We are considering contracting out some of our current in-house services, such as catering and cleaning. Are these covered by the legislation on transfers? How do I handle it?

Jennifer O'Sullivan writes:

The application of the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 (“TUPE”) in Ireland to the area of contracting out services can be a grey area from a legal perspective. The area of contracting out of services and second generation awards of service contracts has a clear legislative basis in the UK, under the amended 2006 Regulations, but in Ireland this specific issue is governed by the principles set down by the European Court of Justice in the decision in Süzen [1997] Case C-13/95 and by the case law of the Employment Appeals Tribunal which seeks to apply those principles.

In the current economic climate, this is a key legal consideration for employers seeking to reduce cost by either outsourcing facilities for the first time, changing service provider for an existing outsourced facility or potentially bringing that outsourced activity back in-house.

This article outlines the principles set down in the Süzen case and a recent informative decision of the ECJ which reaffirmed those principles.


1. The Basic Principle of TUPE

TUPE was enacted for the purpose of protecting certain rights of employees in the event that the business in which they were employed was transferred to a new employer. TUPE applies only to the transfer of an “undertaking business or part of an undertaking or business from one employer to another employer to another employer as a result of a legal transfer”. For TUPE to be applicable, the entity which is transferred must retain its identity and the transferee must continue or resume the same or similar economic activities post transfer.

The Courts and Tribunals have identified that the key issue is whether a transferee has obtained a business, or part of a business, which they can continue to operate. It is essential that the transfer relates to a stable economic entity and this necessitates that the entities activities are not limited to performing one specific works contract. The part of the transferor’s business which is transferred must be capable of being carried out on a long term basis.

There are a number of factors to be considered in assessing whether a transfer has taken place:

(i) the type of business concerned;
(ii) whether assets, tangible or intangible, are transferred;
(iii) whether employees are being taken over and how many;
(iv) whether customers are being transferred;
(v) the degree of similarity between activities carried before and after the transfer; and
(vi) the period for which any of these activities are suspended.


2. The Süzen Decision

The general legal principle which emerged from the landmark Süzen decision is that loss of a customer contract does not constitute a transfer.

The rationale behind this is that the original undertaking does not cease to exist simply by losing a customer and part of the business belonging to it cannot be considered to have been transferred to the new awardee of the contract. A catering company, for example, will not cease to exist as a whole entity if they were to lose one contract to supply cafeteria workers to a competitor.

There are important exceptions to this general rule. In certain labour intensive industries, a group of workers engaged in a joint activity on a permanent basis may constitute an economic entity. This entity will be capable of maintaining its identity after it has been transferred where the new employer does not merely pursue the activity in question but also takes over a major part in terms of the numbers and skills of the employees specifically assigned by the original employer to a particular task. In those circumstances the new employer takes over a body of assets enabling them to carry on the activities of the transferor company on a regular basis. In certain industries, tangible assets, such as plant or machinery, are unimportant. The real asset is the employees and their own skills or knowledge. The question becomes whether the business carried on by the existing service provider is labour dependent and does not require any tangible assets to carry out the activities.

An obvious example of an asset reliant industry is the transport industry, where trucks would be the asset without which the business could not be run. The employees in that industry are not the focus of the business.

Conversely, in many cases involving contracts for cleaning or security services, the EAT has focused on whether a substantial part of the workforce is taken over. If some of the assets of the original undertaking are also transferred, this can tip the balance further in favour of holding that TUPE applies.

It will therefore be necessary to examine each existing service which an employer proposes to transfer to a new service provider. The activities carried out by the existing service provider will need to be examined to see whether they potentially fall into the Süzen exception.

In brief, a mere changeover of contracting companies is not TUPE:

A. What is required is a concomitant transfer of assets; or
B. The taking over of a major part of the workforce in terms of numbers or skills’

The key question arises as to whether the activity that the employee is engaged in is labour dependent or whether it is asset based. This distinction is crucial. If, after analysis, it is determined that the activity carried out on one or all of the existing contracts is labour intensive, the importance is attached to whether or not the employees transfer. Therefore, by refusing to take on the employee, the new entity could potentially avoid TUPE, depending on the specifics of the case. This has led to some arbitrary results, which is why this area of law was radically overhauled in the UK in 2006.


3. Illustrative Irish Case Law

In Cannon -v- Noon Cleaning Services Limited and CPS Cleaning Services Limited [1998] ELR 153 it was found that there was no transfer of undertaking where the contract for the cleaning of the Balbriggan Garda Station was lost to CPS Cleaning. No tangible assets transferred between the two contractors and CPS declined to employ the claimant. The EAT felt they had no alternative but to apply the Süzen decision, finding that a possible transfer of the intangible profit margin on the contract was not sufficient of itself to be a major factor in the transfer.

The case of Farrell v United Cargo City Services Limited and City West Transport Limited UD 96/2004 is a good example of where a business was deemed to be asset dependant. United Cargo initially held a distribution contract which was put up for tender and awarded to City West, a company that had been set up by a manager of United Cargo. City West decided to run the contract with 10 employee, two less than United Cargo, and employed 6 of the United Cargo employees but not the claimant. No assets were acquired from United Cargo by City West which bought its own trucks to provide the services. The EAT held that while there was a taking over of part of the workforce there was no transfer of assets. City West’s business required substantial plant and equipment and therefore could not be regarded as a labour intensive activity. Since there was no transfer of tangible assets between the two contractors, the EAT found that TUPE did not apply.


4. Recent ECJ Decision Reaffirms Süzen

In CLECE SA v Maria Socorro Martin Valor and Ayuntamiento de Cobisa [2011] C-463/09, the ECJ found that it was not a transfer of undertaking where a municipal authority terminated its contract for cleaning services in order to carry out the function itself. In this case, the municipal authority refused to engage the claimant, an employee of the contract cleaning company and instead engaged five new workers to carry on the same work.

It was reiterated by the ECJ that cleaning services are an activity essentially based on manpower. Therefore, the new employer was required to not only pursue the original activity but to also take over a major part, in terms of their numbers and skills, of the employees specifically assigned by the previous employer, to carrying out that activity.

The ECJ noted that the Directive does not require that the taking on of staff by the transferee be subject to a contract. The majority of employees can also be taken on as a result of the unilateral decision of the new employer to take on the new staff.

In this case, CLECE did not take over the employee previously carrying out the cleaning work through a contract company nor did it take over any tangible or intangible assets of the original undertaking. No transfer therefore occurred between the original contract cleaning company and the municipal authority.


5. Conclusion

The recent decision of the ECJ has affirmed the Süzen case and emphasised the crucial distinction between a labour intensive activity, where the staff themselves are effectively the undertaking, and an asset reliant business. This remains a grey area of law, with employers requiring advice on the specific facts of each individual situation to determine the potential applicability of TUPE to the proposed outsourcing arrangement. Until any future amendment of the 2003 Regulations, the law at present is dictated by case law of the ECJ and EAT therefore practitioners and employers alike should be vigilant in keeping abreast of developments.