Mark Shulman & Rachael Taylor, Cumberland Ellis LLP

The Comprehensive Spending Review 2010 announced a package of reductions in public spending in the region of £83 billion  and  this is expected to lead to significant job losses in the public sector (perhaps as many as 490,000 over the next five years according to figures  revealed by the Treasury).

It seems likely that some employees will be absorbed elsewhere within the public sector, some will be outsourced to the private sector, and others will move within the public sector as part of wholesale reorganisation or restructuring of government departments. For example, a list has been published of approximately 190 quangos which are to be abolished, but a further 120 or so are to be merged. Likewise, the notion of shared services between local government bodies (such as HR and IT) is gaining popularity and the NHS is also increasingly looking to such arrangements in order to save costs. Whether The Transfer of Undertakings (Protection of Employment) Regulations 2006 SI 2006/246 ("the TUPE Regulations") will apply to employees involved in such restructuring is arguably a grey area at the moment.

The TUPE Regulations were enacted to implement the amended and consolidated Acquired Rights Directive (2001/23 EC) ("ARD") and replaced in their entirety the Transfer of Undertakings (Protection of Employment) Regulations 1981 SI 1981/1794. There are two types of transfer envisaged by the TUPE Regulations. Under the first part of the definition, a transfer arises where there is:

"…a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity;" (Regulation 3(1)(a)

The other route is via a "service provision change" which applies when:

"(i) activities cease to be carried out by a person ("a client") on his own behalf and are carried out instead by another person on the client's behalf ("a contractor");

(ii) activities cease to be carried out by a contractor on a client's behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by another person ("a subsequent contractor") on the client's behalf; or

(iii) activities cease to be carried out by a contractor or a subsequent contractor on a client's behalf (whether or not those activities had previously been carried out by the client on his own behalf) and are carried out instead by the client on his own behalf, …" (Regulation 3(1)(b)

Accordingly, where services (for example, legal services) are carried out by a government department and are then outsourced to an external service provider (such as a private practice law firm), there could be a TUPE transfer by reason of a service provision change.
However, there is an exception where a transfer as defined under the TUPE Regulations occurs entirely within the public sector. Regulation 3(5) of the TUPE Regulations provides that:

"An administrative reorganisation of public administrative authorities or the transfer of administrative functions between public administrative authorities is not a relevant transfer'.

There is no statutory definition of what constitutes a public administrative authority, but in Adult Learning Inspectorate & Ors v Beloff UKEAT/0238/07/RN, the EAT agreed that the reference is to "a public body whose functions involve the exercise of public authority…" Case law has evolved which suggests that the scope of Regulation 3(5) excludes from the legislation's application only a relatively limited range of situations involving the transfer of entities pursuing non-economic objectives within the public sector.

This reflects the approach taken in the case of Henke v Gemeinde Schierke, Verwaltungsgemeinschaft Brocken: C-298/94 [1996] IRLR 701 (ECJ) which concerned the merger of municipal councils. Henke established that the reorganisation of the structure of public administration, or the transfer of purely administrative functions, does not constitute a transfer of an undertaking within the meaning of the Acquired Rights Directive and that activities of an economic nature were required in order for there to be a relevant transfer.
The subsequent decisions in Mayeur v Association Promotion de I'Information Messine: C-175/99 [2000] IRLR 783 (ECJ) and Collino v Telecom Italia SpA: C-343/98 [2000] IRLR 788 (ECJ) confirm the limited application of the Henke exception to cases involving simply a re-organisation of public administrative structures or the transfer of administrative functions between public administrative authorities.

These decisions appeared to possibly open the door a little to ARD/TUPE protection in the public sector because of the limited application of the Henke principle.. However, the case of [Law Society v Secretary of State for Justice & Anor]() [2010] EWHC 352 [QB], decided earlier this year, has arguably closed that door again to some extent.

The background to the case is that the Legal Services Act 2007 overhauled the way in which complaints against members of the different legal professions are to be handled, and set up a new Office for Legal Complaints ("OLC"). As a result, the Legal Complaints Service ("LCS") which previously handled complaints about solicitors has since ceased to exist.

In negotiations between the Ministry of Justice, the Law Society and the OLC, it appears that the parties initially proceeded on the basis that the TUPE Regulations would not apply so as to transfer the employment of LCS staff but that, as matters progressed, the Law Society altered its view and finally sought various declarations clarifying the employment status of the LCS staff.

In the High Court, Akenhead J identified three key questions to be answered:

(i) Firstly, whether there would be a transfer of an "economic entity" which retained its identity for the purposes of Regulation 3 of the TUPE Regulations. He held that, on the facts, there was no relevant transfer because, whilst the LCS had a relatively autonomous identity and was found to be an economic entity, the simple fact of transferring services from one body to another did not of itself lead to the conclusion that there has been a relevant transfer. Other factors (established in Süzen v Zehnacker Gebaüdereiningung GmbH had to be considered and the Court held that:

"[t]he reality is that, apart from any employees who are or may be taken on by OLC, there is nothing which is in any normal sense going to be transferred by LCS to OLC. None of the tangible or indeed intangible assets of LCS will go over. None of the buildings will be transferred to or used by OLC. None of the complaints being processed by LCS will be transferred over …"

In reaching this conclusion, the Court emphasised the difference in the type of organisations particularly because the LCS and the OLC had differing jurisdictions and powers which would lead to significant differences in their respective cultures and approach.

(ii) Secondly, if there was a transfer of an undertaking, whether it would amount to a transfer of administrative functions. The Court did not feel compelled to answer this question (because it had already decided there was no relevant transfer), but nonetheless held that it would have been be a transfer of an administrative function for the purposes of Regulation 3(5) of the TUPE Regulations.

(iii) Thirdly, whether the transfer was within the scope of the Cabinet Office Statement of Practice: Staff transfers in the Public Sector (January, 2000, revised November, 2007) ("COSOP") which broadly states that TUPE principles should be followed in public sector transfers. COSOP is a policy document and the Court was "unconvinced" that it was legally binding on the OLC and the Court declined to make any declaration on the matter.

Whilst the Court did make specific findings about the nature of the organisations involved in the Law Society case, it reaffirms that where purely administrative functions are transferred from one public body to another it is unlikely that employees will be protected by TUPE and that the Henke exclusion remains alive and well.

Given the current economic climate, it is difficult to second-guess what steps the Coalition Government may take with regard to the effect of TUPE on public sector employees. Ed Davey, Minister at the Department for Business, Innovation and Skills (BIS), told Parliament this month that the government has no plans to revise the TUPE Regulations. Under the Public Bodies Bill introduced by the Government in October 2010, Ministers would have the power to modify, abolish or transfer public bodies, and to make provisions the same as or similar to the TUPE Regulations in relation to affected staff. The explanatory notes to the Bill state that:

"[a] Minister could, in connection with an order abolishing a public body and transferring the functions to a Government Department, make a transfer scheme to transfer the terms and conditions of the employees but modify them to bring them under the terms and conditions of the Civil Service, employed by the Crown."

In relation to employees whose employment does transfer under TUPE, there have been some other interesting recent developments. [Ward Hadaway Solicitors v Love & Ors]() UKEAT/0471/09/SM was concerned with a service provision change in relation to legal services provided to the Nursing and Midwifery Council ("NMC"). Ward Hadaway was one of a panel of four firms of solicitors providing such services to the NMC prior to its decision to outsource all its legal work to a single provider. Following a tender process, the work went to Capsticks (another firm of solicitors) who thereafter were awarded the work on all new legal matters. For a period of six months or so Ward Hadaway continued with their existing matters but did not commence any new matters following the tender.

Two former Ward Hadaway employees sought declarations of their terms and conditions on the grounds that there had been a service provision change for the purposes of the TUPE Regulations.

The Employment Appeal Tribunal found that there had been no service provision change because of the nature of the activities performed before and after the change of provider. The Appeal Tribunal held that work in progress was to be distinguished from an expectation of work in the future and that only work in progress satisfied the definition of "activities" for the purposes of the service provision changes under the Regulations. Consequently, there was nothing which actually transferred to Capsticks and so there was no service provision change.

In [Todd v Strain & Ors]() UKEATS/0057/09/BI it was held that relatively minor (arguably trivial) administrative changes to employees' pay arrangements constituted "measures" for the purpose of consultation under the TUPE Regulations because such changes were not an inevitable consequence of the transfer. In addition, the EAT confirmed that there was no requirement for "measures" to have a negative impact because "part of the purpose of the duty to consult must surely be to enable transitional arrangements…to be explained to employees and for them to be reassured".

This is important because any envisaged measures will trigger the consultation obligations under the TUPE Regulations and, on the basis of the Todd case, it is arguably safe to assume that employees should be consulted when any relevant transfer is contemplated regardless of how minor any potential changes might be (in this case, the changes were solely in relation to how and when employees were paid in the month in which the transfer took place, without any adverse financial impact).

In a climate of uncertainty and with the Government's programme of public sector cuts just beginning, we can be sure that there will much more to say about transfers under public employment.