranty is a statement about a particular state of affairs. A breach of a warranty can give rise to a claim for damages if it’s caused quantifiable loss. A party seeking damages for a breach of warranty will also be under an obligation to mitigate their losses.

For example, parties may want a warranty that the information provided to them is accurate and up to date.  They may also decide how to split responsibility for pay and benefits where the transfer date occurs in the middle of the month, for example, but sums are not paid until the end of the month. This may be coupled with a warranty to ensure the parties abide by this.   

Indemnities for actions

The parties will usually be keen only to accept liability over things they have done and have control over.  

Under TUPE, the transferee becomes responsible for many of the transferor’s acts and, as such, it is common for parties to agree that the transferor will provide an indemnity for its pre-transfer acts and the transferee will provide this for its post-transfer acts.  

An indemnity is a promise to reimburse a party (pound for pound) for a particular type of liability, should it arise. It is generally expected that, unlike with warranties, there is no obligation to mitigate loss. Indemnities are therefore viewed as being more protective than warranties.  

Also, under TUPE, liability for failure to inform and consult is joint and several and so the parties often seek to agree that they shall indemnify the other for any award ordered in this regard to the extent it relates to their actions. 

It’s also common for a transferee to seek an indemnity to protect it against employees of the transferor that it was not made aware of, known as ‘woodwork’ employees.   

Where warranties and indemnities are not provided, there may be alternative methods to achieve the same aim, such as agreement on a pricing change mechanism should issues arise that were not contemplated. 

Warranties and indemnities need to be drafted very carefully and can give rise to substantial liabilities. Legal advice should be sought when drafting or negotiating these. 

So, to some Specific Issues

If the Client or Contractor is aware of any specific issue that may expose it to liability then it may well want to cover this off in the commercial agreement.  

For example, if during due diligence the transferee becomes aware of equal pay issues, it may want to seek some form of protection in respect of claims from the transferor, whether this be by warranty, indemnity or some other method depending on the circumstances. 

It may also be the case that the parties want to agree matters such as reimbursement of  redundancy costs if they know that redundancies will need to take place.  

Position on TUPE

Parties may seek to agree a position on TUPE, for example, they may agree that TUPE does not apply to the commencement of the services.  This often helps commercially with ensuring parties are on the same page and a smooth process ensues, however, it’s important to remember that TUPE cannot be contracted out of and so any agreement like this will not actually change the legal position – if TUPE applies, it applies!

Therefore, parties seeking to agree an approach contractually need to be mindful of the risks and may want to seek indemnities to protect themselves in the event the position they have taken is wrong or individuals bring claims. 

What about RESTRICTIONS ON PROMISES and DUMPING of staff

At the start of a contract, if the activities are already being performed by someone, for example, if this is not a brand-new service, then the party picking up the service will usually want to restrict the changes that the existing contractor, Contractor 1, can make to the staff working on the contract and their terms.  

This is to avoid the employees being promised things that the new provider, Contractor 2, has to then deliver on. Also, transferors may try to move underperforming employees onto the contract if they know they are losing it, so that they transfer out to Contractor 2 or to the client or new provider under TUPE, and so restrictions may be needed there.

Entry and Exits

Obviously, the provisions I’ve discussed can apply on commencement of a service but the contract will also typically have ‘exit provisions’, which deal with what happens when the contract ends.   

These will typically reflect those given on entry but the parties effectively swap positions.  For example, a new provider of services may be given more information when it picks up the service but then on exit it will usually be expected to provide this information to a subsequent provider.

Inadequate provisions are obviously a key risk. From a contractor’s point of view, it there are inadequate entry provisions, they may inherit liabilities which they would not want to take responsibility for and, if there are inadequate exit provisions, they may find they’re stuck with these when the contract ends.    

There are a lot of matters that the parties may want to cover off in the agreement and it’s not possible to go through all of them in this podcast. Hopefully, it has given a taster of the types of considerations parties need to be aware of.

TUPE clauses in commercial contracts need careful consideration and drafting to ensure they cover what is required and offer adequate protection over and above the statutory standard. 

This brings us to the end of this podcast and the TUPE Podcast Series.  We’ve covered 10 subject areas and I hope you’ve found it helpful and informative. If you have any questions on TUPE please do not hesitate to get in contact with me or any member of the Clarkslegal team. 

Thanks for listening.