The Scottish Employment Appeal Tribunal has ruled that following a service provision change the contract of a transferring worker can be split between multiple transferees. It means an employee can go from working full time for one employer to working part time for two or more, so a very different approach in SPC cases to what we have been used to. That approach, of multiple transferees, is one the courts have previously recognised for business sales – that’s following an ECJ case last year called Govaerts – but this is the first time it has been applied to SPCs. This Scottish case is called McTear Contracts Ltd v Bennett and we’ll consider the implications shortly but first the facts, briefly.
It involved a client local authority, North Lanarkshire Council, who re-tendered a contract for replacement of kitchens within its social housing stock which had previously been carried out by a single contractor who had two dedicated teams assigned to this work. The contract was awarded to two new contractors on a geographical basis. They accepted that there had been a service provision change but appealed against the tribunal’s allocation of the transferor’s employees. Despite there being no requirement to apply Govaerts to the UK’s service provision change provisions, which are unique to the UK, the EAT ruled that it would be undesirable for there to be a difference in the approach and so, the EAT ruled, the Govaerts approach should be followed in the UK when it comes to service provision changes.
This decision has already had an impact and we are now advising a number of clients involved in outsourcing on this case affects them. To discuss the implications I spoke to Gill Ross who joined me by video link from Glasgow. I asked her how, in light of this case, you go about deciding how contracts should be split:
Gill Ross: “It’s going to be very difficult. Previously, when you had the fragmentation scenario, it was usually quite easy to determine whether there should be a transfer or whether fragmentation made it such that employees wouldn't transfer to any particular transferee. With this decision now that makes split employment a possibility for employees, it just makes the landscape a lot more complicated. Where you’ve got, for example, contracts being split geographically, say north and south, it may be easier in that scenario to look at where employees work in practice, perhaps looking at timesheets, their tracker devices if they're their mobile employees, to see if in actual fact they work on a day to day basis and maybe split them geographically based on work patterns. Otherwise, if you don't have that information, it's really difficult to work out how you would assign people to a particular transferee. In some situations you may have contracts that are being split into not just two packages, if there's you know, north and south, for example, but into 5, 10, 15 different work packages. In that situation it's very difficult to work out how you would, you know, cut up an employee's contract and assign them to different transferees. The ET decision, which should come out, hopefully, in the next couple of months, might give more practical guidance around how you would apply this decision on a practical basis. It may be that you look at, you know, the volume of services that are being transferred to the different transferees, is that how you work out the percentage split? Or do you look at the employees’ timesheets to work out the percentage split between different parts of the contract? It's really, really difficult and I think each case is going to have to be looked at very carefully between the client, between the outgoing contractor, between the incoming contractor, and try and find a workable solution.”
Joe Glavina: “Can the parties agree between themselves that the contracts will not be split? Is that an approach that could work?”
Gill Scott: “Yes I think there's going to be a lot more focus on commercial agreements. Obviously at the moment we don't have contracts which envisaged this the situation but I think going forward there's going to have to be a lot of thought going in at the start of contracts, and even at the bid stage, you know, what is going to happen at the end of this contract? Could there could there be split employment? Can we work out a mechanism for how we would determine where employees go at the start of a contract to make sure that people are assigned to particular activities or services but that's difficult to do because services continually evolve and it may be what people start out thinking is going to happen in a contract changes over the course of a 5 or 10 year contract. I think what we'll see in commercial contracts are maybe a greater focus on defined employee lists that are provided on exit, or indemnities, price adjustment mechanisms, all these sorts of things that can be built into contracts to try and address these situations and make sure that parties aren't, you know, inheriting more liability and costs than they want to in a particular contract because a lot of these contracts maybe operate with small margins and if employees are going to be transferring unexpectedly to an incoming contractor that could wipe out any profit margin that they get on the contract. So as I say, I think, there will need to be a lot more thought going in at the start of these contracts as to what is going to happen, who's going to transfer to an entry, who potentially might transfer on exit and try and build in some solutions around that, whether that be indemnities or, you know, defined employees sent into different areas or work packages.”
Joe Glavina: “Can I ask you about the tender process? Is there any scope for the parties to create their own certainty and spell out what will happen in their outsourcing agreements?”
Gill Scott: “It’s difficult to do. I mean, I think at the moment what you tend to have in commercial agreements, outsourcing agreements, are what we call ‘standstill provisions’ that say, you know, within the last six months of the contract you can't move people around, you can't reassign people, you can't bring in new people. So there might be more focus on that, and outgoing contractors who are facing a situation that they don't have people aligned to particular areas or particular services, may they need to look at almost breaching the standstill provisions to try and shoehorn people into areas to maximise the possibility of people transferring and not ending up in a split employment scenario.”
Joe Glavina: “Previously there was been this strategy used to avoid TUPE by arguing the activity in question is so fragmented that it leaves no one contractor with a majority of the work. Presumably this case undermines that tactic?”
Gill Ross: “It does, yes. Clients would often look to fragment contracts because it you know, it creates competition between different bidders, different people, you’ll have people bidding different prices and it’s a good idea for the clients clear that competition and get the best place. With this decision coming out and applying in the UK, you know, for the foreseeable unless we get a Court of Appeal decision or, you know, a legislative change incoming contractors particularly are going to be wary of this, they're going to have to build in cost assumptions, they’re going to be looking for more information from clients about what they may inherit in terms of employee liabilities. It’s potentially not as attractive now for the ultimate client to fragment services because the incoming contractors are going to potentially inherit either employees on a split employment basis or they're going to inherit redundancy termination costs if the employees can't be split up properly.”
The Scottish EAT’s decision in McTear is binding, which is why this case is having an immediate impact. It’s binding because TUPE has been retained after Brexit, along with the rest of the EU-derived employment legislation, so tribunals and the EAT continue to interpret it in accordance with ECJ decisions – so in this case in line with the ECJ’s decision in Govaerts. However, the Withdrawal Agreement does allow for the Court of Appeal and Supreme Court to depart from previous ECJ judgements so we will need to watch closely to see if this case is appealed. If you would like to read the EAT’s decision in McTear you can - we have put a link to that in the transcript of this programme.
- Link to EAT’s decision in McTear Contracts Ltd v Bennett and others