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The ever changing technology sector often sees quick changes to the landscape of businesses. M&A activity offers a fast route to market expansion and talent acquisition.

These acquisitions and mergers often involve employee legal and operational obligations. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) frequently apply to these deals. A mishandled transfer can lead to automatic unfair dismissals, and substantial penalties for failure to inform and consult.

Essential Guidance for Managed Service Providers

Here is a practical overview of how TUPE impacts MSP and tech acquisitions, alongside top legal tips for navigating the process effectively.

Understanding TUPE in the Tech and MSP Context

TUPE is designed to safeguard employee rights when a business, or part of one, transfers from one owner to another. A transfer generally occurs in one of two ways:

• Business Transfers: The transfer of an economic entity that retains its identity post-transaction. This is common in asset purchases where client contracts, proprietary systems, and operating teams move across to a buyer.
• Service Provision Changes (SPCs): Specific provisions covering situations where a client outsources services, switches service providers (e.g., changing from one MSP to another), or brings services back in-house.

When TUPE applies, transferring employees automatically move to the incoming employer on their existing terms and conditions of employment, with their continuous service preserved. Any attempt to harmonise terms simply because of the transfer is void under UK law.

Key TUPE Risks Unique to the Tech and MSP Sectors

Operating in the tech sector brings specific employment dynamics that interact uncomfortably with statutory TUPE rules:

• Complex Staff Allocation: Tech engineers often split time across multiple enterprise clients, distinct client pods, internal projects, and ad-hoc troubleshooting. Determining who is formally "assigned" to a transferring business unit or service contract often requires detailed forensic analysis of working patterns.
• High-Value Remuneration Structures: Specialised tech talent frequently commands intricate benefit packages, including retention bonuses, equity options, bespoke commission models, and remote-working allowances. Buyers inherit these contractual liabilities automatically.

• Subcontractor and Contractor Traps: The widespread use of contractors, off-payroll workers (IR35), and third-party specialists can blur the lines of employment status. If deemed "employees" in practice, these individuals may assert transfer rights and associated claims.

Top Tips for MSPs and Tech Firms Undertaking M&A

1. Distinguish Between Share Purchases and Asset Purchases Early

• Examine the deal structure: TUPE applies directly to asset sales and business transfers, but it does not generally apply to a pure share purchase where only the ownership of the employing company changes hands.
• Watch for post-completion restructuring: Even in a share acquisition, if the buyer integrates the acquired MSP’s operations, transfers assets into the parent entity, or merges service desks post-closing, TUPE can be triggered at that secondary stage.

2. Conduct Meticulous Due Diligence on Remuneration and "Off-Book" Benefits

• Uncover informal arrangements: Tech environments often feature unwritten perks such as guaranteed remote work days, flexible core hours, or discretionary bonus traditions that have become implied contractual terms through custom and practice. It is important that your due diligence uncovers everything possible so you don’t get any nasty surprises and claims from employees post transfer.
• Audit all incentives: Scrutinise share schemes, IP assignment clauses, and non-compete covenants in the target's contracts to determine whether they survive transfer or require statutory replacement.

3. Establish Exactly Who is "Assigned"

• Review objective time and value records: Do not rely solely on job titles when assessing whether specialised staff (such as Level 3 support or DevOps engineers) transfer.
• Assess operational connection: Evaluate percentages of working time, cost-centre allocations, and the organisational purpose of each role to establish whether an individual forms part of the transferring organised grouping of employees.

4. Strictly Follow Information and Consultation Timelines

• Engage with elected representatives: Both the seller and buyer must inform and if measures are proposed, consult with trade union or elected employee representatives long before completion as to the measures which are proposed as part of the transfer.
• Avoid statutory award penalties: Failing to comply with information and consultation duties can result in joint and several liability between seller and buyer for an award of up to 13 weeks’ uncapped gross pay per affected employee.

5. Be Realistic About Harmonisation Restrictions

• Recognise strict post-deal limits: Employers cannot legally change terms and conditions if the sole or principal reason is the transfer itself, even if employees initially agree to the change. The change to the terms would be deemed void under the TUPE regulations.
• Rely on valid ETO reasons cautiously: Variations to contracts and dismissals are only potentially lawful if made for an Economic, Technical, or Organisational (ETO) reason entailing changes in the workforce (such as genuine redundancies or fundamental shifts in job functions).

6. Negotiate Robust Warranties and Indemnities

• Address hidden liabilities: The seller is required to provide Employee Liability Information (ELI) at least 28 days before the transfer, but ELI covers only minimum statutory particulars. Make sure the contractual arrangements are clear on what parties must provide and when, especially where this is required in addition to statutory minimum obligations.
• Protect the commercial bottom line: Commercial buyers should insist on comprehensive employment warranties and specific indemnities covering pre-transfer liabilities, equal pay exposure, failure to inform and consult, and historic holiday pay miscalculations.

Conclusion

For growing MSPs and tech companies, M&A offers transformative commercial reach. However, inheriting an existing workforce under TUPE requires strategic planning, clear employee communications, and rigorous contractual protection. Engaging employment law experts at the earliest stages of transaction planning ensures operational synergies can be realized without incurring costly regulatory fallout.

Get in contact for advice or support.