The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) are designed to safeguard the rights of employees when the business in which they work changes hands or there is a change in service provider.
TUPE does this by providing that, when the relevant tests are met, employees automatically transfer to the new service provider or business owner (the “transferee”) on their existing terms and conditions.
Any changes to terms and conditions can only be made in limited circumstances. Changes will be void if they are made because of the transfer, unless:
- there is an economic, technical or organisational reason (“ETO”) entailing changes in the workforce which requires the change. The employee must also agree to any change; or
- the terms and conditions of the employee’s contract permits the variation.
The starting position enshrined in TUPE is that new employer leaves terms and conditions alone. The pay of any transferring employees is therefore protected.
This can result in transferees being faced with a situation where the pay of transferring employees is different to the pay of its existing employees. This can cause friction where the two groups are doing the same work and are working alongside one another. But should the new employer just leave pay alone?
Not necessarily…
What happened?
The claimants were a group of 80 cleaners of BAME background. They had worked at Great Ormond Street Hospital (“GOSH”) on behalf of their employer, Outsourced Client Solutions (“OCS”). OCS had a contract with the NHS Foundation Trust (the “Trust”) to provide cleaning services to GOSH.
In August 2021, GOSH brought the cleaning services in-house, and the claimants were part of the group that transferred to the Trust.
What were the employees paid?
OCS paid the claimants the London Living Wage, which at the time was £10.75 per hour.
Employees of the Trust would ordinarily have been paid Agenda for Change rates of pay. This is the national standardised pay system for many NHS staff: it includes various pay bands, as well as other terms, such as contractual sick pay, annual leave, pension and overtime. Under the Agenda for Change bands, the cleaners would have been entitled to £11.50 per hour.
After the claimants transferred, they were not moved on to Agenda for Change rates.
Was the difference in pay discriminatory?
The claimants brought claims of indirect race discrimination. They claimed the Trust should have:
- required OCS to offer Agenda for Change pay rates and benefits; and
- after the transfer, offered the Agenda for Change pay rates
It is best to consider this case in two distinct periods: the period before the transfer (when the claimants were employed by OCS) and the period after the transfer (when they were employed by the Trust).
Pre-transfer
The Employment Appeal Tribunal found there was no discrimination pre-transfer.
The arguments here were technical and pinned on an argument that the Trust was a “principal” prohibited from discrimination (under s.41 of the Equality Act).
The Court of Appeal’s decision in Royal Parks Ltd v Boohene was pivotal to the EAT’s decision. Royal Parks involved very similar facts and held that s.41 does not enable an outsourced worker to bring a discrimination claim against an end client (the principal) when it related to pay under their contract of employment with the contractor. This is because the pay terms were not directly related to the relationship between the outsourced worker and the end client. This remained true even if the end client had control or influence over the outsourced worker’s terms of employment, as long as that fell short of prohibiting a particular pay rate.
Turning back to the EAT decision we’re looking at, this meant that the claimants could not bring a discrimination claim against the Trust. The Trust were not the employer pre-transfer. Although the Trust did have some influence over the claimant’s pay (and in the relevant contract the Trust required OCS to pay the London Living Wage), they did not prohibit OCS from paying rates that mirrored the Agenda for Change bands.
Post-transfer
The EAT found that the difference in pay was indirectly discriminatory once they became employees of the Trust.
The EAT agreed with the claimants that the Trust applied a practice of making receipt of Agenda for Change pay for cleaners dependent on whether they had transferred from an outsourced provider.
It was held that this practice put the claimants at a particular disadvantage. When comparing the cleaners who had transferred against those who had always been employed by the Trust, there was a greater proportion of cleaners of BAME background. The Tribunal had earlier established that 78% of the transferring employees were of a BAME background, compared to 51% of staff employed by the Trust at the equivalent bands.
The Trust had sought to objectively justify the difference in pay by relying on the provision in TUPE which says changes are void. They argued that harmonisation was not possible - there was no ETO reason “entailing changes in the workforce” - and so even if a change would benefit the employee, the Trust could not have harmonised pay.
However, the EAT found the claimants had a provision in their contract permitting a unilateral change in their terms. As the Trust did have the power to uplift the claimants’ pay, the discrimination was not justified.
What does this mean for employers?
This case raises an interesting question of what transferees should do when there is a pay difference between the employees who are transferring and those who are directly employed by a client.
TUPE only requires a transferee to preserve terms; there is no obligation to increase pay to be in line with the transferee’s rates of pay.
Whilst this case doesn’t change that position under TUPE, it is clear that transferees can be liable for discrimination upon transfer simply by keeping the transferring employees’ terms “as is”. This is particularly where the employment contracts permit changes to terms, as the transferee has the power to rectify any inequalities.
In this case, the discrimination was based on the racial composition of groups. But we often see similar arguments arise in relation to sex and equal pay. Transferees need to be alive to such arguments and consider the make-up of the transferring versus existing population. This will not always be straightforward. The employee liability information which a transferor is required to give to a transferee 28 days before a transfer does not include diversity data. For example, transferors do not need to provide data about a transferring employees’ sex, race, religion or any disability.
Transferees can request more detailed information as part of their due diligence but, if a transferor does not collect or monitor diversity data, there may be limited information to share. Large employers, with 250 or more employees, are required to monitor gender (as part of their gender pay gap obligations) but that is as far as the legal obligations extend. This could change in the near future, and we are expecting an Equality (Race and Disability) Bill this year which will also introduce ethnicity and disability pay gap reporting. As it stands, obtaining diversity statistics before a transfer can be challenging.
TUPE takeaways
Here are some takeaways for transferees:
- No blanket increase: It’s important to remember this case isn’t saying that just because there is a pay difference, there will always need to be a pay increase. However, this case does highlight the underlying risks of having differences in pay across your workforce.
- Do your homework: detailed due diligence prior to a transfer is vital to understand possible liabilities. The employee liability information will only give transferees part of the picture and it will often be prudent to build into an outsourcing agreement a requirement for further information to be provided at an early stage.
Transferees will, of course, want to understand the terms and conditions of transferring staff to understand their obligation upon transfer. But it is important to then compare the terms of the transferring population against the terms of the existing employees. Where there are differences, aside from any legal risks, this could impact culture and morale. - Consider inequalities: If a difference in contractual terms is identified, transferees should go one step further and analyse whether the difference puts people of a certain characteristic at a disadvantage. As we flag above, the necessary data may not be available prior to the transfer. Transferees may need to do their own analysis after the transfer.
- Different routes to implement changes: if you want to make changes because of a transfer, remember there are two routes to achieving this under TUPE. Establishing an ETO reason which entails changes in the workforce can be tricky and also requires the employee to agree to the change.
If there is a contractual power to vary terms, this can be a more straightforward option. However, any detrimental changes will usually be contentious and meet resistance. Increasing pay (or improving terms) for a group is less likely to cause issues in practice. - Make the most of consultation: getting involved with the transferor’s consultation process can give you a good opportunity to discuss any changes with the employee’s directly, flushing out any issues ahead of the transfer.
Looking ahead
It is worth highlighting that this case involved a transfer from a private sector employer into the public sector. Public sector employees will often have more generous terms, particularly in areas such as pensions. Although TUPE itself doesn’t require transferees to “level up” the terms of incoming or existing, this is set to change.
The new Employment Rights Act also contains provisions which could require private sector employers to enhance terms, although the details remain to be seen. The Act includes powers to introduce regulations and a statutory Code of Conduct aimed at removing a two-tier workforce when ex-public-sector employees and private sector employees are working alongside one another. This would be achieved by stipulating terms to be included in outsourcing contract, meaning private sector employers could face enhanced contractual terms when working on public sector contracts.
The government have also previously said there will be new measures “ensuring that outsourcing of services can no longer be used by employers to avoid paying equal pay”. No further detail has been provided, but this also suggests a focus on equalising terms where a contractor worker earns less than employees who are directly employed.
Looking through a wider lens, this case is also noteworthy when considering the possibility of increased pay transparency in Great Britain down the line. Last year, the government called for evidence about measures to increase pay transparency (aligning it more closely with the changes in the EU). The changes could include requiring employers to provide employees with information on pay structures and how employees’ pay compares to others doing the same work, or work of an equal value.
If such changes come into force in Great Britain (they are likely to have to be introduced in Northern Ireland because of the terms of the Brexit settlement), this would equip employees to more easily compare their pay to those they work with. Even if not, many employers are considering ‘voluntary’ compliance with the EU Pay Transparency Directive in relation to workers in Great Britain, and so a greater level of scrutiny around pay equality can be expected.
Could the changing landscape mean we will soon begin to see end clients (particularly in the public sector) requiring their pay rates to be mirrored to avoid any two-tier workforces? Could we begin to see private sector employees take a similar approach? Or could transferring employees ask for pay transparency data as part of pre-transfer consultation? Time will tell…
Getting in a TUPE tangle? Contact our team for support.
Mr Alpha Anne and others v Great Ormond Street Hospital for Children NHS Foundation Trust – download full judgment here.