Transferring a service contract to two or more parties – who takes on the employees?

Diane Gilhooley, HR expert in the education team at Eversheds, offers advice on transferring a service contract to two or more parties

August 18, 2008

It is well established, in both legislation and case law, that where an organisation outsources a service to a third-party contractor, the staff employed to carry out that service will transfer to the contractor. Similarly, where a service previously carried out by an external contractor is brought back “in house” or is transferred from one external contractor to another, the staff employed by those contractors will also transfer. These “service provision changes” are now expressly covered by the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations.

Whereas the legal effect of any transfer will usually be relatively straightforward (where, for example, a service is being transferred from one contractor to another), the position becomes more complex where a service that was previously provided by one contractor is to be passed to two or more new contractors. In particular, which of those two contractors, in that situation, should take responsibility for any employee employed by the original contractor?

This issue was recently considered by the Employment Appeal Tribunal (EAT) in the case of Kimberley Group Housing Limited v Hambley and Others and Angel Services (UK) Limited v Hambley and Others. In this case, the original contractor had provided accommodation services under a contract with the Home Office. That contract was subsequently awarded to two separate companies (Kimberley Group and Angel Services), resulting in a number of staff at the original contractor losing their jobs.

The employment tribunal found, as a matter of fact, that the operations carried out by the original contractor could be broken down into two geographical areas, Middlesbrough and Stockton. They found that after the transfer, 97 per cent of the operations in Stockton were performed by Kimberley, with the remaining 3 per cent performed by Angel and the 71 per cent of the operations in Middlesbrough were performed by Kimberley with the remaining 29 per cent performed by Angel.

The EAT’s approach

The approach taken by the EAT was to consider first whether in fact a transfer had taken place for the purposes of TUPE. It acknowledged that there may be some circumstances in which a service that is being provided by one contractor but that is then transferred to two or more new contractors becomes so fragmented that it ceases to retain its identity as a distinct economic entity. In these circumstances, there will be no service provision change for the purposes of TUPE. However, assuming that the service does retain its identity after the transfer (albeit that it is now being carried out by two or more new parties), the next question is to consider to which of the new contractors the employees of the original contractor have transferred.

The EAT directed that to determine this a tribunal must consider the part of the undertaking to which an employee was assigned prior to the transfer. That employee’s new employer would be the contractor to which that part of the undertaking had been transferred. Referring to previous authority on this point, the EAT said that there was not necessarily an exhaustive list of factors that would conclusively determine to which part of an undertaking an employee was assigned. However, the focus must be on the link between the employee and the work activities that are performed. Factors that may be relevant would include the amount of time spent on one part of the business or the other, the amount of value given to each part by the employee, the terms of the contract of employment showing what the employee could be required to do and how the cost of the employer of the employees’ services had been allocated between the different parts of the business.

In adopting this approach, the EAT confirmed that when considering this issue in the context of service provision changes, tribunals must adopt the same approach as they would take when considering any other transfer of undertakings. The decision will be welcomed by employers as a helpful confirmation of the approach that will be applied in determining the allocation of liability for employees on the change of service provider.

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