The return of the tendering trap

Outsourcing is big business, with the European market alone reputedly worth pounds 400bn. Organisations across Europe are tendering out everything from catering facilities to information technology. Financial planning has not been helped by the constantly evolving interpretation of the Acquired Rights Directive (ARD) which completed yet another twist with the European Court decision in the Suzen case on 11 March.

The decision, which has just been followed by the Court of Appeal in a case involving Brintel helicopters, has created fresh uncertainty for both employees and contractors.

The directive was introduced in 1977 with the aim of protecting employees' rights when their company is transferred to a new owner. On the sale of a company's shares, the employees' terms and conditions remain unaltered because, although the major shareholder changes, the legal entity employing the work-force - the company - does not. By contrast when a business is disposed of through an asset sale, employees do not have the same protection as a purchaser could avoid responsibility for employees by buying everything but the company's shares. The directive was introduced to close that gap.

In broad terms it says that when an economic entity retains its identity after transfer, employees are transferred with the same terms and conditions. The only rights that do not transfer are pension rights. So the purchaser can inherit significant employee-related liabilities which go to the heart of the contract price. Each EU state has incorporated the directive into its legislation, the UK in the form of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (Tupe). Initially the directive was believed to extend only to commercial ventures and not to non-core activities such as catering or information technology and many out-sourcing contracts were negotiated in the belief that Tupe would not apply.

A flurry of European case law has since shown that reasoning to be premature. The European Court held that the activities of a single cleaner were capable of constituting an economic entity and in 1993 Tupe was amended to make clear that it was not restricted to commercial ventures.

One problem created by the constant shift in interpretation relates to out-sourcing contracts negotiated some years ago which are coming up for re-tendering. The likelihood is that if there is a change in contractor there may be an automatic transfer of staff, though, as a result of the Suzen decision, the position is not as clear as it was. Previously the test was whether it could be shown that there is a distinct economic entity that retains its identity before and after the transfer. Now the court is saying that the directive will not apply on re-tendering if no assets are transferred and a substantial part of the work-force is not transferred.

The problem is that as many of the contracts were negotiated on the assumption that the directive would not apply and thus staff would not transfer, those contracts do not provide for the release of employee-related information to any rival tenderers.

Anyone bidding for a contract will want to know the size of the work- force he may inherit and the associated liabilites. But the old contractor is not under any statutory obligation to provide that information and there is little commercial incentive to do so given that he stands to lose the contract.

Customers have few options. They can try to renegotiate the outsourcing agreement by relying on a break clause or they can apply commercial pressure to the contractor by threatening to exclude him from re-tendering if he refuses to supply information to rivals.

Potential contractors' worries will not be confined to lack of work- force information. There may also be concerns about the outgoing contractor's ability to manipulate the work-force size and quality. There is nothing to prevent an outgoing supplier transferring sub-standard staff into the entity at the end of the contract or redeploying key employees that the incoming contractor was relying on inheriting.

The real advice for those who have out-sourced non-core activities is to address the problem now rather than wait until the contract expires. If commercial pressure is unable to resolve the problem legislation may prove the only answer. But if the drafting progress of the successor to the directive is anything to go by, legislation may be some time coming.

Ian Hunter

The writer is an employment law specialist at Bird & Bird.