Bob Niblett (DTI official on behalf of Rt. Hon. Ian McCartney)

Municipal Journal Conference

Mr McCartney has asked me to say that he is very sorry that he cannot be here to take part in your conference today, but he does want to give you a clear message about what the Government plans to do to improve the legislation on employment rights when an undertaking is transferred - the TUPE Regulations. Of course the impact of this will not be confined to local authorities and contractors, but will extend to all sectors of the economy. The Minister has asked me to give you the presentation which he would have made himself, if he had been able to be here today.

Let me start by quoting a figure from a recent research report by the Institute of Industrial and Commercial Law at Staffordshire University Law School. The researchers for the Law School interviewed 300 employers involved in Compulsory Competitive Tendering. They found that a staggering 68% of them - more than two out of three - had actually been involved in some form of litigation arising from business transfers, incurring all the costs and legal fees that entails. I have no doubt that many of those of you who are here from local authorities could also tell a story of the time and the council tax payers? money which you have had to spend trying to resolve legal conflicts caused by the ambiguity and the inadequacy of these Regulations, or by the ingenious ways in which people have tried to get round them.

Clearly everyone - except perhaps lawyers! - will benefit if we can do something to make these Regulations clearer and more straightforward. We want everyone to know where they stand, so that where there is a transfer, those who are affected are given proper protection as a matter of course, without question, quibbling or evasion. If we get it right, we will slash those lawyers? fees in years to come, and the money can be spent on better services.

There are two reasons for our present difficulties. First, the Acquired Rights Directive was drafted over twenty years ago, before competitive tendering and contracting out were a real consideration. So the European Court has spent the last ten years developing an explanation of how the Directive should apply to contracting out situations. Secondly, the previous Government spent fifteen years trying to draw a line to stop TUPE applying to contracting, until it was forced into line by a European Court judgement.

The current Government takes a rather different view about the importance of this legislation. Ministers believe that the principle on which it is based is thoroughly positive. If made to work effectively, it should be the clearest possible example of positive regulation, because it helps necessary changes to happen smoothly by securing the interests and commitment of the people who are affected by those changes. It requires a co-operative, partnership approach to business restructuring. It gives everyone a stake in improving labour market flexibility and competitiveness.

This is why the Government was very keen to take advantage of the UK Presidency in the first six months of this year, which was our chance to set the agenda, to try to get agreement on a redraft of the Acquired Rights Directive. The very fact that redrafts of the Directive had been on the table for many years was itself causing uncertainty. We wanted to resolve the situation in a way which would give both us, and our partners in the European Union, a firm basis for updating our national legislation. There were not many who believed that we would be able to make much progress in such a short time, given the complexity of the issues, and the fact that we needed the agreement of all 15 countries to make any changes. But we did succeed. We managed to persuade all the other member states to agree to a new text, which confirms all the basic protections which the Directive gives, but makes some points clearer and provides more options for Member States to apply provisions which suit their own practice. This now gives us a firm framework for revising our own legislation.

The Government?s strategy in revising this legislation is based on the principle that it must be made to work effectively for all those whose interests depend on it. That is, the workers whose interests it defends, the employers and contractors whose business it shapes, and the clients or local authorities who use it as a framework for contracting. This mirrors the partnership approach which the Government is adopting in deciding policy on employment relations generally. If the interested parties can agree on a reasonable and fair framework of rules which balances all their needs, this is a far more productive way forward, and a sounder basis for real progress, than imposing something which asserts the position of one party in a way which damages another.

Fortunately in the case of the TUPE Regulations there is such a common interest. Certainly in the area of public sector contracting, the consultations which the Government has undertaken, and the joint representations which have been made, show a very strong consensus between the contractors, the workers representatives, and the client authorities, in favour of ensuring that the TUPE Regulations apply to all situations where the same service is contracted out, retendered, or brought back in-house. In other words, no more argument about TUPE or non-TUPE bids; no more wrangling over the difference between first and second generation contracts; no more second guessing about whether there may be a later challenge as to whether TUPE applied or not. It should be clear up front to all parties whether what is being done involves a TUPE transfer; and the assumption should be that the contracting out, retendering or bringing back in house of a service contract does entail a TUPE transfer for the employees, unless there are special, clearly defined circumstances where there really is no transfer of the same service to a new contractor.

This view, presented to the Government by the people whose businesses and livelihoods are so closely affected, is perfectly consistent with the Government?s strategy for the improvement of the delivery of public services in central Government and through encouraging Best Value. Clarity and certainty about TUPE will encourage employers and contractors to compete on quality and standards of service, rather than by undercutting employees? terms and conditions. From the employees point of view, it has the effect of "taking the fear out of transfer". Those are not my words, but those of the representatives of contractors, employees and public authorities who have got together to present their views to the Government. The Government fully agrees with them that if we can take the fear out of transfer, this can do nothing but improve the commitment of the people involved in delivering our public services, their readiness to accept necessary change, and the effectiveness and quality of delivery of those services.

Reducing the fear of redundancy, by providing continuity of employment under TUPE when there is a change of employer, helps people plan their lives and their finances, their mortgages and pensions. People can be part of a flexible labour market and still feel secure and confident to save and invest. This can only be good for the economy as well as for the people concerned. It also saves public money on unnecessary redundancy payments, including those cases where people take a substantial payment one day and are back in their old jobs the next, working for a different contractor. The only reason why anyone providing a service should be made redundant is if there is a genuine reduction in the service or a genuine change in the technical or organisational arrangements for delivering it. People should not lose their jobs or have their contracts changed just because a new contractor has taken over the service.

So the Government agrees that TUPE should normally apply in all these circumstances, and that it should be clear and certain to everyone concerned that it is going to apply. How are we going to make this work in practice?

First, we will try to improve the legal framework. We have taken the first step on this through the agreement to revise the Acquired Rights Directive. That on its own is not enough, because all the Directive can do is to set a broad framework of rules, in language which can be understood and agreed by 15 different countries with very different detailed law and practice. It is essentially a negotiated consensus on what the general ground rules should be. It is the result of political agreement as much as legal analysis. Despite this, getting the wording of the Directive right is vital and essential, because it forms the basic law against which individual cases and national interpretation can be finally tested by the European Court. It gives authority for the more detailed national rules.

When we came to discuss the revision of the Directive, last January when our Presidency began, two things were clear straight away. First, there was a general agreement between Member States that the wording of the Article 1, on the scope of the Directive, needed to be revised because of its lack of clarity and the large number of cases in which the European Court was being asked for guidance on its interpretation. Secondly, no Member State would agree to redraft the Directive in such a way as to narrow its current scope or to remove any existing protection from workers. Member States each had their own different objectives in wanting to redraft different aspects of the Directive to deal with specific problems of interpretation which they had encountered. Our job, as the Presidency, was to reconcile all these wishes and to produce a text which all could agree was better than the original. At the same time we needed to ensure that nothing was included which would make things worse or cause more problems of interpretation, and we had to meet our own particular objectives for improvement.

Following a public consultation, the Government established its main objectives in revising the Directive as being:

-to make it clearer that the Directive did apply in cases of contracting out;

-to make it possible for workers? representatives to agree changes in terms and conditions if this would help save an insolvent company; and

- to make it clear that we could provide for a transferee employer to be required to provide a broadly comparable pension or future service.

We were successful in all these objectives. The new expanded version of Article 1.1 makes it clear for the first time that the Directive does apply to transfers from the public to the private sector, including contracting out, changes of contractor, and the return of a contract in house. Although the European Court had given this interpretation, having it specifically stated in the Directive now gives us a firmer basis for redrafting our own TUPE Regulations, in such a way as to establish the assumption that they will apply in such cases.

It does not of course say that the Directive always applies. The presumptions of the case law remain; there must be an economic entity which retains its identity after the transfer; and the economic entity which transfers must have some substance, in terms of assets, employees or both. These are matters which we will have to address and interpret clearly in the TUPE Regulations.

At the insistence of a number of Member States, the new Article 1 also makes clear, as established by the European Court, that the Directive does not apply to the administrative reorganisation of public administrative authorities, or the transfer of administrative functions between public administrative authorities. However, taken with the provision on contracting out, it is clear that this should be interpreted narrowly so that changes of service contracts within public administration are covered. And as a matter of policy, the Government is committed to treat employees involved in transfers within public administration no less well than those who are covered by the Directive.

The second main issue was about the provision in the Directive that employees? terms and conditions cannot be changed if the reason for the change is a transfer to another employer. Following the Wilson and Meade cases, the UK courts have established that this cannot be done even if there is agreement with the employees? representatives that changes should be made. This interpretation of the law does seem very paternalistic, because it takes no account of the possibility that the employees may find it in their real interest to agree to a change. The interpretation has not been followed in other Member States, where it is generally accepted that changes can be made by agreement with employee representatives, and it remains to be seen what the eventual outcome will be if this issue reaches the European Court.

However, Member States did agree that there should be a change in the Directive on this issue in cases of insolvency. It is now possible for Member States to provide for employee representatives to be able to agree changes in terms and conditions when an insolvent company is rescued, if this will save the jobs of the people concerned. It can also be provided that the insolvent company?s outstanding debts to the employees do not transfer to the purchaser in this situation. The Government is considering whether to amend TUPE to introduce these new provisions; the argument for doing so is that more insolvent companies are likely to be rescued and jobs saved.

The third main possibility opened up by the revisions to the Directive is to require the new employer following a transfer to provide broadly comparable occupational pension arrangements. The original Directive specifically excluded continuing occupational pension rights from the otherwise automatic transfer of terms and conditions, although it did require Member States to protect accrued pensions. The Government?s legal advice to public authorities involved in transfers has, nevertheless, been that arrangements should be made for broadly comparable occupational pension schemes to be continued for future service, because of the risk of legal challenge on the grounds that the transferor employer had failed to maintain the value of the whole employment contract, including pension arrangements.

The Government is considering how to put this policy on a legal basis and how far it should apply to transfers within the private sector also. We will need to be sure that if we do make new provisions for occupational pension arrangements under TUPE these are practical and realistic, and do not cause unreasonable difficulties. At the same time, the prize is great if we can devise suitable requirements; it would greatly contribute to the establishment of proper occupational pension arrangements for people working in the more flexible areas of the labour market, adding immeasurably to their security and their ability to make longer term financial provision for themselves and their families.

So the key issue now is exactly what amendments to make to TUPE to reflect all these objectives and to take advantage of the possibilities opened up by the revision of the Directive. For clarity, and to ensure that we meet the policy objectives fully, we will need to draft the Regulations in such a way as to show as clearly as possible what the conditions are under which the rules apply and what their effect is. Further consultation will be needed to get this right and to ensure that the legislation meets the needs of its users. We must, of course ensure that the Regulations are consistent with the Directive, but at the same time Article 7 of the Directive does allow us to make further provisions in the interests of workers. We will use this provision if necessary to make the scope of the Directive and its effects clear and comprehensive. To give an example, we could consider making a provision to prevent contractors evading the Regulations by refusing to take on staff in a labour intensive organisation where no other substantial assets are transferred, which is, of course, a problematic issue under the current interpretation of the Directive following the case of Süzen.

So the intention is to consult further on the detail of the new TUPE Regulations, with the aim of introducing them in the spring of next year.

But this is not all we are doing. The law alone, however clear we can make it, can do no more than provide a framework of rules. There will always be questions about it and there will always be those who want to test or challenge the rules. There will always be new doubts about interpretation. The best way to prevent this becoming a real problem, at least in the public sector, and to establish a clear and settled position - and to slash those lawyers bills - is as a matter of policy, to set out clear guidance to authorities, to the effect that contracting exercises should normally be conducted on such a basis that TUPE would apply. There would have to be particular reasons for departing from this, but in general it would provide the degree of certainty which all concerned are seeking. Ministers are considering how best to develop such an approach, and how far such a policy can be adapted for the purposes of Best Value in local government.

Even where a transfer of function takes place within central government where the Directive cannot apply, we are adopting a policy whereby no employee should be treated less well than had the TUPE Regulations applied. Together with the new framework which we will be establishing in the amended Regulations, we expect that this will secure a position where most people involved in public sector contracts and transfers within public administrations will no longer need to be concerned about this legislation; it will become a fact of life with little room for question or dispute.

No doubt there will still be plenty of work for the lawyers while we are making all these changes and while we are all testing the new rules. But there is a real prospect that if we can get it right, and once the new arrangements have settled down, the lawyers will have to find something else to fight over, and the conference organisers will have to find another topic on which to draw in their customers. Most importantly, we will have taken the fear out of transfer.

Other speeches by Bob Niblett (DTI official on behalf of Rt. Hon. Ian McCartney)