TUPE and contract novation

Two separate transfers, happening at once

The parent sector page makes the point that in facilities management the people and the contracts are least separable. In practice that is two distinct mechanisms running in parallel, and a buyer needs to understand both because they can produce opposite answers.

The first is the transfer of employment obligations, which happens by operation of law and does not need anybody's agreement. The second is the movement of the contract itself, which needs the client's agreement and can be refused. It is entirely possible to inherit a workforce and not inherit the contract they were delivering, which is the worst outcome available and is avoidable with a fortnight's planning.

What follows is a description of how the mechanisms work rather than legal advice. The employment position on any specific transaction is a question for your solicitor, and in FM it is worth involving one earlier than usual.

The service provision change, which is the FM-specific trigger

Most people know that employees transfer when a business is sold. In facilities management the more common trigger is different: a change in who provides a service. That covers a client outsourcing a service for the first time, moving it from one contractor to another at re-tender, or taking it back in-house.

The practical consequence is that this happens constantly in FM, whether or not anybody is buying a company. Every contract won at re-tender brings people with it, and every contract lost takes people away. A buyer looking at an FM business is looking at an organisation that has been absorbing and shedding workforces as a matter of routine, and the quality of the records that process leaves behind is a genuine indicator of how well the business is run.

Who is assigned, which is where the arguments happen

The employees who transfer are those assigned to an organised grouping whose principal purpose is carrying out the activities for that client. Each part of that is a question of fact, and each part is contested in practice.

• Part-time and multi-site staff. A cleaner working across four buildings for three clients is not obviously assigned to any of them.
• Mobile and relief staff. People who cover absence across a region are frequently claimed by both sides and by neither.
• Supervisors and managers. A contract manager overseeing several accounts may or may not be assigned to the one in question.
• Recent movements. People moved onto the contract shortly before a transfer attract obvious scrutiny.
• Whether the activities stay fundamentally the same. Where a client re-specifies the work, bundles several services into one contract or splits one into several, the position becomes considerably less clear.

None of this is exotic. It is the ordinary substance of an FM transaction, and the reason a buyer needs the assignment analysis before agreeing a price rather than after.

Employee liability information, and what its absence tells you

The outgoing provider is required to give the incoming one information about the transferring employees, in advance, covering identity, terms, disciplinary and grievance history, claims and collective agreements.

Treat that as a diligence document, not a formality. What you want out of it is a costed picture: headcount by contract, contractual terms including anything unusual, length of service, accrued holiday, pension arrangements, sickness records and any live claims. Then price it.

Where the information arrives late, thin or inconsistent, that is information in itself. A seller who cannot say who is assigned to which contract is a seller who has not been managing the thing that determines their own cost base.

Which liabilities travel

Broadly, the employment relationship transfers as it stands, with continuity of service preserved and existing terms intact. That carries with it a set of accrued obligations that are easy to miss when looking at a contract schedule:

• Accrued but untaken holiday, which in a large soft services workforce is a real number.
• Arrears of pay, unpaid overtime and any national minimum wage exposure.
• Existing claims, including unfair dismissal and discrimination claims arising before the transfer.
• Collective agreements and any recognition arrangements.
• Pension obligations, which transfer on their own particular basis and are the item most often assumed away.

The other half of it, which buyers reliably underestimate, is that harmonising terms after a transfer is hard. You cannot buy a contract and staff it more cheaply with your own people, and you cannot quietly move the transferred workforce onto your own terms because it would be convenient. Whatever cost base arrives is, for practical purposes, the cost base.

The consultation timetable is part of the deal timetable

Both the outgoing and the incoming employer have obligations to inform, and in some circumstances consult, employee representatives before a transfer. Where representatives do not exist, they have to be elected first, which takes time nobody has allowed for.

That matters commercially because it collides with confidentiality. A transaction that has been kept quiet has to become visible to a workforce at a defined point before completion, and the sequencing of that against customer notification, staff announcements and the funding timetable needs deciding rather than discovering. See timelines.

Novating the contract, which is not automatic at all

While the people move by law, the contract does not. Most FM agreements restrict assignment, contain a change of control provision, or both, and moving one properly usually requires a three-party novation with the client's agreement.

A client asked to consent has the upper hand for a moment and may use it. Consent requests are a natural point at which to raise service concerns, request a price review, ask for an extension of the term on different conditions, or simply put the work out to tender. Approach them early, with a plan, and with the largest clients handled in person rather than by letter.

Public sector and framework contracts have their own procedures, and some cannot be novated at all without a process that takes months. Establish the position contract by contract during diligence, not at completion. This is the same tension covered in share purchase versus asset purchase, and it is why buying the company is often chosen in FM even though a contract book purchase looks cleaner.

Note the asymmetry it creates. Buying named contracts rather than the company does not avoid the employment transfer, because the service provision change happens anyway. So the contract book purchase gives the buyer the liabilities of a people transfer without the certainty of an inherited contract, unless the novations are secured first.

What this does to the funding

A lender that knows FM will ask about all of the above before it asks about turnover, because the employment obligations are a large part of the cost base being acquired and the novations decide whether the revenue arrives at all.

Expect several things. Employee liability information will be requested as part of the pack. Accrued holiday and pension exposure will be treated as debt-like items in the completion arithmetic rather than as operational detail. Where key novations are outstanding, expect a condition of drawdown, a retained element, or a facility sized on the contracts that are certain. See equity contribution and what lenders look for.

Then there is the working capital consequence. Payroll in a labour-heavy business runs weekly or monthly from the first day, and client payment terms do not. Add the accrued holiday you have inherited and the cost of any double-running through the handover, and the cash requirement in the first quarter is materially larger than the purchase price suggests. See margin and mobilisation cost and working capital.

Getting it in front of the right people

A generalist funder reads an FM business as large turnover with a thin margin and a workforce, and stops there. A funder who has lent into the sector reads the contract expiry profile, the indexation clauses and the employee liability position, because those are the things that decide whether the debt is serviceable.

We know this market and we know specific people who have funded FM acquisitions before and understand that the contracts and the headcount are one question rather than two. Tell us the contract profile, the headcount and the shape of the deal, and we come back to you with who can fund it and what they will want to see.

We introduce buyers who are acquiring through a limited company or a NewCo. If you are buying personally, as a sole trader or as a partnership, we will point you to an authorised firm directly instead.