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Employment Law

Legal guidance - compliance - software

15 MAY 2012

Testing the limits of the service provision change

Douglas Leach

A flurry of recent EAT decisions has dealt with attempts to stretch the range of circumstances in which a service provision change can be said to have occurred under the 2006 TUPE regulations. Douglas Leach rounds up those judgments and reports on a decidedly restrictive trend in judicial approach.

Before the 2006 TUPE regulations came into force, there was no provision in either the 1981 TUPE regulations or the Business Transfers Directive (2001/23/EC) explicitly providing for a relevant transfer in circumstances that can be summarised as a change of contractor.

There had been uncertainty in the area for some time, following the then European Court of Justice's judgment in Süzen v Zehnacker Gebäudereinigung GmbH Krankenhausservice. There, the ECJ (now the Court of Justice of the European Union) decided that the directive could in theory apply in respect of a change of contractor, but only where there had also been a transfer of significant tangible or intangible assets, or where the new contractor had taken over a major part of the workforce assigned to the contract. The mere fact of the contract changing hands would not be sufficient.

Of course, this meant essentially that terms and conditions would be protected if a new contractor actually took on the relevant staff assigned to a ‘labour-intensive' entity, but there would often be no transfer at all if it did not (subject to the totality of the now familiar ‘multi-factorial' considerations and in particular to arguments that not taking the staff on was designed to avoid a TUPE-transfer: ECM (Vehicle Delivery Service) Ltd v Cox, ADI (UK) Ltd v Willer and RCO Support Services v UNISON).

The position in relation to the initial outsourcing situation had been clearer, in that the ECJ had established that this was capable of attracting the application of the directive, in Rask and Christensen v ISS Kantineservice and Schmidt v Spar-und Leihkasse der früheren Amter Bordesholm, Kiel und Cronshagen. Again, however, assessment of the totality of the factual circumstances ultimately remained a question for the domestic courts, and despite the now famous efforts of Lindsay P in drawing all the strands of the domestic and European case law together in Cheeseman v Brewer Contracts Ltd, predicting the outcome of any individual case remained difficult.

A new regime

Enter the 2006 TUPE regulations, which sought to create a more certain framework. This was even at the expense of providing protection domestically in circumstances where it was not required under EU law (following Süzen), in that the regulations are expressly applicable where there is a mere change of contractor. This also has the benefit of avoiding the potential circularity of there being no relevant transfer in labour-intensive cases unless there is a transfer of the relevant staff.

Reg 3(1)(b) provides that there will be a service provision change where:

1. activities cease to be carried out by a client on his own behalf and are carried out instead by a contractor [‘outsourcing']

2. activities cease to be carried out by a contractor on a client's behalf and are carried out instead by a subsequent contractor [‘change of contractor'] or

3. activities cease to be carried out by a contractor or a subsequent contractor on a client's behalf and are carried out instead by the client [‘in-sourcing'].

Further conditions are then specified at reg 3(3), namely that immediately before the change, there must have been an ‘organised grouping of employees' situated in Great Britain, which had as its principal purpose the carrying out of the activities concerned on behalf of the client. In addition, inter alia, the activities in question must not consist wholly or mainly of the supply of goods for the client's use (reg 3(3)(b)).

The EAT established firmly in Metropolitan Resources Ltd v Churchill Dulwich that the service provision change provisions are a new construct, entirely separate from the ‘standard' relevant transfer provisions at reg 3(1)(a) and from EU law. As such, the pre-existing case law does not apply to reg 3(1)(b).

Further, the EAT emphasised that a key factor in whether there is a service provision change, is the factual question of whether the relevant activity remains ‘fundamentally or essentially' the same after the change (see also Kimberley Group Housing Ltd v Hambley, Clearsprings Management Ltd v Ankers and OCS Group UK Ltd v Jones).Three recent EAT judgments have addressed that question.

Fundamentally or essentially the same activity?

In Nottinghamshire Healthcare NHS Trust v Hamshaw & ors, an NHS-operated residential care home closed down upon Nottinghamshire County Council taking over responsibility for the service, and the residents were re-housed in their own accommodation. Two private-sector providers were engaged to meet the former residents' care needs in their homes. The trust informed the healthcare assistants working at the home that they would transfer under TUPE to one or other of the new providers, and stopped paying them on 1 April 2010. Various claims were brought, which required a determination of whether or not there had been a relevant transfer.

An employment judge concluded that there had not been a ‘standard' transfer or a service provision change. The EAT declined to interfere with that conclusion. As regards the ‘standard' transfer, the identified economic entity had not retained its identity. In respect of the alleged service provision change, the EAT agreed that the activities carried on by the two new private providers, were not ‘fundamentally or essentially the same' as those that had been carried on by the trust.

The EAT's conclusions in this regard were based on the same factors relied upon in deciding that the entity had not retained its identity for the purposes of the ‘standard transfer' issue, namely that the changes upon closure of the home represented a ‘material shift in the ethos of the service and the manner of its provision'. That shift consisted of the care being provided to the service users in their own homes and of encouraging service users to take responsibility for more domestic tasks and their own possessions.

Arguably, both the tribunal and the EAT conflated the test of ‘retention of identity' for a standard transfer with that of whether the activities remained ‘fundamentally or essentially the same' for a service provision change. It might well be said that the activity of providing care assistance remains fundamentally the same, even if other aspects of the identity of the entity are lost in the change. A firmer footing for the finding of no service provision change would perhaps have been that the client changed from the trust to the council at the same time (see Hunter v McCarrick below), but ultimately the question was one of fact and the EAT was firmly of the view that there had been no perversity.

The EAT was also reluctant to interfere in Johnson Controls Ltd v Campbell & anor. There, JC provided a centralised taxi-booking service enabling the co-ordination of taxi sharing. The claimant worked for JC, principally servicing the UK Atomic Energy Authority. The UKAEA eventually decided that its secretaries could be used to book taxis and stopped using JC's services. An employment judge decided that the activity was not fundamentally the same after that point, because there was no longer a ‘centralised' service, and the EAT had little difficulty in finding no perversity.

In reaching that conclusion, Bean J referred extensively to Enterprise Management Services Ltd v Connect Up Ltd & ors. Here, the claimants were employed by Enterprise to work on a contract to provide IT support for schools run by Leeds City Council. Enterprise did not re-tender for the contract when it came up for renewal and Connect-Up took over.

Up to that point, one might be forgiven for understanding those facts to constitute the archetypal service provision change. However, the new contract did not include the provision of support for curriculum systems, which formed about 15 per cent of the work that Enterprise had undertaken. This difference was, somewhat surprisingly, enough for the tribunal to conclude that the activity after the contract changed hands, was not ‘fundamentally or essentially' the same. Again, the EAT saw no perversity in that conclusion.

Fragmentation, ‘organised grouping' and the relevant client

A second basis for finding that there had been no service provision change in Enterprise was that when Connect-Up took over it had only signed up 41 per cent of the schools that had previously contracted with Enterprise. That figure later rose to 62.5 per cent, with the remaining schools distributed among five other providers.

HHJ Peter Clark noted (at para 8(4)) that ‘cases may arise ... where the division of services after the relevant date, known as fragmentation, amongst a number of different contractors means that the case falls outside the service provision change regime.' He considered that on the above figures ‘the provision of services formerly provided by Enterprise were so spread amongst other providers ... that no service provision change had taken place on that basis.' An open question would appear to remain however, as to the extent of fragmentation that will be tolerated before a case will fall outside reg 3(1)(b).

Where only part of a service is lost to another contractor, there will only be a service provision change where a group of employees is formally organised to provide that part of the service for the client before the change: Eddie Stobart Ltd v Moreman & ors. ES ran a depot delivering meat. Over time, clients were lost. The last two (Forza and Vion) had contrasting delivery systems, with the effect that in practice ES's night shift serviced mainly Forza and the day shift mainly Vion. There was no formal distinction: an employee working mostly on the business of one or other client was a matter of coincidence.

When ES closed the depot, Vion entered into a contract with FJG. This firm only took on one ES employee and the question arose as to which party was liable for the various ensuing claims. The tribunal and the EAT held that ES was liable as there had been no service provision change.

The EAT decided that the first requirement is for a deliberately ‘organised grouping' of employees working for the particular client prior to the loss of the contract. This view was echoed by Lady Smith more recently in Argyll Coastal Services Ltd v Stirling & ors. There could have been a service provision change in Eddie Stobart if some ES employees had been deliberately grouped so as to be ‘Vion-specific', but they were not.

Along similar lines, the importance of the service being provided to a particular client was underlined in Hunter v McCarrick, where the EAT held (on complicated facts) that the activities carried out by different contractors before and after the change, must be carried out for the same client for a service provision change to have occurred.

Supply of goods: when is a service not a service?

In Pannu & ors v Geo W King Ltd (In Liquidation) & ors, the EAT dealt with a separate issue which is nevertheless capable of having a serious impact on the reach of reg 3(1)(b), namely the scope of the exception under reg 3(3)(b) which provides that there will be no service provision change where the contract in question is a contract ‘wholly or mainly' for the supply of goods.

The claimants worked on Geo W King Ltd (GWK)'s axle assembly line. GWK had a contract ‘for the supply of goods and services' (para 3) with IBC Vehicles Ltd, pursuant to which GWK sourced the necessary parts for IBC, assembled them and supplied IBC with completed axle assemblies. That contract further had a schedule appended to it that specified the value GWK was adding to the separate parts in the process of assembling them.

GWK got into financial difficulties and for a time latterly IBC paid for the parts that GWK assembled on GWK's behalf (so that GWK was then doing nothing but assembling parts). GWK eventually ceased production and IBC entered into a new contract with Premier, for Premier to assemble the same parts at IBC's own premises.

The tribunal concluded that there had been no service provision change because the relevant activity to be considered was the activity of the contractor, not the activity of the employees. GWK was supplying completed axle assemblies, which meant that the contract was wholly or mainly for the supply of goods. It made no difference that IBC had paid for the constituent parts for GWK for a period. The EAT held that the tribunal's conclusion on the facts had not been perverse, and dismissed the appeal.

This was not necessarily the foregone conclusion that some have suggested it to be. Even taking care to consider the activity of the contractor, GWK was still expressly contracting to provide a service of sourcing and assembling parts. Indeed, that ‘service' approach would arguably be consistent with the spirit of the Supply of Goods and Services Act 1982, and there is extensive commercial contract case law on the distinction between sale of goods and sale of services contracts that the EAT was seemingly not referred to. Given the factual nature of the enquiry, it is conceivable that in another analogous case the opposite conclusion from that in Pannu could be reached by a tribunal, which would be equally difficult to appeal against.


It is plain that the requirement for the relevant activity to remain ‘fundamentally or essentially' the same will often be critical and if almost any credible distinction can be drawn between the nature of an activity before and after the change, there is a good chance of avoiding a service provision change finding. Thus, whatever the objective, care will be required in defining the relevant ‘activity' to suit the desired end.

Whatever the tribunal decides however, an appeal is unlikely to be worthwhile. Add to this the problems of ‘fragmentation', the need for the grouping of employees to be formally organised in respect of a particular client and the apparently broad view taken of the ‘supply of goods' exception, and the margins of the service provision change provisions begin to look fairly rigid: unless a case fits squarely within the categories of ‘outsourcing, in-sourcing or change of contractor' spelt out by reg 3(1)(b) and involves a clear ‘service', a service provision change finding is unlikely.

Cases referred to:

Süzen v Zehnacker Gebäudereinigung GmbH Krankenhausservice [1997] IRLR 1119

ECM (Vehicle Delivery Service) Ltd v Cox [1999] IRLR 559

ADI (UK) Ltd v Willer [2001] IRLR 542

RCO Support Services v UNISON [2002] IRLR 401

Rask and Christensen v ISS Kantineservice A/S C-209/91 [1993] IRLR 133

Schmidt v Spar-und Leihkasse der früheren Amter Bordesholm, Kiel und Cronshagen C-392/92 [1994] IRLR 302

Cheeseman v Brewer Contracts Ltd [2001] IRLR 144

Metropolitan Resources Ltd v Churchill Dulwich [2009] IRLR 700

Kimberley Group Housing Ltd v Hambley [2008] ICR 1030

Clearsprings Management Ltd v Ankers (24.02.09, UKEAT/0054/08/LA)

OCS Group UK Ltd v Jones (04.08.10, UKEAT/0038/09/CE)

Nottinghamshire Healthcare NHS Trust v Hamshaw & ors (19.07.11, UKEAT/0037/11)

Johnson Controls Ltd v Campbell & anor (14.02.12, UKEAT/0041/12)

Enterprise Management Services Ltd v Connect Up Ltd & ors [2012] IRLR 190

Eddie Stobart Ltd v Moreman & ors (17.02.12, UKEAT/0223/11)

Argyll Coastal Services Ltd v Stirling & ors (15.02.12, UKEATS/0012/11)

Hunter v McCarrick [2012] IRLR 274

Pannu & ors v Geo W King Ltd (In Liquidation) & ors [2012] IRLR 193

This article was first published in ELA Briefing (Vol.19, No.4, May 2012)

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