Asset Transfers / Business Purchase: 5 common questions

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Asset Transfers / Business Purchase: 5 common questions

TUPE applies when there is a “relevant transfer”, which includes:

“a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity”.

The part of TUPE which deals with asset transfers (business purchases) is derived directly from European legislation and as such, has to be interpreted in line with the purposes of the European legislation, which is to safeguard employees’ rights on the transfer of a business.

What is an economic entity?

“Economic entity” means:

“an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary”.

TUPE will of course only apply where there is a workforce to protect. Importantly, case law confirms that a workforce which is specifically and permanently assigned to a business may, in the absence of any other assets, constitute an economic entity in itself (Vidal case).

An organised grouping can be a single employee. The key point to note is that it has to be organised – there has to be a deliberate intention for the grouping to be organised to pursue a particular economic activity that is due to tranfser.

Does everything have to transfer?

Where only certain assets transfer, such that there is not “an economic entity which retains its identity”, TUPE will not apply. However it is worth bearing in mind –

  1. If a business is reliant upon tangible assets which don’t transfer, it can’t be a relevant transfer as the business will not retain its identity (Oy Liikenne Ab v Liskojarvi case – a bus service company was purchased, but the purchase didn’t include the buses – not a relevant transfer)
  2. Vice versa, if certain assets transfer which are fundamental to the business’ operations, this in itself might be indicative of a TUPE transfer (Ferreira da Silva e Brito & others v Estado Português Case C-160/14 case – the take-over of an air operating company where the planes transferred – was a relevant transfer).

What if post-transfer, the business will be run differently – will it still retain its identity?

The fact that the business will be run differently post-transfer will not necessarily mean TUPE doesn’t apply. The fundamental question is what is the core of the current business, and what will the business be post-transfer. If the answer is the same (even though the service might be provided in a different way) it is likely to be a transfer.

It is not enough to assert that a business is run in a certain way/will be run in a certain way post-transfer. In order to help you to establish whether TUPE should or shouldn’t apply, we will need evidence of how the business has been run in the past, and what will be taking place going forward.

Does transfer mean purchase?

In short – no. The key test is whether the purchasing party will have control of the asset post-transfer.

How can I be sure whether or not TUPE applies on an asset transfer?

Because of the fact that the interpretation of TUPE with regards to asset transfers requires a “purposive approach” (i.e. the purpose of the original European regulations, safeguarding employee’s rights, must be borne in mind), case law has confirmed that “the necessary factual appraisal is one to be made by the national court” (Allen v Amalgamated Construction Co Ltd). Accordingly, when undertaking an assessment of whether TUPE applies to your transaction, we will consider a number of tests that have been developed by the courts, in particular:

The “going concern” test:

Is the business being transferred as a going concern, such that it will retain its identity? This will require detailed consideration of exactly what is being transferred, and the importance of those transferring assets to the business.

The “temporary cessation” test:

The law requires for the undertaking to be present “immediately” before the transfer. As such, the interruption of the activities being carried out by that undertaking may lead to arguments that the economic entity has not retained its identity. However, a temporary cessation of the activities of the undertaking will not necessarily prevent there being a transfer. For example, a purposive interpretation of the legislation may lead to the conclusion that a temporary closure over Christmas or school holidays should not mean that employees are not protected by TUPE.

The “fragmentation” test:

Where a business is being purchased in part or where different divisions of the business are being purchased by different buyers, the “economic entity” can end up being broken up, such that it doesn’t retain its identity. In such circumstances, TUPE may not apply, but a careful analysis of how the business is being broken up and whether any one of the employees constitutes an economic entity that will retain its identity post-transfer will need to be undertaken.

In particularly complex circumstances, the parties can apply to the Tribunal for a judgment on whether or not TUPE applies. Whilst this is only normally used where parties are in dispute as to whether or not TUPE applies, it can be a useful option to get clarity on “grey areas”.

This note is part of a series of notes on TUPE prepared by solicitors in our employment team. Please see the other notes for more information, or contact us if you have any queries. 

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