Notice to employees when selling business

Selling a business is a complex process, involving a broad range of considerations. How you manage and engage with your workforce through the process will be critical, not just to maintain positive relations but also to minimise legal risk.

The following guide for employers examines the rules relating to employee rights on the asset sale of a company — including how much notice to give employees when selling a business — together with advice and guidance on how to handle workforce issues when selling up.

Which regulations govern employee rights when selling a business?

When selling a business, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended by the 2014 Regulations) govern employees’ rights. These regulations can be collectively described as ‘the TUPE Regulations’.

The TUPE regulations can be both complex and technical, although their underlying purpose is simple: to protect and preserve an employee’s rights when a business changes hands, ensuring that employees are not disadvantaged when they move across to a new employer.

The net effect of TUPE is to automatically transfer all employees who were employed immediately before the transfer — together with any associated rights, powers, duties and liabilities arising under or in connection with their contracts of employment — from the outgoing employer (the transferor) to the incoming employer (the transferee).

Employee rights on the sale of a business

When TUPE applies to the sale of a business, the incoming employer will be stepping into the shoes of the outgoing employer. In this way, the new employer will effectively be taking on the rights, responsibilities and liabilities of the old employer towards all assigned employees.

In broad terms, employee’s transferring to a new employer will continue to enjoy the same terms and conditions of employment and, with the exception of certain occupational pension arrangements, their existing employment rights will remain intact. They will also carry over the same continuity of employment for the purposes of any statutory rights for which continuous service is a qualifying requirement, such as unfair dismissal — as well as any statutory or contractual rights where length of service impacts any entitlement, such as redundancy payments and notice periods on dismissal.

The TUPE Regulations will usually render any dismissal automatically unfair where the sole or principal reason for the dismissal is the transfer, either before of after the transfer takes place. This is because, under TUPE, employees receive certain protections around dismissal and redundancy. However, if an employee is subsequently dismissed for reasons unconnected to the transfer, by reason of redundancy or otherwise, the 2 year qualifying service requirement to bring a claim for unfair dismissal or statutory redundancy pay will run from the original start date with their previous employer. An employee can also be lawfully dismissed prior to the sale of a business, provided the reasons for their dismissal are unconnected to the transfer.

Notice of dismissal

In some cases, despite the protections against dismissal and redundancy afforded to employees under TUPE, there may be certain circumstances in which redundancies in connection with the transfer can be justified, for example, where there is unlikely to be sufficient work for all employees. The exception to the rule against dismissal before of after the sale of a business — either by reason of redundancy or for some other substantial reason — is essentially where there is an ‘economic, technical or organisational reason entailing changes in the workforce’. These are commonly referred to as ETO reasons.

However, any dismissal or redundancy based on an ETO reason entailing changes in the workforce will still be subject to the rules around fair dismissals and proper redundancy procedures, including making offers of suitable alternative employment. This means that employers must still act reasonably in their decision to dismiss or in their selection for redundancy, and follow fair procedures. In these circumstances, and only having undergone a full dismissal procedure or redundancy consultation, employees will be entitled to a minimum statutory notice period based on how long they have worked for the business of:

at least one weeks’ minimum notice, where they have worked in total for the business for between a month and 2 years
a weeks’ notice for every year employed, where they have worked in total for the business for between 2 years to 12 years
12 weeks’ notice, where they have worked in total for the business for 12 or more years.

Notice of transfer

The TUPE Regulations trigger very specific information and consultation obligations on the part of both the outgoing and incoming employer toward employees and their representatives during the transfer process. In this context, giving ‘notice’ to employees refers to giving notice of the proposed transfer, rather than notice on dismissal or redundancy.

The employers must provide employees with certain prescribed information, including:

the fact of the transfer, the date or proposed date of the transfer, and the reasons for it
the legal, economic and social implications of the transfer for any affected employees
any planned measures which the incoming employer envisages taking in connection with the transfer, or confirmation that there are no planned measures that will be taken.

There is no statutory definition of ‘measures’, although this can include dismissals and redundancies. In some cases, despite the protections against dismissal and redundancy afforded to employees under the TUPE Regulations, there may be certain circumstances in which a decision to terminate employment in connection with the transfer can be justified for ETO reasons, for example, where there is unlikely to be sufficient work for all employees.

Planned measures can also refer to any material change in existing work practices or working conditions, such as changes to hours or benefits, although changes to terms and conditions are again subject to TUPE limitations. As with dismissals and redundancies, the Regulations do not prevent contractual variations if the sole or principal reason for the variation is an ETO reason entailing changes in the workforce, although the employee must agree to the variation.

Notifying employees

Once a decision has been made to proceed with the sale of a business, both employers must identify any affected employees with whom to inform and consult. The statutory obligation to inform and consult applies to any employee affected by the transfer and any planned measures connected with it. This will not only include the transferring workforce, but also any non-transferring or any other staff in relation to both the incoming and outgoing employer.

The employers should also identify any recognised trade unions or existing employee representatives in respect of all affected employees. If the workforce is non-unionised and there is no other suitable representative body, employees must be invited to elect their own representatives. If the employees fail to elect representatives within a reasonable time, having been invited to do so, the employers must instead give the information directly to the employees. Similarly, for a business with fewer than 10 employees, known as a micro-business, each of the affected employees may be consulted about TUPE directly.

The information given to employees or their employee representatives should be provided clearly in writing and delivered by hand or, where applicable, sent by post to the union’s main or head office or addresses notified by the appropriate representatives.

When should employees be informed of a decision to sell the business?

Where the obligation to inform and consult is triggered, the prescribed information under the Regulations must be provided to employees or their representatives long enough before the transfer to enable the outgoing employer to consult with them about it. There is no set timetable for consultation, although it must be in good time, where the larger the transaction and the more employees affected, the longer the timetable for consultation will need to be. If arrangements need to be made for the election of employee representatives, this is likely to prolong the process, especially where training is required before any consultations can begin.

Overall, to be considered fair, the consultation process must involve the provision of both adequate information and time to respond to any representations made by employees or employee representatives prior to the point of transfer. The sooner the process starts, the more likely it is to be meaningful, preferably when the proposals are still at a formative stage.

In some cases, it may be beneficial to keep employees and their representatives informed of any potential transfer before a sale has been agreed. By keeping staff informed early on, this can help to highlight important matters which employers may not have otherwise considered, such as if there is sufficient work for two sets of staff and what, if any measures may need to be made post-transfer to ensure the efficient running of the business. However, the obligation to inform and consult only strictly arises once a decision has been made to sell the business.

Once the sale of the business completes, the outgoing employer — providing that some of the business and employees remain — must inform and consult with any remaining staff, whilst the incoming employer must inform and consult with the transferring staff. The incoming employer must also inform and consult about any potential redundancies.

Where an incoming employer is planning to make redundancies after the transfer takes place, they may want to embark on a pre-transfer collective consultation about post-transfer dismissals in parallel with TUPE consultation. Where a potential redundancy situation arises as a result of a transfer, employers must consult directly with affected employees and indirectly through representatives when the incoming employer is making, or intending to make, 20 or more redundancies within a 90-day period at a single establishment.

In these circumstances, an incoming employer can consult with affected employees, provided the outgoing employer agrees and certain other conditions are met. However, if the employers opt to start the collective redundancy consultation process prior to the transfer taking place, they must not select or dismiss any individual for redundancy before the sale goes through, and individual consultation with affected employees will still be required post-transfer.
How can the risks around employee rights be managed?

Where the TUPE Regulations apply, it is not possible for the parties to opt out of their statutory obligations, including the obligation to inform and consult about a transfer. Still, even though TUPE cannot be avoided, employers can factor in appropriate contractual warranties and indemnities before proceeding with the sale of a business. This will enable them to agree in advance as to who will bear the financial costs of any pre-existing employee liabilities or arising out of any failure to comply with the Regulations. This includes any failure to follow the information and consultation obligations that both employers owe to employees throughout the transfer process, where an employee may lodge a tribunal complaint for:

any failure relating to the election of employee representatives, by any employees who are affected
any other failure relating to employee representatives, by any of the employee representatives to whom the failure related
any failure relating to representatives of a trade union, by the trade union, and
any other case, by any affected employees.

The penalty for non-compliance is up to 13 weeks’ uncapped gross pay per affected employee, based on what the employment tribunal considers just and equitable having regard to the seriousness of the employer’s failure to inform and consult. In most cases, the outgoing and incoming employers will be jointly and severally liable to pay the amount ordered by the tribunal, where it will be for the parties to apportion such liability on a contractual basis.

Seeking expert advice from a TUPE specialist can help employers to navigate the complexities of the TUPE Regulations, where these apply, exploring ways to minimise the risks and potential liabilities involved. The employers will also need to carefully consider the impact of TUPE when deciding the timetables involved. Most TUPE transfers are time-consuming, due to the legal requirements around consultation periods and the exchange of information, where realistic management of time and resources is essential to a successful outcome.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.