LRC: The Loss of a Service Contract for Tesco did not amount to a Transfer of Undertaking

The Rights Commissioner has ruled recently that the high-profile transfer of a service contract for Tesco from Keelings to Stobarts in September 2010 did not fall within the definition of a transfer under the Transfer of Undertakings Directive (S.I. No. 131/2003 — European Communities (Protection Of Employees On Transfer Of Undertakings) Regulations 2003) Transfer of Undertakings Directive The purpose of Transfer of Undertakings and Protection of Employees Directive (TUPE) is to afford protection for employees where a business transfer occurs, thus protecting the employees’ continuity of service and associated rights and terms and conditions. The Regulations apply to “any transfer of an undertaking, business, or part of an undertaking or a business from one employer to another employer as a result of a legal transfer (including the assignment or forfeiture of a lease) or merger.” The effect of TUPE means that if employees work for Company A and Company B then takes over A’s business, all the employees within Company A will transfer to Company B automatically with full continuity of service and on exactly the same terms and conditions they enjoyed previously. This classic example of a TUPE scenario is known as a “first-generation transfer”. Tesco Cancel Keelings Contract and Award it to Stobarts The Rights Commissioner case concerned a Tesco contract for the transportation of Tesco chilled goods, which Keelings had been awarded. Keelings had 147 employees dedicated to the Tesco contract, the majority of whom were drivers. However, Tesco took the commercial decision to cancel the relationship with Keelings and award the contract to Stobart. While Stobart did offer the Keelings employees positions with their company on this contract, only 19 employees actually moved to Stobarts with the rest of the employees being made redundant by Keelings. At that time SIPTU, who represented the Keelings employees, contended that this loss of a service contract amounted to a transfer within the definition of the TUPE directive with SIPTU Sector Organiser Pat Ward referring to the decision of Keelings and Stobart to ignore the TUPE directive and make the Keelings employees redundant as “an outrage”. However, at this stage it is important to note that this type of transfer differs from a first-generation transfer as there is no direct contractual relationship between Keelings and Stobarts. The loss of a service contract by one company and the award of it to another company, as was the case here, is classified as a “second-generation transfer”. Second-Generation Transfer The Rights Commissioner in this case noted that a second generation transfer is not automatically covered under the TUPE regulations and therefore employees in such scenarios do not have the automatic right to transfer from the old service provider (Keelings) to the new service provider (Stobarts). However, the Rights Commissioner referred to the decision of the European Court of Justice in Ayse Süzen (Case C-13/95), the most important case in terms of second-generation transfers, where it was held that employees in cases such as the Keelings/Stobart issue may be protected by TUPE where: 1.    There has been a concomitant transfer from one undertaking to the other of significant tangible or intangible assets; or 2.    There has been a taking over by the new employer of a major part of the previous employers workforce who were assigned to the contract in question. The Ayse Süzen decision essentially means in a second-generation scenario that if the contract in question is “labour intensive” then TUPE rules will apply where a major part of the workforce transfer to the new company. An example of a labour intensive style of contract is one for contract cleaning where the man-power is the core part of the service. Alternatively, where the contract is “asset reliant” then TUPE rules will apply where major assets transfer to the new company. An example of an asset-reliant style of contract would be one for a bus service where the buses themselves are the core part of the service and not the employees. Importantly, if a contract is “asset reliant” and no assets transfer, but all the employees transfer, then TUPE will not apply. Conversely, if a contract is labour intensive and assets transfer both no employees then again TUPE will not apply. Essentially, in this case the Keelings employees needed to argue that the contract was asset reliant and that assets transferred or that it was labour intensive and employees transferred. Asset Reliant In the Rights Commissioner, SIPTU argued that the transportation of chilled goods was an asset reliant contract due to the importance of trucks to the service and that the TUPE regulations applied to the Keelings/Stobart matter as “full responsibility for the transport function … was transferred to Stobart by Tesco by way of contractual arrangement”. They went on to state that the TUPE regulations should also apply because the contract itself “is a stable economic entity that continues to be carried out post transfer and will continue to be carried out in the long term”. Rights Commissioner Ruling The Rights Commissioner, however, found against the SIPTU argument and held that TUPE did not apply to this contract transfer for the following reasons: 1.    The service was asset reliant and no actual physical assets (i.e. trucks and trailers), goods, premises or operating methods transferred from Keelings to Stobart 2.    The contract itself is not an economic entity that transferred as both Keelings and Tesco had retained their separate economic identities after the transfer of the contract to Stobart 3.    Only a small percentage of employees transferred to Stobart (i.e. 19 out of 147 employees) 4.    There was no contractual relationship between Keelings and Stobart and negotiations only ever took place between Keelings and Tesco or Tesco and Stobart and negotiations never took place between Keelings and Stobart. Conclusion When it comes to TUPE it is absolutely essential that all employers take advice on the implications of a transfer of a business or a contract from one company to another. The amount of permutations that may derive from particular transfer scenario, as evidenced above, are quite significant and what might appear to be a transfer within the definition of TUPE may not in fact amount to such a transfer. In the above matter the distinction between a first-generation transfer and a second-generation transfer, and subsequently whether or not the second-generation transfer was covered by TUPE, was the difference between 128 employees being made redundant or not by Keelings. Indeed, if TUPE was found to apply then Stobart would have been held liable for up to two years salary in compensation for 128 employees for not transferring them over and also 4 weeks salary for each employee due to the failure to engage in consultation. This potential loss for Stobart essentially amounts to 13,824 weeks salary. The financial implications for both Keelings and Stobart were staggering. As a result, the distinction and its long-term financial implications for both employer and employee are massively significant and as a result employers must seek advice on what is in all reality the most sweeping and difficult aspect of employment law in Ireland. Employers should seek advice from Peninsula Business Services if they are faced with a potential first-generation transfer or second-generation transfer scenario as the financial repercussions on the employer might be quite significant. Please phone the 24 Hour Advice Service on 01 8555050 and one of our experienced advisors will be happy to assist.