We currently hold a contract from our client to provide certain services. We have been advised that, arising out of a recent tendering process, we have lost this contract and the contract will transfer to a new service provider. We have a number of employees assigned to work on this contract and we are concerned about the impact on these employees of the loss of this contract. Are there TUPE implications? How do I handle it?

Jennifer Cashman writes:

The situation you describe with regard to loss of this contract is what is referred to as “second generation outsourcing”. In other words, the Principal, who is currently your client, has outsourced this work to your company and now intends to change outsourcing partner, resulting in the loss of the contract to your company, and the question for you as to how you deal with the employees who are assigned to this contract. The loss of a contract in a second generation outsourcing situation such as this does not automatically trigger TUPE.

The law in this regard is as follows:

* Irish Legal Position

In 1997, the ECJ issued a decision directly relating to a change of service providers which greatly qualified the general understanding of previous decisions of the Court. The case of Suzen resulted in the following important points being made by the Court:

A. The Directive is to ensure continuity of employment relationships within an economic entity irrespective of any change of ownership.

B. For the Directive to be applicable the transfer must relate to a stable economic entity that activity is not limited to performing one specific works contract.

C. The mere fact that the service is provided by the old and new awardees of a contract are similar does not support the conclusion that an economic entity has been transferred. An entity cannot be reduced to the activity entrusted to it. Its identity also emerges from other factors, such as its workforce, its management staff, the way in which its work is organised, its operating methods or indeed, where appropriate, the operational resources available to it.

D. The mere loss of a service contract to a competitor cannot therefore by itself indicate the existence of a transfer within the meaning of the Directive. In those circumstances, the service undertaking previously entrusted does not, on losing a customer, cease fully to exist and a business or part of a business belonging to it cannot be considered to have been transferred to the new awardees of the contract.

In Ireland, the Employment Appeals Tribunal (“EAT”) has generally applied the Suzen case in Ireland and as a result the general legal principle emerging from Irish decisions is that loss of customer contract does not necessarily constitute a transfer. The rationale behind this is that the original undertaking does not necessarily 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 awardees of the contract.

To decide whether or not TUPE applies in a second generation outsourcing situation, the question must be asked as to whether the business is asset reliant or labour intensive. The Suzen decision referred to above essentially means in a second generation scenario that, if the contract in question is “labour intensive” then TUPE rules will apply where a major part of the workforce transfers to a new company. Alternatively, where the contract is “asset reliant” then TUPE rules will apply where major assets transferred to the new company. Importantly, if a contract is “asset reliant” and no assets transfer, but all the employees transfer, then TUPE will not apply. Conversely, if a contract is labour intensive and assets transfer but no employees transfer, then again TUPE will not apply.

The EAT has applied Suzen in many decisions. For example, in Cannon –v- Noonan Cleaning Limited and CPS Cleaning Services Limited [1998], it was found that there was no transfer of an undertaking and the contract for the cleaning of a Garda station was lost to CPS Cleaning. No tangible assets transferred between the two contractors and when the Claimant turned up for work with the new contractor after the end of the first contractor’s contract, she was sent away by the second contractor who thereafter declined to employ her. Accordingly, the EAT had no alternative but to apply the Suzen case, finding also that the possible transfer of the intangible profit margin on the contract was not off sufficient significance of itself to be a major factor in the transfer.

* Application of the Law

In applying the law to your query above, the question must be asked as to whether or not the service which you are providing to the Principal is labour intensive or asset reliant. Once that question is answered, then the question that must be asked is whether or not employees are being taken over “in a labour intensive business” or whether assets are transferring “in an asset reliant business”. The answer to these questions will then determine whether TUPE applies or not and whether your employees, currently working on this contract, have a right to transfer to the new service provider.

Once you decide whether or not TUPE applies, that will determine what should happen next with regard to the staff. If TUPE does not apply, it will be a matter for you to either redeploy your staff or alternatively make your staff redundant.