Tempted to Snap up a Bargain Business? An Employment Cautionary Tale…

Our client came to us some months after he had found and purchased a business teetering on the edge, but with masses of potential. The owner just could not turn things around and was desperate to sell. The client knew exactly how to change the fortunes of the business, and bought it for a knock down £10,000. What a bargain!

Or so he thought…

Unfortunately he had not bought the business with the benefit of legal advice, and so had overlooked the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE for short).

TUPE is a nasty set of regulations which prey upon the unwary business buyer. They are designed to protect the workforce of the transferring business.

TUPE applies to a transfer of an undertaking which retains its identity after the transfer takes place. In general terms, they apply to most non-share transfer business purchases and also to most contracting outs. Clever avoidance schemes very rarely work as the Courts are keen for employees to receive their due protection.

When TUPE applies, the effect is dramatic. The following list is just a few examples:

• Employees transfer over to the new owner.
• Employees are treated as if they have always been employed by the new owner. Anything the old employer did is treated as if done by the new employer. For example, if the old employer discriminated against an employee, that employee can sue the new employer.
• Employment contracts transfer over with most terms intact and they can be very difficult and sometimes impossible to change.
• There are obligations to provide specified information to, and to consult on certain matters with, employee representatives, as well as the requirement to facilitate a process to elect some representatives if there are none.
• There is an obligation on the seller to provide specific employment related information to the buyer.

The list goes on, and unfortunately our client was caught out badly. He inherited under TUPE two female employees who had suffered discrimination by the old employer. After the purchase, they sued the client and he settled the claim for £40,000 each. Of course, he did not know about the issues until after the business was his and TUPE had done its worst. Then again, neither had he asked any questions of the seller. Had he done so, he might have been able to sue the seller.

So, what should our client have done? Here are a few suggestions.

• Even though TUPE requires the seller to give the buyer specified information, this does not necessarily answer all of the questions the buyer should be asking. Ask detailed and relevant questions, ask for relevant documents, and get the seller to guarantee the answers given. If they are wrong, you may be able to sue.
• If the answers reveal potential issues, negotiate. Try to reach an agreement that even though you are the one who will be sued, the seller is responsible for all the costs of anything which happened before purchase. If you are worried that the seller may not have the money to do this, try to negotiate a reduced purchase price or retain part of the purchase price to cover the risks revealed.
• If all else fails, pull out of the deal. As the client found out, some deals just are not the bargains they appear to be.

Martin Donoghue advises clients on all aspects of employment law.  To contact Martin, please call +44 (0)20 7749 2700 or email mdd@silvermansherliker.co.uk.