Asset Purchase Agreements and TUPE in England: When do employees transfer?
- Ignas Bartus
- Oct 5, 2024
- 4 min read
In the context of business acquisitions, asset purchase agreements (APAs) are commonly used to transfer specific assets of a company from the seller to the buyer. However, one key consideration that often arises in such transactions is the potential application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE safeguards the rights of employees in situations where a business or part of a business is transferred to a new owner. In this article, we will explore how TUPE interacts with asset purchase agreements in England, backed by relevant case law.
Understanding TUPE
TUPE aims to protect employees when the business they work for changes hands. Under TUPE, employees of the seller automatically transfer to the buyer on their existing terms and conditions of employment, including their continuity of employment. This regulation applies in situations where there is a transfer of an "undertaking" or part of an undertaking, which can include the sale of a business, merger, or service provision change.
When Does TUPE Apply in an Asset Purchase Agreement?
The critical question in asset purchases is whether TUPE applies to the transaction. TUPE will only apply if the asset purchase involves the transfer of an undertaking, i.e., the business or part of it as a "going concern." This typically means that the buyer is not just purchasing assets but also taking over the operation of the business, including its workforce.
The case of Spijkers v Gebroeders Benedik Abattoir [1986] sets out the key test for determining whether a transfer of an undertaking has taken place. The European Court of Justice in Spijkers held that a transfer occurs when there is a transfer of an economic entity that retains its identity post-transfer. This can include factors such as the type of business, whether tangible and intangible assets are transferred, and the transfer of employees.
Thus, in asset purchase agreements, TUPE may apply if the transaction involves more than just assets; it must also include the transfer of the business operation itself. For example, if the buyer intends to continue the same business activities using the same employees, TUPE is likely to apply.
Key Obligations for Buyers and Sellers under TUPE
When TUPE applies, both buyers and sellers have certain obligations. The seller must inform and consult affected employees or their representatives before the transfer. They must provide details about the transfer, its implications, and any measures that may be taken concerning the employees. The buyer, on the other hand, must take on the employees on their current terms and conditions, with limited scope to change them post-transfer unless specific conditions are met.
One key case on this point is Wheeler v Patel [1987], where the court emphasized that a failure to inform and consult employees could result in claims for compensation. This case highlights the importance of compliance with TUPE's requirements to avoid costly litigation.
Employee Rights Under TUPE in an Asset Purchase
Employees covered by TUPE retain all their existing rights, including pay, holiday entitlement, and redundancy rights. Importantly, their continuity of employment is preserved. This was confirmed in Litster v Forth Dry Dock & Engineering Co Ltd [1989], where the House of Lords held that employees dismissed shortly before a transfer for a reason connected with the transfer are treated as having been employed immediately before the transfer, meaning they are still covered by TUPE protections.
In an asset purchase, this means that if TUPE applies, the buyer inherits the employees as they are, with all accrued rights and obligations. Attempts to change employment terms after the transfer may be deemed invalid unless they are justified for economic, technical, or organisational reasons, as set out in the case of Delabole Slate Ltd v Berriman [1985].
Contractual Provisions in Asset Purchase Agreements
Given the potential application of TUPE in asset purchases, it is essential to include provisions in the APA to manage the associated risks. These provisions typically address:
Liability for employee claims: The APA may include indemnities whereby the seller agrees to cover certain liabilities relating to the employees before the transfer, such as unpaid wages or holiday pay. In P&O Trans European Ltd v Initial Transport Services Ltd [2003], the court reinforced the importance of having clear indemnity clauses in place to allocate liability for employment claims arising before and after the transfer.
Consultation obligations: The agreement may specify which party is responsible for informing and consulting with employees, ensuring that TUPE obligations are met.
Warranties: Sellers often provide warranties confirming that all relevant information about the employees has been disclosed, helping the buyer to assess potential liabilities accurately.
Conclusion
When entering into an asset purchase agreement, both buyers and sellers must be aware of the potential application of TUPE. If the transaction involves the transfer of a business as a going concern, TUPE is likely to apply, and both parties must comply with their obligations under the regulations. Failure to do so can result in significant financial penalties, as demonstrated by the case law discussed above. Incorporating clear contractual provisions within the APA can help manage these risks and ensure a smooth transition.
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