The pitfalls of short-notice service contract bids

Charles Pallot looks at the TUPE and pension risks employers should consider throughout the bidding process, and how best to mitigate them

Many companies are struggling to meet their obligations under service contracts with their clients, and are looking to exit those contracts. While this can create what looks like a golden opportunity for other businesses, they should involve their HR and pensions teams at an early stage in the process to assess the TUPE and pensions risks that could affect the profitability or even the viability of the new contract.

Taking over a contract will almost inevitably mean you will inherit employees assigned to that contract by the outgoing service provider, under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE).

Risks and mitigation 

The main TUPE and pensions risks, with suggested ways of mitigating those risks, are as follows:

The services being provided by the outgoing service provider are being fragmented among a number of new providers, and you are only bidding to provide some of the services. Under TUPE, this means you may not inherit all of the employees you need, or any employees at all

The fragmentation of service delivery is a complex area under TUPE, and could in theory take a long time to resolve through the tribunal process. This is impracticable when you will be starting your period of service delivery at short notice. You should engage with the client and the outgoing service provider as early as possible to find out as much as you can about staffing issues, and reach agreement about who will and who will not transfer. You should also obtain full indemnity protection from the client in relation to any employee who does not accept your assessment of the situation.

You inherit too many people

You should model your staffing needs for the contract as early as possible in the process, and ask the client to reimburse all costs of making unneeded transferring employees redundant, and ideally for an indemnity against unfair dismissal and discrimination claims.

The outgoing service provider tries to transfer employees to you who would not be caught by TUPE

You should seek reimbursement and indemnity protection from the client to allow you to deal quickly and efficiently with people claiming to transfer.

You receive inaccurate or incomplete TUPE information about the transferring employees

You should seek reimbursement and indemnity protection from the client covering any claims received from inherited staff who say you have not respected their pay or other terms and conditions of their employment.

You are not able to carry out a proper TUPE information and consultation process, leading to claims for protective awards (up to 13 weeks’ gross pay per employee)

The outgoing service provider as ‘transferor’ may not cooperate in that process, or you may not have enough time to carry out a full Information and consultation process. You should therefore seek indemnity protection from the client. 

You will inherit liability for employment claims arising out of the acts or omissions of the outgoing service provider

You should seek full indemnity protection from the client in respect of such claims.

You inherit employees who are members of, or are eligible to join, the LGPS or an equivalent ‘funded’ pension scheme

You should make sure that:

  • the client confirms that the relevant pension fund is fully funded;
  • there is appropriate protection for you in relation to employer contribution rates; and
  • the client takes responsibility for any exit deficit payment that arises at the end of your period of service delivery. 

Taking these risks and mitigation strategies into account throughout the bidding process will help your business make a fully informed decision about whether or not to bid for the new contract and, if it does, its pricing calculations. 

Charles Pallot is a partner in the employment department at Ashfords