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Proposed UK Legislation Extends Acquired Employment Rights to Buyouts

A new legislative proposal in the UK House of Commons seeks to remedy one of the most glaring gaps in existing UK labour law. Under existing law, when a public or limited company changes hands through acquisition by another company or individual, the existing terms and conditions of employment are protected through the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). TUPE does not apply, however, when a controlling shareholding is transferred to a new owner, who effectively becomes the new employer. And this is precisely the mechanism by which buyout funds take companies private.

This legal black hole which the buyout firms have massively exploited is not limited to the UK; it exists across the European Union. TUPE transposes into UK law the EU's Acquired Rights Directive. A similar legislative gap afflicts the legislation on European Works Councils, which also fail to recognize a transfer of shares as a change of employer. The exclusion of companies taken private through a leveraged buyout from laws and regulations which provide for continuity of employment conditions and rights (including union rights) has been identified as a key issue for union political action.

In a February 27, 2007 presentation on private equity to UK Labour MPs, the IUF stressed that "Existing legislation at nearly every level fails to take account of the role of private equity as employers. The funds actively intervene in management decisions, imposing layoffs and restructurings. They make decisions affecting the lives of millions of British workers, yet they call themselves an 'asset class' rather than employers…the funds aren't recognized as employers by national governments or international agencies. Even in the European Union they operate in a parallel universe outside legislation establishing and enforcing employer responsibilities, like the Acquired Rights Directive. The funds are focused entirely on exiting the investment. From this point of view, employees are merely an expense, and we've seen the kinds of industrial relations practices this leads to. This situation clearly has to change."

UK unions are now campaigning in support of the Transfer of Equity (Protection of Employment) Bill, introduced by Labour MP John Heppell, which will have its second reading in Parliament on March 7. The bill would amend TUPE by bringing within its ambits LBOs and other mechanisms for transferring a controlling share in a company by requiring that:

  • Existing contractual terms and conditions of employment are protected, including trade union rights and recognition

  • Workers are informed and consulted about any potential changes that flow from a transfer of a controlling share ownership. The purchaser and the seller of the shares will need to explain how the change will affect their job security and their terms and conditions of employment.

  • Trade union representatives are informed in advance of any proposed transfer of shares and are given the time to prepare their position and make presentations to the company before the takeover.

  • The principle of any dismissal connected with a transfer being automatically unfair will apply.

  • There will be provision for employee representatives to have appropriate remedies against both the purchaser and the disposer of the shares in the event of any default in the TUPE obligations.

The text of the Transfer of Equity (Protection of Employment) Bill is available