TUPE when buying or selling a business: buyer and seller responsibilities explained

Are you buying or selling a UK business through an asset sale? If that business has employees, TUPE will be a key consideration for both sides. In short, the employees come with the business on the terms they already have, and both buyer and seller have specific things they must do before completion. This guide covers what TUPE is, the buyer's main responsibilities, and the seller's.

What is TUPE?

TUPE is short for the Transfer of Undertakings (Protection of Employment) Regulations. It is a set of rules that protect employees when there is either a business transfer or a change of service provision. Since I specialise in M&A, this guide focuses on the business transfer side.

Under TUPE, when there is a sale of a business, the relevant employees are transferred from the seller's entity to the buyer's entity under their existing terms and conditions of employment. That means the only thing that really changes, typically, is who the employer is. The employees remain entitled to the same terms and conditions as they had with the seller. Their pay, their benefits and the rest of their contract carry across. From the employee's point of view, they turn up to work the day after completion and do the same job on the same terms for a different company.

This is why TUPE matters so much on an asset sale. On a share sale the employer company does not change, so the employees stay where they are. On an asset sale the business moves from one legal entity to another, and TUPE is what moves the employees with it. So if you are a buyer choosing between the two structures, bear in mind that an asset purchase does not let you leave the workforce behind, and it brings a set of obligations with it that a share purchase does not.

TUPE obligations of the buyer

There are three main responsibilities that I would point a buyer to.

• Conduct due diligence. As always in a business acquisition, the buyer is responsible for conducting its own due diligence. In this context, the buyer needs to understand the kind of workforce it will be inheriting. If I were the buyer, the main things I would want to know are: how many employees am I taking on, what are their salaries, and what kind of benefits will I need to provide to them? Those numbers go straight into the cost of running the business after completion, and because the terms transfer as they are, you cannot simply decide to pay people less once you own the business. What you find in due diligence is what you get.
• Notify the seller of any measures. The buyer must tell the seller about any key changes or measures it plans to put in place that might affect the transferring employees. That is because the seller, before completion, needs to communicate to the employees any changes that might affect them, and the seller can only do that if the buyer has told them. The kind of things a buyer would need to communicate include, for example, relocations and reorganisations within the company. If you are planning to move the operation to different premises, merge teams with your existing business or change reporting lines, the seller needs to know in time to tell the staff before the deal completes.
• Take on the employees. The last main responsibility is simply to adopt the transferring employees, to inherit them. Taking on employees under TUPE is not optional for a buyer. If the buyer wants to proceed with the acquisition and TUPE applies to the affected employees, then those employees must transfer to the buyer. You cannot buy the business and leave the staff behind, and you cannot pick and choose among them. The employees who are assigned to the business being transferred come with it.

TUPE obligations of the seller

The seller has three main responsibilities of its own.

• Identify the affected employees. There are really two categories here. First, the employees who will be transferred from the seller to the buyer. Second, any remaining employees who will stay with the seller but are nonetheless affected by the business transfer, for example because the part of the business they supported is leaving. Both groups need to be identified, because the seller's duty to inform is not limited to the people who are moving.
• Inform and consult the affected employees. The seller must communicate a few key details to the affected employees. Those communications can go to the employees directly if the seller's business is small enough, or they may need to go to employee representatives. Either way, this is not a courtesy. It is a duty on the seller, and the communications need to cover: the fact that there is going to be a business transfer and the proposed or estimated date of completion; the details of the buyer, so who the buyer is; and any changes that might affect those employees, which is where the buyer's notification of measures feeds in.
• Provide employee information to the buyer. The seller must notify the buyer, at least 28 days before completion, of a few key details about the transferring employees. That includes who they are, their terms and conditions of employment, any disciplinary and grievance records relating to them, and any claims and liabilities relating to them. This is the information that lets the buyer understand exactly what it is taking on, and it should match what the buyer has already found in due diligence. Where it does not, that is a question to put to the seller before completion rather than after.

How the two sides fit together

It helps to see the two lists side by side. The buyer investigates, notifies and inherits. The seller identifies, informs and discloses. The responsibilities are designed to interlock. The seller cannot properly inform the employees unless the buyer has said what measures it is planning. The buyer cannot properly assess the workforce unless the seller has supplied the employee information. In my experience the deals that run smoothly on TUPE are the ones where both sides treat these as part of the deal timetable rather than as an afterthought, so that the 28-day deadline and the consultation period are built in from the start rather than discovered a fortnight before completion.

Next steps

If you are buying, put the workforce questions into your due diligence early and tell the seller as soon as you know of any reorganisation or relocation you are planning. If you are selling, identify the affected employees now and work backwards from your target completion date so that the information reaches the buyer with at least 28 days to spare. In either case, speak to a corporate solicitor about how TUPE fits into the asset purchase agreement. Sellers thinking ahead to the tax position can read tax when selling a business.