Service contract rescues – the dos and don’ts

The news that Allied Healthcare is “actively exploring” the sale or transfer of its care and support services is sad news for individuals who either rely on their services, or who are employed under the various contracts it manages.

Conversely, it presents opportunities for other care providers to pick up these contracts and continue the services Allied can no longer provide.

Opportunities can, however, bring an element of risk. The temptation for would-be buyers and transferees to rush into buying contracts where, ordinarily they would be more circumspect, is great but potentially costly in the long run.

Given the importance of human capital in the transfer of service contracts, the relaxing of some of the costly protections offered to employees under the Transfer of Undertakings (Protection of Employees) Regulations 2006 (“TUPE”), is a huge draw. Ordinarily, in the sale of a business or the transfer of a contract, the rights of transferring employees are preserved as their employment transfers to the buyer or the transferor (Regulation 4). In addition, they are protected from dismissal where that dismissal is related to the transfer (Regulation 7). The buyer, or the transferor, inherits all the rights but also the liabilities connected with the employment contracts. This is not always the case if the transferor is in financial difficulty.

Be wary however, of a key distinction...

When the transferring business is subject to “relevant insolvency proceedings”, TUPE is modified;

• The buyer or transferee is not liable for some pre-existing debts owed to the employees; for example statutory redundancy payments, arrears of holiday and pay; and
• Both buyer and seller have greater flexibility in relation to the variation of contractual terms.

Relevant insolvency proceedings are described as situations where an insolvency practitioner has been appointed but the endgame is not a liquidation of the assets but rather the sale of the whole or part of the business as a going concern (BEIS Guidance).

In the eyes of the drafters of TUPE, employees should not be denied the preservation of their rights while the transferring business continues to trade and so Regulations 4 and 7 are not done away with totally.

When the transferring business is subject to “bankruptcy proceedings” or “any analogous insolvency proceedings which are instituted with a view to the liquidation of the transferor’s assets”, the picture is different:

• The employees will not automatically transfer to the transferor/buyer, rather the buyer can ‘cherry pick’ those employees it chooses;
• Any existing employment-related debts or liabilities will not be transferred;
• Any transferring employment contracts can be varied; and
• Any dismissal of transferring employees will not be automatically unfair.

Bankruptcy proceedings or analogous insolvency proceedings describes the situation where, under the appointment of an insolvency practitioner, the business is being liquidated and no longer able to trade.

So, when it comes to taking on contracts from a failing provider, the adage of “there is no such thing as a free lunch” could be applied! Always proceed with care, armed with comprehensive due diligence reports;

DON'T

• Assume that TUPE has been relaxed, solely based on press reports or industry gossip concerning the impending liquidation of the current provider;
• Believe that TUPE won’t apply or will only apply in part just because that is what the transferor has agreed – tribunals will always look beyond the transferring parties’ agreement to the realities of the situation and the protection of employees.

DO

• Actively investigate the background to any failing contracts – even if TUPE doesn’t apply, investigate other transferring liabilities, i.e. non-performance penalties etc.
• Discover why, where possible, the contracts have failed and the current provider subsequently struggled. Consider if there are other forces at play – economic or political – and how will you, as the transferee, both prepare for and address these other issues?

For more information

If you would like further information regarding this e-briefing or for any matters relating to TUPE, please contact Matthew Wort.