UK firms tighten post TUPE transfer due diligence after EAT ruling

The Employment Appeal Tribunal has handed down a useful decision on post-transfer pay disparities, sending a clear message to employers that relying on TUPE restrictions is not, on its own, a safe justification for maintaining differences in pay and benefits once employees have joined the workforce. We will hear more on that risk, and how to manage it, from TUPE expert Gillian Harrington.

The case involved around 80 cleaners who transferred to Great Ormond Street Hospital after many years working for an external contractor. Before the transfer they were paid the London Living Wage, which was lower than the NHS Agenda for Change rates received by directly employed hospital staff. After the transfer, the Trust delayed aligning pay and benefits, prompting claims of race discrimination because the transferring group was predominantly from Black, Asian and minority ethnic backgrounds.

The EAT drew an important distinction. It confirmed the hospital could not be held responsible for historic pay decisions made by the contractor. However, once the cleaners became employees of the Trust, they were entitled to compare themselves with the wider workforce, and the ongoing disparity was found to create a prima facie case of indirect discrimination.

The Trust argued that TUPE limited its ability to change terms, but the EAT rejected that defence, pointing out that, crucially, the contracts contained a variation clause which could have allowed pay to be lawfully aligned.

So what does this ruling tell us about the risks of taking a ‘wait and see’ approach after a transfer? To what extent can employers rely on TUPE constraints when disparities exist? And how important is it to scrutinise contractual terms - and carry out proper due diligence - before employees transfer, rather than afterwards? Earlier I caught up with Gillian Harrington who joined me by phone from Aberdeen to discuss the case: 

Gillian Harrington: “I think what was quite interesting in this case is that the employees, once they transferred over, that was when the legal risk arose and these employees were then able to compare themselves with the wider workforce of their new employer. So I think the key issue here is that doing nothing post transfer is not really an option for employers. They should be looking at employees who transfer over from TUPE and looking at their salaries and making sure that there isn't going to be any potential indirect discrimination issue as happened in this case. I think one other thing to think about is that although from equal pay legislation, which could be a whole talk in itself, but although under equal pay legislation there can sometimes be a defence for a material factor, for example, that might be TUPE, but that isn't always the case and in this case here, because there was that contractual entitlement to vary terms to match NHS terms, I think that then did create a risk here. So it's just really important that employers look at employees who are transferring over under TUPE to avoid potential indirect discrimination risks.”

Joe Glavina: “We know many employers rely on TUPE constraints to explain why they don't immediately harmonise terms and conditions once the staff come over to them, Gillian, but this case says there are limits to that approach.”

Gillian Harrington: “Absolutely, and I think that is a very valid point, Joe, because often we see clients saying we want to harmonise terms and conditions and our advice often is, well, under TUPE employees are entitled to transfer over under their current terms and conditions of employment. So actually it's quite difficult to harmonise post transfer, but I think this case highlighted that where there is a specific contractual variation clause which permits the new employer to utilize that and to make contractual changes then actually that prohibition on making changes terms and conditions post transfer doesn't always necessarily apply. So I think it's just important to be bearing in mind as well what the terms of the transferring employees’ contracts state because it won't be in all circumstances that you can't change terms and conditions post transfer.”

Joe Glavina: “We know there was a variation clause in this particular case, Gillian, and if clients are sitting on a variation clause this case suggests it could be a red flag. So would it help if they carried out some kind of an audit to identify potential risks like that?”

Gillian Harrington: “Yes, absolutely. Certainly when clients are potentially looking to insource services, for example, or if they're acquiring a particular part of a business where they are doing their due diligence, that is something that we would suggest we could certainly help with, looking at, as well as the employee liability information such as which employees are transferring and their main terms, looking at the precise terms of their contracts and looking at, I suppose, firstly is there a contractual variation clause? Is that specific, enabling you to make particular changes? Also, as well, looking at, well, what are the benefits, what are the salaries that these employees are on just now, and how do these compare with the salaries of your own workforce because that is something that is going to need to be analysed when these employees transfer over. So it's better to do your homework initially before that transfer takes place just to identify any potential risks that might be apparent there.”

Joe Glavina: “So is the real takeaway from this case that employers need to be proactive in identifying and managing disparities in the workforce because once the employees transfer over then any inherited differences are going to be quickly become the new employer's risk?”

Gillian Harrington: “Absolutely, Joe. I think that is certainly something that employers need to take into account. There may not be an issue now, but then when these new employees transfer over, if there is a potential provision, criterion, or practice, or a particular group that might be more adversely affected than others, and there is that inherent indirect discrimination risk. So it is really important to be mindful of that and to take your steps in terms of due diligence before the employees transfer over.”

If you would like to read more about this case you can. The employment team has written about the case in some detail for Out-Law and we’ve put a link to it in the transcript of this programme for you.

- Link to Out-Law article: ‘Tribunal clarifies approach to pay disparities for transferred workers’

- Link to judgement: Anne v Great Ormond Street Hospital (EAT)