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Does TUPE Apply to LLP Members?

The year 1981 saw some memorable events that enthralled the British public, such as the wedding of Prince Charles and Lady Diana Spencer, John McEnroe ending Bjorn Borg’s run of five consecutive men’s singles titles at Wimbledon, and the heroics of Ian Botham as England’s cricket team overcame Australia to retain the Ashes. It is safe to say that the laying before Parliament of the Transfer of Undertakings (Protections of Employment) Regulations 1981 (“TUPE”) was not one of these events. However, TUPE has gone on to have a significant effect on the lives of millions of employees in the UK, and nearly 40 years after its introduction it is still going strong, now in the guise of the TUPE 2006 regulations.

TUPE has caused a lot of arguments over the course of its life, and one question which is often debated is whether it applies to the members of limited liability partnerships.

What does TUPE do?

The aim of TUPE is, of course, to protect the rights of employees when the business or other undertaking in which they work is transferred from one party to another.  It does this through the automatic transfer principle, which means that the employees who are assigned to the relevant undertaking at the time of its transfer automatically become employees of the transferee, on the same terms and conditions of employment and with their continuity of service preserved – the transferee effectively stepping into the transferor’s shoes and becoming liable for the transferor’s acts and omissions before the transfer.  The dismissal of an employee because of the transfer will be automatically unfair (subject to some limited defences and the employee having the requisite continuous service for an unfair dismissal claim), and there are obligations to provide certain written information about the transfer to the affected employees’ trade union or other elected representatives (and in some cases to consult with the representatives too), failing which each affected employee could be awarded up to 13 weeks’ pay.

TUPE also protects transferring employees against any purported variation to their contracts (with very limited exceptions) if the transfer is the sole or principal reason for the variation.  It is therefore difficult for a transferee to harmonise the terms and conditions of transferring employees with those of its existing workforce, even if the employees will be left worse off in only one or two limited respects and the overall effect of the changes will be to the employees’ advantage.  Many employers try to get round this by terminating the existing contracts and re-engaging the employees on the new terms, often backed up by settlement agreements under which the employees waive their rights to pursue any claims.

Employees can object to a TUPE transfer if they don’t want to be employed by the transferee, but it is a limited right as their employment with the transferor is treated as terminated by operation of law with effect from the transfer date, and there is deemed to be no dismissal.  Employees who object to the transfer are not entitled to any statutory or contractual compensation on termination, unless they object and resign in response to the employer’s repudiatory breach of contract or a substantial change to their working conditions to their material detriment.  This will deter many employees from objecting to the transfer, but it could still be attractive to an employee who wants to join a competitor instead and be free from their restrictive covenants, as the transferee will not be able to enforce the covenants (since the employee’s contract will not have transferred to the transferee).

Are LLP members covered?

TUPE applies to an “employee”, which it defines as “any individual who works for another person whether under a contract of service or apprenticeship or otherwise but does not include anyone who provides services under a contract for services”.  This is slightly wider than the definition of employee used in some other employment legislation, such as the Employment Rights Act 1996 (“ERA”), but there is no equivalent provision in TUPE for the broader category of “worker” found in the ERA and elsewhere.

What does this mean for a member of a limited liability partnership (“LLP”)?  While it is clear from the Supreme Court’s decision in Bates van Winkelhof v Clyde & Co LLP [2014] UKSC 32 that LLP members can have the statutory employment rights enjoyed by workers under the ERA and other legislation (including, for example, paid annual leave, limits on their working time, protection against unauthorised deductions from wages, the right to be accompanied at disciplinary and grievance meetings, and the right not to suffer a detriment on grounds of whistleblowing), and while LLP members are expressly protected against unlawful discrimination under the Equality Act 2010, it is far from certain whether any rights are afforded to them by TUPE.

Not surprisingly, there is a dearth of reported decisions to give any guidance on the issue, as the circumstances in which TUPE might apply to LLP members – essentially the sale or merger of the LLP’s business, or the contracting out of services performed by the members – do not arise very frequently.

One case which is commonly cited to support the argument that TUPE applies to LLP members (even though it did not concern an LLP) is McCririck v (1) Channel 4 Television Corporation (2) IMG Media Ltd (Case No 2200478/13), where an Employment Tribunal held that the definition of “employee” in TUPE covered “workers” as well as to those employed under a contract of service or apprenticeship.  The Tribunal also ruled that the exclusion in the definition of anyone providing services under a “contract for services” ‘must be read as confined to the case of an independent contractor in business on his own account’, and said there was no good reason for imagining that Parliament could have intended to exclude “workers”.  It thought ‘There would be no rational basis for doing so given that business transfers by their nature will affect all persons employed in the undertaking…whether employees under contracts for services, apprentices or “workers”.  The result would be a system which was not only unprincipled but impractical.  How could the TUPE regime operate effectively if every transfer necessitated a laborious inquiry into whether staff members were employed under contracts of service or “workers”?’

Another Employment Tribunal came to the same conclusion in Dewhurst v Revisecatch Ltd t/a Ecourier (Case No 2201909/18), but neither this nor the McCririck decision is binding authority, and we have yet to have a judgment on the issue from an appellate court.  It could also be argued that if Parliament had intended TUPE to apply to the wider class of “workers” then it could have said so expressly (either in the original regulations in 1981, or the revised ones in 2006), as it did with workers’ rights in other legislation, such as the ERA.  As to the Tribunal’s comments in McCririck regarding the effective operation of the TUPE regime, it is unfortunately the case that very many transfers involve difficult questions as to who is covered by them, especially where a transfer involves part, rather than the whole, of an undertaking.

The Court of Appeal has however found (in Cowell v Quilter Goodison Co Ltd [1989] IRLR 392) that an equity partner in a traditional partnership (rather than an LLP) was not an employee for the purposes of TUPE, because he effectively worked for the partnership under a “contract for services”, which expressly excluded him from the definition of “employee” set out in TUPE.  This could add weight to the argument that LLP members are similarly not “employees” under TUPE, notwithstanding the limits that the Employment Tribunals subsequently placed on the “contract for services” exclusion in the McCririck and Dewhurst cases.

Practical implications for LLPs

Where does this leave LLPs and their advisers, especially in a merger scenario?  In the absence of any clear authority to the contrary, there is certainly a possibility that the members of an LLP will be able to establish that they are “employees” as defined in TUPE, and therefore entitled to the protection TUPE gives.

It would, therefore, be advisable to include the LLP members in the information/consultation process which the LLP ought to be carrying out with its employees’ trade union or elected representatives about the proposed TUPE transfer.  If any changes are going to be made to the members’ terms which will be to the members’ detriment in any respect, consideration should be given to obtaining settlement agreements from the members as part of the mechanism through which they sign up to the new terms.  As for the risk that some transferring members will decide to opt out of the transfer and move elsewhere, leaving the transferee LLP with no basis to enforce their restrictive covenants, the transferee could try to guard against this by insisting that the transfer agreement is conditional on certain key members joining them.

With some interesting arguments on each side, but no definite answer for the time being, there are bound to be individual LLP members seeking to argue that TUPE applies to them – so careful consideration and proactive risk management will be important for any LLP in a potential TUPE scenario.

If you have any questions concerning transfers of undertakings please get in touch with Partner David Fisher, who specialises in employment and partnership law, and has a particular fondness for TUPE.