Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
A consultation regarding the changes is currently underway, and if approved, the reforms could be implemented as early as October 2013.
The changes are intended to create clarity for the parties involved, helping to deliver growth for businesses and providing continued protection for employees involved in business transfers. However, whilst the plans to reform TUPE are well intentioned, careful attention needs to be paid to the detail of the changes, as it looks likely that one of the key proposed alterations to TUPE will create more legal uncertainty around employment rights.
The key reform that is expected to impact public sector organisations is the proposal to stop TUPE from automatically applying to a ‘service provision change’. A service provision change occurs when a service provided by a local authority is outsourced to a contractor, is re-tendered or is brought back in-house, with the current method ensuring the transition of any existing employees from one provider to another. If the reforms go ahead TUPE may no longer apply to outsourcing and employees could find themselves facing a challenging legal argument to prove that TUPE does apply or be faced with redundancy.
The proposed regulations are intended to make it more attractive to bid for public services. TUPE currently asserts that in a service provision change, the new employer automatically has to continue any existing contractual terms. Local authorities are also obliged to ensure pension rights are maintained by the new contractor. Many contractors don’t bid for a contract where they might pick up substantial employment obligations, particularly in relation to pension rights.
However, if the changes are implemented, the Government’s hope is that the new service provider could take on staff without acquiring the associated employment liabilities.
However, we don’t believe that will automatically be the case. As part of the proposals, the test to define whether TUPE applies will revert to looking at whether there is a stable economic entity which retains its identity after a transfer.
Case law has shown that in some cases an economic entity can be reduced down to the workforce delivering the work. For many labour intensive services there is a possibility that TUPE will still apply but each case will be fact specific. This amendment is likely to result in increased legal costs, as authorities seek to make sense of the complex EU and domestic case law to ascertain whether TUPE applies. Local Authorities are unlikely to want to give contractors any assurances in this regard and as a result bidders may still be put off.
The potential lack of TUPE protection could also lead to an increased risk of industrial action from disgruntled staff whose work on a service being outsourced. Employers have to consult with staff and unions about transfer and a suggestion that terms will not be honoured is likely to cause unrest.
Whilst the intention is to increase competitiveness and level the playing field when bidding for public sector contracts, creating increased uncertainty regarding employment protection is likely to have a detrimental affect. At this stage, the proposals are not set in stone; so it is essential that any organisation that is likely to be affected contributes to the public consultation which closes on 11 April.
Matthew Wort is a partner at Anthony Collins Solicitors.
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