TUPE- Supply of Goods Exception to Service Provision Change

Mon, 26 Mar 2012

By Mugni Islam-Choudhury
Under cover of darkness in late December, on the shortest day of the year, at a time when all throughout the land were focussed on meeting pressing deadlines (and buying last-minute presents) before the start of the holiday season, the EAT handed down a significant judgment on TUPE which has potentially wide application but arrived almost unnoticed.
The case is Pannu and others v Geo W King Ltd (in liquidation) and others [2012] IRLR 193 and it is the first appellate decision on Regulation 3(3)(b) TUPE 2006, which provides that there is no TUPE transfer when the activities consist wholly or mainly of the supply of goods. 
The claimants all worked on the X83 axle line at Geo W King Ltd (“GWK”), a manufacturer of axles and braking systems for vans and commercial vehicles. The X83 was an axle produced exclusively for IBC Vehicles Ltd (a subsidiary of General Motors UK), who used the axles supplied under a contract for the supply of goods and services to manufacture its X83 vans at its Luton Plant, and as such GWK were Tier 1 suppliers. As a pre-condition to supplying these axles, IBC required GWK to purchase the components for the axles from IBC’s approved Tier 2 suppliers. 
After GWK got into financial difficulties, IBC agreed to pay Tier 2 suppliers directly, but continued to be supplied by GWK with the finished product. After production eventually ceased at GWK’s factory, IBC then entered into a contract with Premier Manufacturing Ltd (Premier) for the assembly of axles at IBC’s Luton factory.
The claimants alleged that they had transferred under TUPE to either IBC or Premier. The Tribunal held that that there was no old style TUPE-transfer, as this was an asset-heavy undertaking, and assets had not transferred from GWK. The Tribunal also went on to find that there was no TUPE transfer under the “service provision change” provisions under Regulation 3(1)(b) TUPE 2006, because the supply of goods exception under Regulation 3(3)(b) TUPE applied. This states the rules on service provision change in Regulation 3 (1)(b) will only apply where “the activities concerned do not consist wholly or mainly of the supply of goods for the client’s use”. 
There was no appeal on the finding that there was no “old-style” TUPE. However, the claimants appealed on the grounds that after IBC started paying for the parts directly to Tier 2 suppliers, the only relevant activity that the employees of GWK performed was the assembly, testing and delivery of the axles, and so it was essentially a service. They argued that as Premier essentially carried out the same service, Regulation 3(1)(b) applied, and there was a TUPE transfer. As a result, they argued, the supply of goods exception was not engaged. They pointed to the fact that by the time Tier 2 suppliers were being paid directly by IBC, GWK’s provided more service than goods, and that Premier only provided a service. 
HHJ Peter Clark rejected the claimants’ arguments. Firstly, the EAT found that “wholly or mainly” should be given its ordinary meaning, and was essentially a question of fact for the Tribunal. 
Furthermore, the EAT found that, although relevant, an important distinction needed to be made between the activities of the employees of GWK (who provided a service to GWK) and the activities of GWK itself as the contractor. Regulation 3(3)(b) was only concerned with the latter. Therefore, whilst the claimants provided their services to GWK, GWK (on the facts that the Tribunal were entitled to find) carried out the activity of wholly or mainly supplying goods – that was the nature of the activity. 
The EAT held that the changing in the funding arrangements did not alter the position, that GWK ‘s activities remained the same (i.e. supplying goods) irrespective of how the raw materials used in producing the finished goods were paid for. It went on to hold that to conclude otherwise would be to divert attention from the relevant activities to the nature of the contract, which, although forming the factual matrix is not, of itself, the focus of Regulation 3. 
Furthermore, it agreed with IBC and Premier that, strictly speaking, what happened after GWK ceased trading and how Premier operated thereafter was irrelevant. This was because the focus of Regulation 3(3)(b) was for the Tribunal to look at the nature of GWK’s activity – if the Tribunal found (as it did here) that the activity was wholly or mainly for the supply of goods, then that was the end of the matter. As the EAT was satisfied that the Tribunal was entitled to come to that finding, it dismissed the appeal. 
This is, no doubt, a business-friendly decision, and points to perhaps the direction of travel in the EAT’s application of TUPE 2006 – i.e. that a contracting out situation does not always lead to TUPE situation arising when contractors change. The EAT in Pannu found useful the example provided in the BIS guidance to TUPE 2006 in relation to a contractor supplying drinks and sandwiches to a company for the company’s own staff. Should that contract be awarded elsewhere, TUPE does not apply, as this would be a contact for wholly or mainly the supply of goods, even if there was an entire team dedicated to making sandwiches for that one contract. 
Although it is plain to see in the BIS example how the activity is “wholly or mainly” the supply of goods, it is perhaps less clear the more sophisticated (or important) the service element is. Take for example, suppliers of IT equipment, where part of the contract is to have dedicated on-site support - the position seems less clear as the contractor’s activities are not just supply but also substantially a service. As the EAT has emphasised, it is all really a question of fact for the Tribunal, and so ensuring that the evidence is clear on this point is fundamental in getting the correct determination. 
However for parties involved in contracting out negotiations, this case provides them with a number of concerns – no doubt, any new potential contractors would want to argue that it is a wholly or mainly supply of goods contract, whereas the incumbent provider (wanting to see all its redundancy liabilities transferred to the new provider) will want to focus on the service element. It will be interesting to see how this decision now impacts on contracting out negotiations, and whether stalemate will lead to applications for declarations from the High Court in cases where the rights of large numbers of employees (and therefore potentially large redundancy costs) are stake.

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