Dr John McMullen, partner in Short Richardson & Forth LLP and a Visiting Professor of Law at Durham University, considers the service provision change regime under TUPE 2006 and likely impact on litigation, taking account of the emerging case law. The article is published in Amicus Curiae – Journal of the Society for Advanced Legal Studies at the Institute of Advanced Legal Studies. The Journal is produced by SALS at the Institute of Advanced Legal Studies, University of London. The article is based on a lecture given at the IALS in May 2010 and draws on the text of the author's looseleaf work on Business Transfers and Employee Rights

McMullen, John

English

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9Amicus Curiae Issue 84 Winter 2010THE SERVICE PROVISION CHANGE REGIMEUNDER TUPE 2006The definition of a transfer of an undertaking underArticle 1 of the Council Directive 2001/23/EC on theapproximation of the laws of the Member States relating tothe safeguarding of an employees’ rights in the event oftransfers of undertakings, business or parts of undertakingsof businesses (the “Acquired Rights” Directive) is whetherthere is “a transfer of an economic entity which retains itsidentity, meaning an organised grouping of resources whichhas the objective of pursuing an economic activity, whetheror not that activity is central or ancillary”. The Transfer ofUndertakings (Protection of Employees) Regulations 1981were interpreted in the light of this definition, supplementedby the seminal European Court guidance in Spijkers vGebroeders Benedik Abbatoir CV [1986] ECR 1119. Thesubsequent cases of Ayse Süzen v Zehnacker GebäudereinigungGmbH Krankenhausservice [1997] IRLR 225 illustrates theuncertainty of the law in the context of the service provisionchange. Ayse Süzen is authority for the fact that the Directivedoes not apply to a situation where a person has a trustedprovision of services to a first undertaking and terminatesthat contract and enters into a new contract with a secondundertaking unless there is a concomitant transfer from oneundertaking to another of significant tangible or intangibleassets or the taking over by the new employer of a major partof the work force in terms of numbers and skills assigned bythe predecessor to the contract.In labour intensive industries such as cleaning,maintenance and security there is rarely a transfer of assetsbetween transferor and transferee. In such sectors the testis reduced to the question of whether a major part of theworkforce is taken on by the putative transferee. Inpractice, therefore, this meant that the putative transfereehad the ability to govern whether there would be a transferby refusing to take on the employees. The test was alsocircular. Whether employees had the right to transferdepended on whether they did transfer.When enacting the TUPE Regulations 2006 thetraditional test of a business transfer laid down by Article 1of the Directive was, via regulation 3(1)(a), retained fortransfers of undertakings not involving a service provisionchange. But a wider definition in regulation 3(1)(b) wascreated for cases of service provision change. Underregulation 3(1)(b) as long as service activities cease by oneperson (transferor) and are taken up by a new person(transferee) and prior to the change over there was anorganised group of employees, the principal purpose ofwhich was to carry out those activities on behalf of theclient there will be a transfer. This, overrules Ayse Süzen inthe UK since the thrust of Ayse Süzen was that a merechange over of contractor did not trigger the Directive.Ayse Süzen is still the operative case in European law onservice provision change and it is still applies in EUMember States apart from the UK. The UK has takenadvantage of the liberty in Article 8 of the Directive tomake provisions more favourable to employees than arecontained in the Directive. Extending TUPE to a widerrange of situations in service provision change cases isobviously a measure which is to the benefit as opposed tothe detriment of employees, the substructure of whichrights are contained in the Directive itself.This provision is intended to be independent of thetraditional business transfer test (now, as stated, containedin Regulation 3(1)(a) of TUPE 2006) and case law on itsinterpretation has been eagerly anticipated. This paperseeks to analyse such case law and examine the scope andboundaries of the new provision.Case law relating to serviceprovision changes under theTransfer of Undertakings(Protection of Employment)(TUPE) Regulations 2006by John McMullenTHE EMERGING CASE LAWThe first case on the provision was that of anemployment tribunal sitting in Reading. But it isinstructive. It is a case where, if Ayse Süzen were operative,there would have been no transfer of an undertaking.Under regulation 3(1)(b) there was. In Hunt v StormCommunications Limited, Wild Card Public Relations Limited andBrown Brothers Wines (Europe) Limited (Case No2702546/2006, March 27, 2007), Storm Commu-nications was a public relations services provider. BrownBrothers Wines (BBW) was its client. In June 2006 BBWgave Storm notice that it was re-tendering for the provisionof public relations services. Storm lost the pitch and thework went, on re-tender, to Wild Card. The claimant hadan employment contract with Storm, as an accountmanager. The job description made no specific referenceto any particular client. But she started working on theBBW account from the outset of her employment andcontinued to do so without interruption until she ceasedworking for Storm. The claimant’s evidence was that shespent some 70 per cent of her time each year on the BBWaccount. The claimant’s evidence was accepted by theemployment tribunal.It is material in this case that no assets transferred fromthe first service provider to the new service provider. Norwas the new service provider willing to take on Mrs Hunt.Clearly, as stated, if Ayse Süzen were operative there wouldbe no transfer. The employment tribunal however had nodifficulty in finding there was a service provision changepursuant to regulation 3(1)(b). As this was not a contractwholly or mainly on the supply of goods or a contractconcerning activities to be carried out in collection with abig event or task of short term duration (the exceptions toreg 3(1)(b)) the sole remaining question was whether,prior to the service provision change, there was anorganised grouping of employees, the principal purpose ofwhich was to provide the services to the client for thepurposes of regulation 3(1)(a). Regulation 2(1) alsoprovides that an organised grouping of employees caninclude a single employee. This, taken with the percentageof time spent on the client’s account made Mrs Hunt anorganised grouping of employee(s) and therefore theconditions in regulation 3(1)(b) were satisfied.FRACTIONAL TRANSFERSSo far so good. But some factual scenarios previouslyunexplored have arisen subsequently testing robustness ofregulation 3(1)(b). These problem cases mainly concernfractional transfers where, upon a re-tender, the service isdispersed, not to one single service provider but to anumber of service providers. In Kimberley Group HousingLimited v Hamberley [2008] IRLR 682, the EAT consideredthere could be a relevant transfer upon such a re-tender.The question of whether an employee transfers to aparticular transferee is a question of fact. This may beillustrated thus. In this case, the transferor providedaccommodation and related services for asylum seekerspending determination of their applications for asylum.There were 140 properties in the Middlesbrough and 50properties in Stockton to accommodate a fluctuatingnumber of asylum seekers. In 2006 the incumbentcontractors, Leema, lost the contract and Kimberley andanother contractor were awarded the right to succeedLeema as a new contractor. It was held that transfers maytake place to more than one transferee even if there wasonly one transferor. It might be the case that there aresome circumstances in which a service is being provided byone contractor to a client that, in the event, is sofragmented that nothing which can be properlydetermined as being a service provision change has takenplace – but this was not the case here.Nonetheless, the EAT decided that, there could not be apartial transfer of an employee (a view redolent of thedecision in Hassard v McGrath (NICA) [1996] NICA 586, acase decided under TUPE Regulations 1981). Either theemployee was transferred with the part of the functionchanging hands or he or she was not. This was a questionof fact, taking into account where the substantial majorityof the employee’s time was spent or required to be spent.In the present case, when 29 per cent of the activities wereperformed in Middlesbrough by Leema and 71 per cent byKimberley, the EAT considered that liabilities in relation tothe employees concerned should transfer to Kimberley. Asto Stockton, where Kimberley took over 97 per cent of theactivities formerly carried out by the transferor there wasno contest. There was a regulation 3(1)(b) transfer toKimberley exclusively.DIFFUSE SERVICE PROVIDERSThe question has arisen, however, whether regulation3(1)(b) can apply on service provision changes where thereare diffuse successor providers. An example in point is theemployment tribunal case of Thomas – James v Cornwall CountyCouncil (Case No 1701021-22) where it was held that it wasnot possible to apply regulation 3(1)(b) where it was, on thefacts, impossible to identify a new service provider followingthe service provision change. This was a case whereCornwall County Council contracted with 17 serviceproviders to provide a free legal helpline service. Under thescheme, callers would be routed to any available adviserfrom the service providers concerned. On the contractrevision, the service providers were reduced to nine, but itwas impossible to determine that there was an organisedgrouping of employees of servicing a particular client.Regulation 3(1)(b) did not therefore apply. Also to be notedin this context is Clearsprings Management Limited v AnkersEAT/0054/L8. This case involved the National AsylumSeekers Service (NASS) the function of which was toprovide accommodation for asylum seekers. Contracts wereawarded to contractors to provide this service. In the NorthWest there were four such service providers, includingClearsprings. On the expiry of the contract the service was10Amicus Curiae Issue 84 Winter 201011Amicus Curiae Issue 84 Winter 2010re-let. Three contractors, but not Clearsprings, wereappointed. The asylum seekers looked after by Clearspringswere randomly allocated to the incoming contractors. As inThomas-James no particular transferee could be identified ashaving taken over the activities; it was so fragmented thatregulation 3(1)(b) could not be engaged.Metropolitan Resources Limited v Churchill DulwichCurrently, the leading case on the construction ofRegulation 3 (1) (b) and its relationship with legacy case lawunder TUPE 1981 is Metropolitan Resources Limited v ChurchillDulwich [2009] IRLR 700. In this case, Migrant Helpline, anagency of the Home Office, had a contract with ChurchillDulwich (CD) under which CD provided accommodationto asylum seekers. Upon the expiry of that contract MigrantHelpline entered into a new contract with MetropolitanResources Limited (MRL) for provision of the service at adifferent location. There were also minor changes in themanner in which the service provision was to be carried outincluding (not only, as stated, a change of location) a changein length of stay, and with a faster turnaround for residentswhich required some adjustment to staff duties. Finally, notall residents made the move to location on the same date.The employment tribunal held that regulation 3(1)(b) of theRegulations applied; there was a service provision changeunder that paragraph in that a relevant transfer hadoccurred. MRL, the putative transferee, appealed thatdecision, arguing that the employment tribunal had failed totake into account the guidelines of the EAT in Cheesman vBrewer Contracts [2001] IRLR 144 (a case on TUPE 1981)which required a multi-factorial approach to the question ofwhether there was a stable economic entity prior to thetransfer and whether there was a transfer of an economic entityretaining its identity in the hands of the transferee. It wasargued that this approach was still valid as far as regulation3(1)(b) was concerned.The EAT (His Honour Judge Burke QC, sitting alone)held that this argument should fail. The history of theTUPE Regulations 2006 was that when a new serviceprovision change regime was intended to remove – or atleast mitigate – the uncertainties or difficulties involved inestablishing a traditional transfer under TUPE 1981 (or,now, regulation 3(1)(a) of TUPE 2006). “Service provisionchange” is a wholly new statutory concept. It is, as stated,independent of European law as the Acquired RightsDirective does not make a similar provision. The EATrobustly took the view that case law on TUPE 1981 (andwhat is now reg 3(1)(a)) is only applicable in cases otherthan service provision changes and, it followed, theguidance of Cheesman did not apply to the question ofwhether there was a service provision change. Thus:• In considering whether there was a service provisionchange, the employment tribunal had to considerwhether the service provided after the change wasfundamentally, or essentially, the same as that providedbefore the change.• The answer to that question is a matter of fact.• The fact that the transfer did not take place wholly onone day, that the employees did not leave thetransferor on the date of the transfer and theproviders use different locations, were not,individually or collectively, fatal to the existence of theservice provision change.• It cannot have been intended by the draftsman of thenew service provision rules that the concept shouldnot apply because of some minor differences betweenthe nature of the tasks carried on after the serviceprovision change, compared with before.• As to the issue of the time of the transfer, bearing inmind not all users of the service transferred on thesame date, the EAT noted that Reg 3 (6) (b) providesthat a TUPE transfer can be effected by a series oftransactions. It held that that paragraph appliesequally to Regulation 3 (1) (a) and to Regulation 3 (1)(b) cases.However regulation 3(1)(b) does not apply for anyactivities following the change-over are “wholly different”.Notwithstanding the broad approach taken to “activities”in Metropolitan Resources Limited v Churchill Dulwich (seeabove) in which it was stated that those activities after thechange-over compared with before cannot be identical, aslong as they were fundamentally, or essentially the same asthose carried out by the putative transfer, OCS Group v Jones[2009] ALL ER (D) 138(Sep) EAT provides an examplewhere regulation 3(1)(b) does not apply because theactivities were “wholly different”.In this case, OCS had a contract to provide cateringservices to the BMW car plant at Cowley. This was to applyfor a centrally located restaurant/deli/bar supported bywhat are described in the decision as four “satellites and ageneral shop”. The service specification provided forEnglish and continental breakfasts, beverages, lunchinvolving hot soup and hot meals, vegetables as well as asalad bar, hot and cold baguettes, sandwiches, rolls, pizza,jacket potatoes together with hot and cold deserts andnormal beverages. The two claimants in this case wererespectively a chef and a supervisor working in thesatellites.On a re-tender MIS took over the contract from OCS onAugust 1, 2007. The employment tribunal found howeveras a matter of fact, that the MIS contract was a substantiallyreduced service which was “materially different to thatoperated by [OCS]”. There were now five “dry goodskiosks” – there was no requirement for hot foodpreparation at the satellites. The satellites were selling pre-prepared sandwiches and salads (although some of the staffduties remained in that the staff were to continue to ensurethe cleanliness of tables, the presence of clean trays,condiments and the rotation of sandwiches). Theemployees argued that there had been a relevant transferalthough they had a right to transfer to MIS from OCS.12Amicus Curiae Issue 84 Winter 2010The employment tribunal held, as stated, the MIS contractwas “materially different” and “wholly different” from theOCS contract. It was switched from a full time canteenservice to a dry goods and previous catering staff who werechefs and the like were, in effect, becoming sales assistantsworking in a kiosk.Another case where arguments under regulation 3(1)(b)failed is Ward Hadaway Solicitors v (1) Love (2) Scott (3)Capstick Solicitors LLP EAT/0471/09. In this case, WardHadaway carried out legal work, externally, for the Nursing& Midwifery Council (NMC) as a panel solicitor. Upon are-tender, Capstick’s were appointed the sole external legalservices provider. As part of the re-structuring of theprovision of legal services, a fair amount of work was alsotaken in-house by NMC, Ward Hadaway were not requiredto transfer over any work in progress to Capsticks and thefirm continued to work on the files it had already beengiven. Employment tribunal felt that there had been anorganised grouping of employees which had, as itsprincipal purpose, been carrying out the activities onbehalf of the client. But it found that it was not the casethat activities ceased to be carried out by a contractor on aclient’s behalf and carried out instead by another person (asubsequent person) on a clients behalf as is required byregulation 3(1)(b)(ii). Ward Hadaway continued to workon its files; there were no activities which have ceased to becarried out by Ward Hadaway. There were some 100 – 140such files providing work for Ward Hadaway for at least sixmonths. Therefore there was no service provision change.The EAT (Judge McMullen QC presiding) agreed anddismissed Ward Hadaway’s appeal and, there being noTUPE transfer, any termination claim by employees nottaken on by Capsticks lay with Ward Hadaway.CONCLUSIONUpon the enactment of regulation 3(1)(b) of TUPE2006 it is widely expected that litigation over serviceprovision changes would virtually cease, so wide is itsapparent compass. New factual scenarios, including radicalreconstruction of service provision contracts and fractionaltransfers to multiple service providers have indicatedhowever the area will continue to be a fertile ground forlitigation.Dr John McMullenThe author is a partner in Short Richardson & Forth LLP and a VisitingProfessor of Law at Durham University, UK. He is the author of BusinessTransfer & Employee Rights, LexisNexis Butterworths, loose-leaf andupdating issues). This article is based on a lecture given at the Instituteof Advanced Legal Studies, University of London on May 19, 2010 anddraws on the text of Business Transfers and Employee Rights.

Case law relating to service provision changes under the Transfer of Undertakings (Protection of Employment)(TUPE) Regulations 2006

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