Existing employee rights when a business is bought

Existing employees of your new business.

There are regulations that govern what happens to employees when someone new takes over a business.

These apply to all employees when a business is transferred as a going concern, meaning employees automatically start working for the new owner under the same terms and conditions. Workers are protected under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), when all or part of a business is bought or sold, the terms and conditions of the employees who transfer in the sale are preserved. In other words, in almost all the cases the new employer cannot change the transferred employees’ terms and conditions to match those of its existing employees.

What is a transfer?

A “relevant transfer” – i.e. a transfer to which the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) apply – occurs when:

a stable economic entity is transferred from one business to another

that entity retains its identity after the transfer

A stable economic entity is defined as an organised grouping of resources, e.g. a grouping of employees and assets, such as premises and computer equipment, that pursues an economic activity.

TUPE applies equally to relevant transfers of large and small businesses, and to public and private undertakings. This means there would be a relevant transfer if you sold your business or partnership or if your business bought and operated another business.

Note that TUPE generally applies to second and subsequent transfers of the same undertaking. This means that, if you sell a business or part of a business that you previously bought or relinquish a contract that you previously took over, the employees you took over will now transfer to the new employer.

Not all transfers are relevant transfers. TUPE does not apply in the following instances:

Transfer by share takeover. When a company’s shares are sold to new shareholders, there is no transfer of the business – the same company continues to be the employer.

When a business transfers assets only, e.g. if equipment is sold.

Transfers of undertakings situated outside the UK – although similar provisions apply in the European Union.

Change of business identity, e.g. if the work or organisational structure changes radically.

Whether TUPE applies in any particular case depends on all relevant circumstances. In the event of a dispute, only an employment tribunal or a higher court can decide this.

Where TUPE applies, existing employees of the undertaking transferred automatically become employees of the person who takes it over.

If you intend to buy or sell a business – or part of one – you should consider obtaining legal advice to help you comply with these regulations, which can be complex.

Employment tribunal awards

When you buy an existing business, you might decide you need to employ fewer staff. But be careful about making any changes, as an employee might take a case to an employment tribunal for unfair dismissal or unfair selection for redundancy. It’s best to consult a solicitor before making any such changes.

Inform and consult employees

If you do want to discuss reducing employee numbers or reorganising staff, it’s a good idea to do this once you’ve completed the due diligence period, but before you take over the business. As the new employer you should inform and consult all employees – including employee representatives – who may be affected.

Pensions

As their new employer, you do not have to take over rights and obligations relating to employees’ occupational pension schemes put in place by the previous employer. However, if you don’t provide comparable pensions arrangements, you could theoretically face a claim for unfair dismissal.

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