Transfer of Undertakings (Protection of Employment) Regulations 2006

My Lords, the Transfer of Undertakings (Protection of Employment) Regulations 2006 are unquestionably important. The Merits Committee has also noted their significance. I am therefore pleased that we have had an opportunity to discuss these new TUPE regulations today. As we know, these regulations implement the Acquired Rights directive in the UK. They are therefore made primarily under Section 2(2) of the European Communities Act 1972 via the negative resolution procedure. I say to the noble Lord, Lord Newby, that we have consulted extremely widely, including with the Association of Business Recovery Professionals. We have listened to its views. If we had thought that its views and the proposed course of action would improve the situation, we would have amended the regulations and taken account of that. However, it is our view that they do not and that they merely would have replaced one kind of uncertainty with another, as I shall explain. We therefore felt that we should go forward on this basis. I was asked why we did not take more time to get these regulations right. It has taken a very long time to bring these regulations forward. Work started in 1997, and we have been pressed to finalise the regulations and improve the protections provided by them. Against that background, it would have been a grave mistake to delay them further. The original TUPE regulations were introduced in 1981. They have given rise to large amount of litigation and have been repeatedly tested in the tribunals and courts. This new set of regulations represents a major revision of those 1981 regulations. They have been in preparation for many years and have been the subject of three rounds of public consultation. Our aims in revising the 1981 regulations were several. We needed to update them to reflect the changing face of our labour market, in particular the greater use of outsourcing and similar practices. We also needed to clarify the law, both to reflect important developments in case law across the 25 years or so during which the 1981 regulations were in force and to address some of the inconsistencies that had arisen between domestic and European interpretation of the directive and the regulations. We wanted to revise them also to take account of changes to the Acquired Rights directive. The revised Acquired Rights directive provided new possibilities for member states to develop their law on transfers. We have taken advantage of those possibilities. For example, the 2006 regulations place a new obligation on the transferor employer to provide information to the transferee employer about the employees who are transferring. That information, which should normally be provided in advance of the transfer occurring, should help the new transferee employer to prepare for the responsibilities and obligations that he will inherit. It should therefore help ensure a smoother transition, benefiting both the new employer and the transferred employees. Another major set of changes flowing from the new directive concerns the treatment of transferors subject to insolvency proceedings at the time of transfer. It is this element of the new regulations, which is in Regulations 8 and 9, that has attracted speakers in this debate. In explaining our position on these two regulations, it is fair to say that our objective in making these changes is shared by most, if not all, of us. Regulations 8 and 9 aim to make it easier for a new transferee employer to take on all or some of the business from a transferor employer who is insolvent or, more precisely, is the subject of insolvency proceedings. In other words, it aims to support the ““rescue culture””, preserving as many jobs as possible in the difficult situations which can arise when businesses face extreme financial difficulty. Regulation 8 assists by relieving the transferee employer of some of the debts owed by the transferor to the transferring workers. Under the 1981 regulations, most of those debts would have been transferred to the transferee, creating a disincentive for a new employer to step in. Under the 2006 regulations, we have relieved the new employer of some debts that will now be met through the National Insurance Fund. For example, the fund will meet arrears in pay owed to the transferring employees up to the statutory maximum that can be paid under the Employment Rights Act 1996. This provision applies where the transferor is the subject of insolvency proceedings which have been opened not with a view to the liquidation of the assets of the transferor. In addition, Regulation 8(7) disapplies Regulations 4 and 7 in those extreme cases where the transferor is subject to ““bankruptcy or analogous”” insolvency proceedings which have been opened with a view to the liquidation of the assets. This means that if a transfer occurs in those circumstances, the TUPE provisions concerning continuity of employment and the maintenance of contractual terms and conditions do not come into play. Regulation 9 assists the rescue culture by creating room for the transferred employees to agree new terms and conditions with the transferee or the insolvency practitioner. Under the 1981 regulations, the transferee employer would have to have taken on the employees under their old terms and conditions. Regulation 9 loosens that arrangement and, in effect, permits the parties, subject to particular safeguards, to agree to transfer on different, perhaps inferior, terms and conditions. The safeguards limit contractual changes to permitted variations of contracts that are designed to safeguard employment opportunities by ensuring the survival of the undertaking. They also involve the participation of union or other representatives in the process and the provision of information on proposed contractual changes to the affected employees. In cases where bankruptcy or analogous proceedings are taking place, there is even wider scope to apply new conditions because Regulation 4 does not apply. There have been two broad criticisms of these insolvency provisions and they were made by the noble Lord, Lord Hunt, this evening. First, it has been suggested that Regulation 8 and our guidance are insufficiently clear in identifying which debts are met from the National Insurance Fund. Secondly, doubts have been expressed about our approach to copying out the directive when defining how the various categories of insolvency proceeding are covered. Let me start with the debts issue. The National Insurance Fund will be able to play a role where employees transfer within the scope of the regulations and they are owed certain contractual debts by the transferor. The fund will cover any arrears in pay and holiday pay owed by transferor, subject to the statutory limits. Statutory redundancy pay does not come into play for those employees because they have not been made redundant during the transfer process and TUPE regulations have the effect of deeming such employees not to have been made redundant on the date of the transfer. The situation is different for employees who would have physically transferred had they not been dismissed in advance of the transfer. Such dismissals may be lawful under TUPE where the dismissals were connected with the transfer and were made for an,"““economic technical or organisational reason entailing changes in the workforce””." Those employees are entitled to statutory redundancy pay, and the National Insurance Fund will meet those debts. Where employees have been dismissed because of the transfer itself or for a reason connected with the transfer that is not an economic, technical or organisational reason, that dismissal is unfair under the TUPE regulations. Employees in that position must complain to an employment tribunal of unfair dismissal, seeking the standard compensation for their loss. The liability in that situation could pass to the transferee, but it will be for the tribunal to decide where liability falls. The fund is not responsible for the debts arising from tribunal awards against the transferee. The Insolvency Service has provided a detailed note to insolvency practitioners that sets out the various ways in which the fund can assist. That detailed note clarifies the position adequately and it clear what the situation is. It is complicated, but we are dealing with a complicated situation involving TUPE regulations in an insolvency. There is no getting away from that complicated situation, but it is clear what the National Insurance Fund can do. Let me now turn to the set of questions concerning our decision to copy out the relevant parts of the directive. As a result, we have not specified how each of the many types of insolvency proceeding would be treated. The main reason for adopting our preferred approach was to be sure that we implemented the directive correctly. Had we adopted a different approach, errors might have been made. We are often criticised in this or other places for failing to implement our EU obligations correctly. On this occasion, we have sought to avoid that potential error. It has been said that our approach creates uncertainty because it fails to specify how each type of insolvency proceeding is to be treated. Some argue that it is unreasonable to leave such matters to the courts. However, it is impossible to give absolute legal certainty when applying European directives of this kind. If we had chosen other wording for our regulations—for example, if we had listed each type of insolvency proceeding covered by Regulation 8(6) and 8(7)—we would potentially have created scope for legal challenges about our implementation of the directive. It is not possible to get rid of all uncertainty. Either there is uncertainty about how the general point in the directive applies to particularly circumstances in this country or, if that is specified, there is the uncertainty of that method being challenged because it does not properly implement the European directive. Furthermore, the listing of insolvency proceedings would have made the regulations much more complicated. This point was raised by my noble friend Lord Lea this evening. How would they deal with the transfer of an undertaking located in the UK that was part of a French or Italian business entity that was the subject of insolvency proceedings in its home country? To cater for those circumstances, it might be necessary for Regulations 8(6) and 8(7) to specify how each of those foreign insolvency proceedings were to be treated. That would clearly be ludicrous, but it is a problem that can arise when regulations are drafted in fine detail. I recognise that some insolvency practitioners are concerned about the regulation. In our judgment, the generic descriptions of relevant insolvency proceedings in Regulations 8(6) and 8(7) are reasonably clear. In our view, there are unlikely to be significant problems. Let us look at the position of administrations, the main category of insolvency proceeding. Regulations 8 and 9 were drafted with the intention that where there was a transfer in a business or undertaking, and the transferor was in administration under the Insolvency Act 1986, employees engaged in that business should be transferred to the acquirer of the business or undertaking. In other words, we intend that Regulation 8(7) should not apply in that situation, but the other provisions in Regulations 8 and 9 would apply. It is our view that the regulations have the intended effect. The key words in Regulation 8(7) are ““bankruptcy proceedings”” and ““analogous””. The expression ““bankruptcy proceedings”” is to be interpreted as meaning proceedings that have as their main or only purpose the realisation of a debtor’s assets with a view, after payment of the associated costs and expenses, to the distribution of the proceeds to the debtor’s creditors. A key feature of bankruptcy proceedings is that they are collective proceedings; in other words, they are for the benefit of all creditors. Administration does not fall within the expression ““bankruptcy proceedings””. The key question is whether administration is analogous to bankruptcy proceedings and it would appear that it is not. The principle or main purpose of administration is not the realisation of the debtor’s assets with a view to distribution among creditors. The statutory purpose to which administrators are obliged to have regard first is the rescue of the company. However, the interpretation of the regulations is ultimately a matter for the tribunal and the court. The noble Lord, Lord Hunt, made the point that few transfers of insolvent businesses involve the sale of all assets to the transferee. This is another area where there has been concern. Some assets are simply sold off to the highest bidder as in a liquidation. Just because some assets are liquidated, it does not follow that Regulations 8(6) and 9 do not apply. The regulations refer to the ““liquidation of the assets””. They do not refer to ““the liquidation of some assets”” or to ““the liquidation of any assets””. It is therefore very difficult in our judgment for the tribunal and courts to conclude that the wording of the regulations and the directive means that where some assets are liquidated, Regulations 8(6) and 9 do not apply. I do not pretend that the regulations are completely certain in their effect and in their capture. That is inherent within much new legislation. Complete or near-complete certainty cannot be found in these situations. I turn to one or two specific points that were raised. The noble Lord, Lord Hunt, said that it is impractical for insolvency practitioners to supply the level of detailed information required in the short time periods within which they typically operate. Regulations 11 and 12 have flexibilities within them. In general, the information must be supplied at least 14 days before the transfer, but this can be relaxed when it is impractical for the transferor to do so. It is perfectly possible for an insolvency practitioner to argue that he should supply the information later because he is new to the business. The tribunal can also waive the minimum compensation for a failure to supply the information where it considers it just and equitable in all the circumstances to do so. Again, the insolvency practitioner could argue for this discretion to be used where it was impossible for him to assemble the necessary information. That said, we believe that in most cases the information can easily be assembled by the insolvency practitioner and most information will be located on payroll and in other personnel information, which should be readily accessible. The noble Lord, Lord Hunt, said that the DTI guidance on the provisions is unclear. The statement in the response document is factually correct, although I concede that it might potentially confuse the reader. Where a statutory redundancy payment is made, the individual who receives that payment would need to build up his entitlement from zero. The phrase was not meant to imply that all transferring employees should receive such a payment on a transfer, whether or not they lost their job. Indeed, the opposite is the case where employees take out employment with the transferee because, in general, they will not be made redundant by the transferor in the lead up to the transfer. However, there will be some cases where affected employees are made redundant for an economic, technical or organisational reason connected with the transfer in anticipation of the transfer or afterwards. Those employees are entitled to statutory redundancy payments so long as they meet the standard and other criteria. The position on that is set out very much more fully in the guidance issued by the Insolvency Service. The noble Lord, Lord Hunt, spoke about the justification for making the transferor and the transferee jointly and severally liable for a failure to consult. He asked whether that would inhibit the rescue culture and deter potential employees from taking on an insolvent business. There is no reason why consultation cannot be carried out properly in extreme situations of insolvency. We would want parties to ensure that they occur in practice. Joint and several liability provides an incentive to both employers to ensure consultation occurs. Good prior consultation usually smooths the way for transfers by reducing employee resistance. So our proposals would in fact provide a stimulus to business rescue. The 2006 TUPE regulations have taken many years to produce. They have been the subject of an enormous amount of prior consultation. We believe that we have implemented the directive correctly and have updated the regulations to reflect the way our modern labour market works. We had to make a decision about whether to copy out how the directive was produced, or, alternatively, try to specify the provision in greater detail in terms of the UK and then face the situation of uncertainty because of challenge that it did not properly implement the directive. We have taken the first course because we think that will lead to greater certainty. I think that is the right course to take. However, we will monitor closely how the new regulations operate in practice. If problems emerge we will consider the case for amending the regulations. With those assurances and explanations, I hope that the noble Lord will feel able to withdraw his Motion.