When TUPE applies what does the business agreement need to cover?

Most small business owners don’t understand the importance of taking legal advice before they agree to sell or purchase a business due to perceived costs associated with approaching a solicitor and this is perhaps due to the fact that they do not understand the importance of warranties and indemnities particularly when it comes to transferring employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

What are warranties?

These are assurances by a party in a transaction that something is true or something will happen. If the warranty is breached then the party relying on it will be able to make a claim. To illustrate this, when a buyer is purchasing a business and the seller warrants that all electrical items work; if this proves untrue then the buyer will be able to make a claim against the seller for the cost of repairing the faulty electrical items.

What is an indemnity?

This is an agreement between two parties whereby one party agrees to compensate the other on the happening of a specified event. Where indemnities differ from warranties is that there is no obligation on the person suffering the loss to mitigate. To illustrate this if part A agrees to pay party B their legal costs in the event that a former employee makes a claim against them arising from the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). In the event this happens party A must pay party B and party B has no duty to mitigate their loss so they can use the most expensive solicitor/counsel instead of shopping around for one that’s reasonably priced.

What are the requirements of TUPE?

All employees transferred by TUPE retain the terms and conditions specified in their original employment contract.

TUPE Regulations set out that employees dismissed as a result of the transfer or a reason connected to the transfer will have been automatically dismissed.

What should I look out for during the due diligence process?

Being an employment specialist I am going to emphasis what you need to watch out for in respect of employee’s (though I would be glad for any specialists to comment on other matters):

1.    Key employees are they being transferred over? If not how is this going to impact on your ability to run the company?

2.    If employees are resigning or being redundant as a result of the transfer how are they going to be dealt with? It’s a good idea to agree that they all leave on compromise agreements to protect both parties from litigation.

Checklist of clauses the sale/purchase agreement must cover:

1.    The seller delivers on completion all records of NI and PAYE relating to the transferring employees up to the date of completion together with all other documents.

2.    The understanding that TUPE applies to all the employment contracts of retained employees. Ensure benefits not transferred over are excluded.

3.    Clarity in respect to which employees are transferring over (I recommend listing all employee details including dates of when started, annual salaries and hours worked in a Schedule).

4.    How employees not transferred under TUPE are going to be dealt with.

5.    Indemnifies protecting parties against any costs (including legal), claims, demands and expenses arising from TUPE.

6.    Seller’s discharges and performance of their obligation towards employees up to and including the completion date (including wages and any redundancies).

7.    Seller’s indemnities in respect of carrying out the consultation process.