Court of Appeal confirms that an employer's vicarious liability to third parties does not transfer under TUPE

Background

In ABC v Huntercombe (No 12) Ltd and others, the claimant sought damages for alleged mistreatment during a four-month placement at a privately run psychiatric hospital in 2018/2019. She alleged that she had been mentally and verbally abused by staff and restrained on over 200 occasions.

The hospital’s undertaking transferred from Huntercombe to Active Young People Ltd under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). TUPE provides that "all the transferor's rights, powers, duties and liabilities under or in connection with" a contract of employment transfer to the transferee on a relevant transfer.

The claimant initially brought proceedings against Huntercombe. After discovering that it was in liquidation, and that the terms of its public liability were likely to limit any recovery, she joined the transferee to the proceedings. She argued that Huntercombe's vicarious liability for the acts of its employees had transferred to the transferee under TUPE.

The High Court held that vicarious liability did not transfer. The claimant appealed.

Court of Appeal decision

The Court of Appeal unanimously dismissed the appeal.

The proper starting point was the EU Acquired Rights Directive from which TUPE derives. Its primary purpose is to safeguard the rights of employees on a change of employer, so that employees can enforce against the transferee obligations which they could previously have enforced against the transferor.

Although the words "in connection with" a contract of employment are potentially very wide, they must be interpreted in the context of the Directive's purpose. An employee has no right to require an employer to be vicariously liable for their wrongdoing towards a third party. That liability is owed to the third party and is secondary to the employee’s own liability.

The court also considered the wider structure of TUPE. Transferors must provide transferees with information about claims brought, or potentially brought, by employees. There is no equivalent requirement covering third-party claims arising from employees’ conduct. This supported the conclusion that such claims fall outside the statutory transfer scheme.

It would also be counter-intuitive for TUPE to make a transferee liable for pre-transfer events involving a third party when the transferee had no involvement in those events and no right under TUPE to receive information about them.

The court therefore held that a transferor’s vicarious liability to third parties for employees’ pre-transfer acts or omissions does not transfer under TUPE. It remains with the transferor.

The court refined the High Court’s reasoning, however. Rather than asking whether the liability was sufficiently “directly” connected with the employment contract, the correct conclusion was simply that TUPE does not extend to this particular category of liability.

Learning points for employers

Employers acquiring a business through a TUPE transfer will not automatically inherit vicarious liability owed to third parties for employees' pre-transfer wrongdoing.

However, employee claims do transfer under TUPE, so thorough due diligence on existing and potential employee claims remains important.

Transferees should continue to undertake appropriate due diligence into employee claims and potential claims. Although TUPE does not transfer third-party vicarious liability, the parties should also consider whether potential third-party claims need to be addressed through the transaction documents, insurance arrangements, warranties or indemnities.

For more information or advice, please get in touch with Alice Mennell in our Employment team.