Employment Rights Bill unpacked: will TUPE be transformed?

When a business changes owner, its employees may be protected under the Transfer of Undertakings (Protection of Employment) Regulations 2006.  At first blush, the Employment Rights Bill includes no direct changes to TUPE. But there are a number of changes to dismissal procedures which will impact the steps a transferee can take when employees transfer. The Bill also includes changes to public procurement laws which could have significant implications for private-sector employers when public services are outsourced.  

We consider the implications and whether more radical changes to TUPE could be on the horizon.

Day 1 unfair dismissal

The Bill removes the two-year qualifying period for unfair dismissal claims. So from day one of employment, employers will need to have a fair reason for dismissal and follow a fair process. The removal of the qualifying period will increase the potential liability for transferees, particularly where there are underlying disciplinary and grievance processes. Transferees will need to bear this in mind throughout their due diligence and costings.

The Bill does allow for a modified, “lighter-touch” process for certain dismissals during an initial period of employment (which the government have suggested be 9 months). We unpack this change here. The “lighter touch” dismissal process during this period will not apply to dismissals for redundancy. This means that for employees being made redundant, a full process will be required regardless of their length of service.

This will have a significant impact on how a transferee can shape its workforce post transfer. Currently, transferees can (and often do) follow a shortened redundancy process when making transferring employees with less than 2 years’ service redundant on, or shortly after, transfer. The costs associated with business transfers are likely to be materially increased due to the need to operate full redundancy processes across different organisations. Management time required will also likely increase.

Having said that, it’s worth noting that the Bill does not make any changes to the right to a statutory redundancy payment. Employees will still need to have worked for two years to qualify for this.

Collective redundancies

The Bill removes references to "at one establishment” in the legal test, meaning that employers would need to count redundancies across all sites/workplaces when deciding if the trigger for collective consultation and filing Form HR1 has been reached. We discuss this planned change in detail here. 

Where a transfer is taking place, it is already the case that, with the agreement of the transferor, the transferee can collectively consult with representatives of transferring workers when proposing to make 20 or more redundancies.  Removing the “at one establishment” requirement will likely mean that transferees creep up to the 20+ mark more quickly – so we may see more pre-transfer collective consultation being done in practice (with corresponding contractual provision made for that under the outsourcing agreement, which is typically not a big focus at present).

Fire and rehire

Changes to terms and conditions post-transfer are only permitted in limited circumstances – such as where the change is unrelated to the transfer, it is permitted by the contract or there is an economic, technical or organisational (“ETO”) reason entailing changes in the workforce.

Where a transferee wants to harmonise terms, there are some options available. For example, employers can simply ask transferring employees to sign new contracts (recognising the risk that it may not technically be enforceable). For senior or critical employees, another option is to enter into a settlement agreement ending employment and offering new terms of employment. Legal advice should be sought if considering such options.

Occasionally, transferees may use termination and re-engagement to implement a change in terms following a TUPE transfer. The “fire and rehire” provisions in the Bill are broad, making this tactic possible in only limited circumstances. See our full analysis here. This could still be an option when buying an insolvent business as there is an exception for businesses in financial distress although the “fire and rehire” still has to be reasonable in all the circumstances. 

Public sector outsourcing

The Bill includes new powers to make regulations to protect workers transferring from the public sector, as well as those working alongside them. The aim is to avoid a “two-tier workforce” where ex-public sector employees and private sector employees are working on the same contract but are employed on different terms and conditions.

Further details are awaited but the changes could have major (and costly) ramifications for private sector employers taking over public sector services. Here’s what we know so far…

Less favourable treatment

The regulations may set out provisions to be included in an outsourcing contract to ensure that neither the ex-public-sector workers nor the private sector workers are treated less favourably than the other group. Looking at what this could mean for each group:

• Transferring public sector workers

Any transferring ex-public sector workers should be treated “no less favourably” than they were as workers of the contracting public authority.

Public sector terms and conditions can often be far more generous than what is typically seen in the private sector, particularly in relation to pensions. Most occupational pensions schemes are carved out of TUPE and so do not transfer (although there are exceptions to this). When public sector employees transfer to the private sector, how their pension benefits will be treated is usually a critical consideration.

There are existing government guidance documents to protect the pension benefits of transferring public-sector workers, although these are usually not legally binding. For example, there is non-statutory guidance called “Fair Deal” for central government staff. This broadly requires that all public sector staff who are transferred under TUPE must still be able to remain a member of their public sector pension scheme.

Regulations which ensure transferring public sector workers are “treated no less favourably” by any new private sector employer could certainly bolster the statutory protection for public sector workers. Although details will be set out in regulations, less favourable treatment could be interpreted very widely – and beyond pension protections. Employers already need to honour contractual terms and conditions under TUPE (other than in limited circumstances which we discuss below), but “less favourable treatment” suggests other rights which would not usually transfer, such non-contractual perks, could be relevant. For example, could informal flexi time arrangements need to be honoured?  What about softer, typically discretionary benefits, like dental care plans, emergency childcare support options or subsidised lunches? 

It will be significant if transferees will need to match each individual non-contractual entitlement (in the way that it is currently required to do for contractual entitlements under TUPE). It remains to be seen if “less favourable treatment” will be subject to restrictions or if transferees will be able to argue that an employee is treated no less favourably “on the whole”.

• Private sector workers

Regulations may also be made to ensure that existing workers of the private sector employer are treated no less favourably than the transferring public-sector workers.

Again, this is broadly drafted and further detail will be set out in regulations. But when considering the overall ambition to remove a “two-tier workforce” this suggests private sector workers could need to be offered equivalent terms and conditions to the ex-public sector workers who have transferred across. This would be a seismic change to how TUPE currently works – it has never functioned to “pull up” the entitlements of the existing workforce within the transferee, so that they match those of the transferring employees.

Could this mean that an employer will need to enhance the benefits of their existing staff? Could they need to enrol employees into public sector pension schemes? That would be a very material change for transferees, increasing the cost of providing public services. These powers could lead to existing employees of the transferee accruing rights to certain terms or benefits even if they haven’t been subject to a TUPE transfer.

It is unclear exactly which employees this will apply to. Regulations are likely to set out further detail but the explanatory notes to the Bill suggest this this could be limited to private-sector workers who are working “exclusively or mainly” on the outsourced service. This would mean it affects only workers working on an outsourced public service, rather than the entire workforce. This could still result in a tiered workforce with workers being employed on different terms and conditions depending on what service they are allocated to – which may have implications for employee relations and the general perception of fairness. 

How will this work?

The regulations will focus on contractual terms to be included in outsourcing agreements. The explanatory notes explain that the powers could be used to specify model contract clauses to be included in outsourcing contracts, with different requirements according to the value of contract or the sector. A Code of Practice will also be produced containing guidance on outsourcing agreements. The Code of Practice may also specify when the additional requirements do not apply.

The Bill also introduces a legal requirement for public-sector employers to:

• take all reasonable steps to include any specified protections in any service contract;

• take all reasonable steps to ensure the provisions are complied with; and

• have regard to the Code of Practice.

Even if there are no direct obligations on private sector employers, they will be impacted by enhanced contractual terms. Further guidance is needed on what “reasonable steps” may be. But it is notable this would be an obligation on the public-sector employer only. Although this may have some weight in holding a private sector transferee to account, it is difficult to see how a transferor can reasonably control how the benefits of a transferee’s staff are impacted.

Detailed regulations are likely to be published (and be subject to consultation) next year. 

Future change on the horizon

Worker status

One of Labour’s future plans, which will be consulted on in full, is to remove the distinction between employees and workers.One consequence of this could be that all workers could be in scope to transfer under TUPE. Both the Bill and the Explanatory Notes refer to “workers” and not “employees” when discussing outsourcing – perhaps giving an insight into the future intention. 

Whether workers were in scope has previously been an area of uncertainty. Back in 2019, a Tribunal held that workers (as well as employees) should transfer under TUPE. The decision was widely criticized because of the practical difficulties. For example, workers may owe no ongoing obligations to the company and may not operate under its control, so would be difficult to consult with if they only work occasionally.  In our experience, most companies continue to operate as though TUPE only applies to transfer employees but cater contractually for the possibility of losses incurred if a worker transfers, or asserts they have transferred. 

The previous Conservative government proposed amending TUPE to clarify that workers were not protected. Although a consultation took place, a change in government occurred before any legislative changes were made. Given Labour’s stance on status these changes seem very unlikely to happen now. Instead, Labour will need to address the difficulties of workers being in scope to transfer. 

Equal pay

Labour’s plans to stop inequality of treatment and opportunity at work are wide-ranging – including extending pay gap reporting to ethnicity and disability (for employers with more than 250 staff), extending equal pay claims to cover race and disability and implementing a regulatory and enforcement unit for equal pay. 

Labour plans to ensure that “outsourcing of services can no longer be used by employers to avoid paying equal pay”. For example, if contractor workers earn less than employees who are directly employed. The detail will be delivered through the Equality (Race and Disability) Bill. 

At the moment, there is no suggestion that the government will legislate to address inequalities when a transferee inherits staff who are paid more (or less) than existing staff doing like work or work of equal value (where the transferor is a private sector employer – see above for transfers from the public sector). Currently, case law suggests transferees may be able to defend equal pay claims if there are pay disparities as a result of a TUPE transfer. For example, if women transferred on lower pay than the transferee’s existing male staff.

The government are yet to publish a draft Equality (Race and Disability) Bill but it is expected before summer 2025. The Equality (Race and Disability) Bill will be subject to consultation, as will any accompanying regulations. 

More radical changes?

Labour’s planned next steps include launching a Call for Evidence to examine “a wide variety of issues” relating to TUPE and how it works in practice. 

The government have not said which issues will be under consideration, but an overall review of TUPE is arguably long overdue. Although there were some very minor changes were made in January 2024, extending the limited circumstances an employer could consult with employees directly about a transfer, there are many other aspects of TUPE which cause frustrations in practice.

This could therefore be an opportunity for more radical changes to how TUPE operates. Some of the biggest practical issues are:

• Confusion around whether employees can transfer to multiple employers. An ECJ decision, Govaerts, ruled that a full-time employment contract can be split between new employers in proportion to tasks performed, resulting in two (or more) part-time employment contracts for the individual. Recognising split employment was impractical, this was another issue the previous Conservative government were planning to address. The previous consultation proposed that employers would need to agree who was responsible for each employer’s contracts. Our view at the time was that a clearer mechanism would be needed to determine whether or not TUPE applied and which entity would be the transferee.
• The restriction on changing terms and conditions, when there are often sensible business reasons for harmonising terms with the existing workforce. The restriction applies even when employees agree to the changes and/or the change is to their benefit, if there is no ETO reason entailing changes in the workforce.
• The current requirement for an ETO reason in a redundancy situation. This results in redundancies being delayed until immediately after the transfer (so they can be implemented by the incoming employer with an ETO reason), even where there is a clear “place of work redundancy”, particularly evident as a result of an “off-shoring”. It would make more sense for this to be removed or for the government to legislate that outgoing employers should be able to rely on incoming employers' ETO reasons to carry out the redundancy pre-transfer.
• The current requirement for a business to organise the election of employee representatives even where the employee representatives’ sole role is to receive information (if the employer is not envisaging taking measures); this is administratively burdensome and confusing when an employer could provide the same information directly to all employees.
• The current inability for a business to settle any liability for a breach of its information and consultation obligations by using a settlement agreement, and instead having to enter into a COT3 using ACAS to make any such settlement legally binding.

Lewis Silkin will be responding to the Call for Evidence when this lands – so watch this space! 

See other key planned reforms in our Employment Rights Bill dashboard and our comments in our Labour policy impact hub.