Life cycle of a services contract: what goes around comes around

Life cycle of a services contract: what goes around comes around


Author: Louise Randall

When negotiating a contract for the provision of services the legal implications of TUPE should inform the commercial position of the parties.

The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") is a complex piece of legislation, but it is highly relevant in the context of services contracts.

It is important for commercial managers to understand the operation of TUPE when entering into contractual obligations on behalf of their organisations to provide or receive services.

Failure to plan for the beginning, middle and end of a service provision contract could leave the parties exposed to the risks of changing circumstances.

The wheel turns: outsourcing, changes of contractor and now in-sourcing

The legal world tends to follow trends. In the 1990s companies outsourced all manner of functions such as cleaning, catering, security, payroll etc. for the first time. The new Millennium saw the continuation of that fashion through second and subsequent generation outsourcing as contracts were re-tendered and lately we are seeing a return to in-sourcing with services being returned "home" to the end-user client.

History of the service provision change

While the original TUPE, which came into force in 1981, did not contain any specific reference to service provision, when updated regulations were introduced in 2006 this was rectified by Parliament which came up with its own, home grown concept: "Service Provision Change". While this provided much needed certainty for a time, the Courts and tribunals have slowly eroded the scope of the legislative service provision change and now the Government has said it is considering removing the express reference to service provision change in TUPE, in the interest of reducing "red tape".

Admirable though this sentiment is, if service provision change is removed from TUPE it is likely to have the unintended consequence of creating more uncertainty for businesses. Organisations and their advisers will be forced to consider whether the "old" transfer of undertaking provision in TUPE applies in any event. While this never went away, it has been somewhat overlooked in recent years as the parties have tended to simply focus on whether or not their transaction satisfied the definition of service provision change.

Anticipating the future?

While it has not yet been confirmed that service provision change will go, organisations negotiating services contracts now should bear this possibility in mind and make contractual arrangements accordingly. It is expected that changes could be made to TUPE as early as this November if the Government decides to go ahead.

Although the actual negotiating position will depend on whether an organisation is the potential service provider or client there are some key questions which need to be asked in order to ensure that a comprehensive contractual framework is in place to protect the parties both now and in the future.

The easiest starting point is to split the process into three "bite size chunks" covering the beginning, middle and end of the contract and ask questions about each stage.

A suggested framework

1. What will happen at the beginning of the contract? For example:

  • What services are going to be provided and how will they be delivered?
  • Are the same services already being provided and if so, by whom?
  • What is the timescale?
  • Do you think TUPE will apply on the way in?
  • If there are already staff providing the services are they expected to transfer to the new service provider and if so who will be liable for employment liabilities and costs?

2. What will happen on a day to day basis while the contract subsists?

  • Who will be contractually liable for which employment costs (including recruitment through to termination and redeployment) etc?
  • Does the client have minimum requirement for staffing levels and skills, are there any regulatory requirements which the service provider will be required to observe?
  • How much freedom will the service provider have to change the workforce?
  • Who will be responsible for management and discipline of employees delivering the services. If the service provider, will the client have any control over changes to the staff?
  • Will the service provider be required to provide information to the client on a regular basis e.g. about employees' terms and conditions?

3. What will happen when the contract ends?

  • Will the parties want to mirror the arrangements at the outset in terms of legal liabilities etc?
  • What are the termination events, what notice must the client give to bring the contract to an end early?
  • Do the parties expect TUPE to apply on the way out (bearing in mind the law could be changing)? If the parties are wrong about this assumption will there be a mechanism for terminating employment of the affected staff and sharing liabilities?
  • How will the parties deal with informing and consulting, if required. Will the contract provide for co-operation between the parties over and above the statutory requirements?
  • Alternatively, does the service provider want to hang on to its skilled staff so they can be re-deployed to other contracts i.e. will the parties agree to "contract around" any application of TUPE?
  • If an indemnity is to be provided in respect of possible redundancy costs at the end of the contract, how will this work e.g. will the client be responsible for the whole of employees' service or just the time spent working on their contract?


While contract managers and their advisers don't have a crystal ball they can probably anticipate and cover off in the contract most of the possible outcomes; they should ask themselves, "what would happen if" and "are we protected in that scenario"?