UK: No service provision change under TUPE where client changes

The EAT has ruled for the first time that the service provision change provisions of TUPE cannot apply where the client to whom services are being provided changes at the same time as the change in service provider.

This ruling is good news in particular for purchasers of property portfolios.  Until now the cautious approach was to assume that TUPE might well apply where a property portfolio was sold and new managing agents and/or other service providers were appointed by the new owner. Now it appears there cannot be a service provision change in this situation (at least until any appeal is heard), although in some cases there might still be a transfer of a business.  New owners/managing agents may now be emboldened in refusing to take on staff and outgoing owners/agents may now face more redundancy claims.  It will remain best practice to address the risk and potential costs in the contractual documentation.

A change of client commonly occurs where real estate is sold and new managing agents appointed. The contractor changes, but so does the owner of the property, albeit that the services are being provided in respect of the same property. 

TUPE was amended in 2006 to expressly cover service provision changes (SPCs) in addition to transactions falling within the original "business transfer" test.  The relevant regulation in TUPE applies where activities carried out on a client's behalf are instead carried out by a new contractor "on the client's behalf". 

Given that tribunals are usually heavily influenced by TUPE's purpose of protecting employees' employment, one might have expected a purposive approach to the meaning of "client" to encompass this type of situation, at least where one client is stepping into the shoes of another.  The employees here argued that a purposive construction would simply require adding after "client" the words "or person who has acquired the rights or obligations of the client".

The EAT refused to depart from a literal construction.  It considered that "the client" of the new contractor had to be the same as the original client. It ignored the employee's suggested addition to the wording and instead treated the issue as whether "the client" could be read as "any client" or "clients" - a considerably wider construction.  It was also persuaded in its view by the uncertainty that would be imported into the SPC exclusion (where "the client intends" that the post-change activities will be of short-term duration), should two clients be possible - whose intention would be relevant? 

There remain, however, circumstances where a change of contractor could amount to a business transfer, if an economic entity was transferred and retained its identity - which will depend in part on whether the new contractor takes on assets, employees etc. There was insufficient factual evidence to support such a conclusion here.  There may be an increased focus on these sorts of arguments if employees can no longer rely on the SPC rules in these circumstances - something which we anticipate in any event if the Government's consultation on the removal of the "Gold Plating" from TUPE concludes that the SPC provisions should be reversed out.  (Hunter v McCarrick, EAT)