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Mergers in the Time of Coronavirus Part 2: The Employment Issues

As we begin to emerge into a new, post-lockdown normality, business leaders will be moving their focus from short-term survival to shoring up the long-term success of their businesses. In this context, discussions about mergers which were put on hold in this period may re-emerge, not only as an opportunity for further growth but as a strategy for survival.

Professional service firm mergers are not straightforward, and advance planning is key to their successful implementation. In this article (which is the second in our two-part series on ‘Mergers in the Time of Coronavirus’) we consider the key employment and people issues which arise in the context of a professional services firm merger. For Part 1, which looks at the strategic and partnership issues, click here.

1. The application of Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)

A professional services firm merger will usually involve the transfer of assets from one of the merging firms to the other (or to a new limited liability partnership set up to absorb the assets of both) and it follows that TUPE will ordinarily be triggered.

The effect of TUPE

TUPE operates to move employees and any liabilities associated with them from the old employer to the new employer by operation of law. Effectively, therefore, the new employer steps into the shoes of the old employer and it is as though the employee’s contract of employment was always with the new employer.

Do LLP members qualify as employees under TUPE?

TUPE defines ‘employee’ more broadly than the definition normally used for employment protection purposes as: any individual who works for another person, whether under a contract of employment or apprenticeship “or otherwise” (regulation 2(1), TUPE). The words “or otherwise” open up the possibility that workers may fall within this extended definition. Following the 2014 Supreme Court decision in Clyde & Co LLP and another v Bates van Winkelhof, could this mean that LLP members could also transfer under TUPE on a merger? In a first instance decision in 2019 (Dewhurst v Revisecatch Ltd (t/a Ecourier)), the Employment Tribunal concluded that workers were indeed intended to be covered by TUPE. While this decision does not directly deal with the issue of LLP members and is not currently binding on other Employment Tribunals, it is likely to be persuasive in other cases and firms risk liability for non-compliance with TUPE if they do not treat their workers (including LLP members) as employees for these purposes.

TUPE obligations

Where TUPE does apply, there are specific obligations on an employer to inform and consult with affected individuals. Employers must inform representatives of the affected employees of the transfer and any “measures” proposed and consult on those proposed measures. The consultation must be in “good time” before the transfer; what this means in practice will depend on a number of factors including the size of the transaction and how many staff are affected. A failure to inform and consult can result in an Employment Tribunal ordering payment of a protective award of up to a maximum of 13 weeks’ pay per affected employee, so it is a potentially significant liability.

Where a firm can show that there were “special circumstances” making it not reasonably practicable for information to be given or consultation to take place, they may, to some extent, be absolved from their obligation to inform and consult with employees under TUPE; however, an employer must always be able to show that it has done the best it could to comply. In practice, the defence is likely to be very narrowly construed and while in some very limited cases it may be possible to rely on it on the basis of the commercial confidentiality of the information to be shared (particularly if that information is also highly price sensitive because the transaction involves a public listing), this will be the exception and not the norm.

There is also an obligation for the outgoing employer (the transferor) to provide employee liability information (ELI) to the incoming employer, not less than 28 days before the transfer. ELI comprises written details of the transferring employees including identity, age, particulars of employment, disciplinary and grievance records, employee claims and collective agreements, together with all associated rights and liabilities that will transfer. A failure to comply with this duty can result in a compensation award by the Tribunal with a minimum award of £500 per employee.

The obligations under TUPE are not highly complex, but they do require careful forward planning and should be built into the transaction timetable to avoid the potentially significant liability for non-compliance.

2. Harmonisation of employment contracts

It is likely that the new merged firm will want to harmonise terms and conditions of employment to avoid an inconsistent and fragmented benefits structure which may present a barrier to the full and proper integration of the new combined workforce.

However, employees and workers who have been subject to a TUPE transfer have certain protections which may make harmonisation difficult. Any variations to terms and conditions will be considered void if the sole or principal reason for them is the transfer itself or is connected to the transfer. If there is an ‘economic, technical or organisational reason’ involving changes in the workforce or workplace, changes might be permissible if agreed by the individuals. However, this exception is limited in scope. Given these limitations, employers should seek specific legal advice before seeking their employees’ consent to make any adverse changes to their employment contracts in the aftermath of a merger, even if some time (e.g. months) has passed.

3. Retaining key employees

One of the major risks associated with any merger is the potential loss of key employees. This is particularly pertinent in a professional services firm merger where a key asset of the merging firms is likely to be their people.

While employees, unlike partners, will not have a direct say in whether or not a merger takes place, it is important that they feel enthused and engaged about the merger plans so that they are not left feeling incentivised to leave. Uncertainty around their role and benefits is a common driver for employees to leave a firm which is about to merge, as are concerns about incompatibility of management styles and/or a lack of trust in new management. A well-planned and carefully executed communication strategy (potentially alongside the TUPE information and consultation process set out above), which addresses these issues, is likely to be key to allaying employees’ concerns and retaining their loyalty before, during and after a merger.

If you would like more information on the employment and people issues arising in the context of mergers between professional services firms, please contact Partner Beth Hale, who specialises in partnership law. Please click here to listen to a podcast on mergers by Partners Zulon Begum and Beth Hale.

Unless specifically stated otherwise, we use the term “partner” in a colloquial sense to mean a partner in a general partnership or a member of a limited liability partnership incorporated in England and Wales.