Insurance Post

Making tracks

The Transfer of Undertakings (Protections of Employment) Regulations 2006 hold serious implications for insurers wishing to change outsourcing arrangements but what can firms do to ensure they move in the right direction, asks Simon Henthorn

The Transfer of Undertakings (Protections of Employment) Regulations 2006 were introduced with relatively little fanfare in April. However, despite their quiet introduction, they could present a significant challenge to the UK insurance sector's freedom to sharpen its competitive edge.

Uncertainty had existed under the previous TUPE rules as to when they applied to situations where companies contracted out work but, under the new regulations, this position has become more clear. They may be applied to situations where companies make service provision changes, such as if a company ceases to carry out certain activities and instead outsources them. Other examples include where a company switches from one contractor to another or where a company takes work back in-house.

Outsourcing trends

With outsourcing increasingly commonplace in the insurance industry, these rules are likely to cause problems. For example, this could apply to situations where managing agents and insurers outsource underwriting to brokers, call centres and coverholders. Companies could also be affected by the regulations when contracting out the handling of premiums, claims and complaints and the processing of risks; when handing compliance work to specialist compliance companies; or when legal work has been outsourced to law firms.

Consequently, if companies do not comply with the new TUPE rules when changing their outsourcing arrangements, they run the risk of expensive employment claims.

So when will the new laws apply? In practice, the rules will catch most outsourcing arrangements in the insurance sector, and companies will need to take into account several factors before they make a service provision change because it could cause problems in the future.

Firstly, the rules will apply to situations where - before the provision change - there was an organised group of employees in the UK whose principal purpose was to carry out the activities for the company. They will also apply to companies that intend for the activities in question to be carried out by a new provider following the service provision change other than in connection with a single specific event or short-term task. Finally, if the activities do not relate to the supply of goods for the company's use.

Unforeseen consequences

The objective of the regulations is to protect employees on a business transfer, so what are its implications for insurers? Under the new rules, if an insurance company wants, for example, to bring its claims handling business back in-house, it will be obliged to employ the previous supplier's staff under the same terms and conditions - this includes salary, holiday bonuses and other benefits.

In addition, the company will take on responsibility for any outstanding employment disputes and liabilities relating to the employees. The new laws will also apply when a company decides to change a supplier of a service, such as premium handling.

Often the motivation for a change in supplier is dissatisfaction with the staff who are providing the service, yet under the new rules these staff would automatically move to work for the new supplier. This makes a supply change much less attractive and is likely to have a knock-on effect on competition within the market.

The consequences of flouting or ignoring the rules are unappealing. If an employee is dismissed because of a transfer, the dismissal is automatically unfair and companies could find themselves facing an expensive claim. There is a defence in certain situations; for example, if the company has an economic, technical or organisational reason for the termination.

The need to reduce headcount, leading to a genuine redundancy, will usually count as such a reason. However, even if a company has genuine economic, technical or organisational grounds, it must follow a fair procedure before dismissal takes place in order to successfully defend a claim.

Pre-transfer steps

Both old and new employers are under a duty to inform all employees affected by the transfer, and to consult with them over any measures proposed before the transfer takes place. Both sets of employers are jointly and severally liable for any claims for a breach of these provisions - a tribunal can award up to 13 weeks pay for each employee affected.

In addition, an old employer is required to provide the new one with 'employee liability information' in writing before the transfer. Among other things, this includes details of an employee's terms and conditions of employment and information about disciplinary processes and employment claims. The aim of this is to ensure that the new employer receives information about the employees it will inherit.

As a result of the regulations, any insurer considering changing outsourcing arrangements clearly needs to think carefully about the implications, as well as whether there would be any benefits gained from a change in light of the TUPE rules. If expensive unfair dismissals are to be avoided, great care must be taken to comply with the procedures outlined by the regulations. Consideration should also be given to seeking indemnities against potential TUPE liabilities.

Simon Henthorn is solicitor advocate at Reynolds Porter Chamberlain.

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