Employee rights on business sale

This is an important area of employment law and one that catches many business sellers off guard if they are not properly advised.

The legal framework:

When you sell a business (or part of a business) as a going concern, the Transfer of Undertakings (Protection of Employment) Regulations 2006, commonly known as TUPE, are very likely to apply. These regulations implement EU-derived protections that were retained in domestic law after Brexit and remain fully in force.

What TUPE does:

TUPE automatically transfers employees from the old employer (the transferor) to the new employer (the transferee) on their existing terms and conditions of employment. This means the buyer steps into your shoes as employer. The employees do not need to agree to this, and the transfer happens by operation of law.

Key consequences:

1. Continuity of employment is preserved. The employees' start dates carry across, which affects redundancy entitlements, unfair dismissal rights, and other length-of-service benefits.

2. All existing terms and conditions transfer, including pay, holiday entitlement, contractual benefits, and any collectively agreed terms.

3. Any dismissal connected with the transfer is automatically unfair unless the employer can show an economic, technical, or organisational reason entailing changes in the workforce, known as an ETO reason. Even then, the dismissal must still be fair in the ordinary sense.

4. You cannot lawfully agree with the buyer that employees will be dismissed before or after the transfer to avoid TUPE. Attempts to contract out of TUPE are void.

5. Any changes to terms and conditions that are made because of the transfer are generally void, even if the employee agrees to them, unless there is a genuine ETO reason.

Information and consultation obligations:

Both the seller and the buyer have a duty to inform and, where appropriate, consult with appropriate representatives of affected employees. This means recognised trade unions or elected employee representatives. If there are no existing representatives, you must arrange for elections.

The information that must be provided includes the fact that the transfer is to take place, the approximate date, the reasons for it, the legal, economic, and social implications for affected employees, and any measures that either employer envisages taking in relation to those employees.

Failure to inform and consult can result in a compensation award of up to 13 weeks' pay per affected employee.

Employee liability information:

You as the seller must provide the buyer with prescribed employee liability information at least 28 days before the transfer. This includes the identity and age of employees who will transfer, their terms and conditions, details of any disciplinary or grievance proceedings in the previous two years, details of any legal actions brought by employees in the previous two years, and details of any collective agreements.

Failure to comply can result in a minimum award of £500 per employee.

Employees who object:

An employee has the right to object to transferring to the new employer. If they do, the transfer does not take effect for that employee. However, this is not treated as a dismissal by either party, so the employee is generally not entitled to a redundancy payment or unfair dismissal claim. Their employment simply comes to an end. There is a narrow exception where the transfer involves a substantial and detrimental change to working conditions, in which case the employee may be treated as having been dismissed.

Practical points:

The sale structure matters. TUPE applies to a business or asset sale where an economic entity retains its identity. It does not normally apply to a straightforward share sale, because in a share sale the employer company itself does not change, only the shareholders do. However, if a share sale is combined with a reorganisation that moves employees between group companies, TUPE could still be triggered.

Due diligence is critical. The buyer will want to understand the full picture of employee liabilities, because those liabilities transfer with the employees. Outstanding tribunal claims, contractual commitments, pension obligations, and any potential equal pay or discrimination issues all need to be identified.

Warranties and indemnities in the sale agreement are commonly used to allocate risk between seller and buyer for pre-transfer and post-transfer liabilities.

If you are planning a sale, getting the TUPE process right from the outset is important. Mistakes in information and consultation, or attempts to change terms or dismiss employees in connection with the transfer, can be costly and can also derail or complicate the transaction itself.

If you can share more about the structure of your sale, the number of employees, and the timeline, I can give you more targeted guidance.