How do corporate restructures affect right to work checks?

05 Jan 2015 | 11 min read

Immigration analysis:

The law related to right to work checks and illegal working changed in May 2014. Annabel Mace and Supinder Sian, of the UK business immigration team at Squire Patton Boggs, discuss the changes and explain what employers need to consider if they acquire new workers under TUPE or through Tier 2 or 5 sponsorship. 

What immigration issues should an employer consider if it is involved in a merger, acquisition or other form of corporate restructure?

In any type of corporate restructure, an employer needs first to consider whether it will be acquiring new employees, as this will trigger an obligation to carry out prescribed right to work checks regardless of nationality or immigration status. The law and supporting guidance in this respect changed on 16 May 2014

If employees are transferred to a new employer under the Transfer of Undertakings (Protection of Employment) Regulation 2006, SI 2006/246 (TUPE)--which could be triggered by a change in service provider as well as a corporate restructure--the new employer has a grace period of 60 calendar days from the date of the transfer in which to carry out these right to work checks. Where there has been a change of employer but no TUPE transfer, the checks must be carried out before the new period of employment begins.

If it transpires that any of the acquired employees do not have the right to work and cannot obtain or apply for work permission within the 60-day grace period (either by their own means or through Tier 2 or 5 sponsorship by the new employer), the new employer should take steps to dismiss those employees (subject, of course, to following a fair dismissal process).

An equally important consideration is whether or not any of the employees being acquired are sponsored by the exiting employer under Tier 2 or 5 of the Points-Based System. This will ideally have been established well in advance of completing the restructure because, if the acquiring employer is inheriting sponsored employees under TUPE (or what the Home Office refers to as 'another similar arrangement') and does not already have a sponsor licence (either in its own name or through an entity linked to it by common ownership), it must apply for its own sponsor licence and notify the Home Office via the Sponsor Management System (SMS) within 20 working days of the transfer to it of the sponsored employees. The same notification process applies to an acquiring employer which already has a sponsor licence. The exiting sponsor also has its own SMS notification obligations relating to any sponsored employees being transferred to another employer within ten working days (simply to report a change in employer and workplace) and within 20 working days (to confirm the reason for and provide evidence of the change in sponsoring employer).

It is also worth bearing in mind that a UK entity within a group linked by common ownership could be the Tier 2 or 5 sponsor of non-EEA migrants who are actually employed by another named UK entity in the group. In this scenario, if an employer of sponsored migrants (which is not also the sponsor) ceases to be linked through common ownership to the sponsor on whose licence it is named (for example, because either entity is being sold), in order that it can continue to employ those sponsored migrants, it must apply for its own sponsor licence and notify the Home Office of the change in migrants' sponsor via the SMS within 20 working days of ceasing to be linked to the sponsor.

Should these issues form part of the due diligence process and potential liabilities be covered in relevant warranties?

Absolutely--quite often immigration issues are left to the last minute in the due diligence process but they need to be addressed at an early stage. If, for example, a business is acquiring a large workforce of which a significant number do not appear to have the right to work, this could affect the value of the business. In any event, it is worth trying to require the current employer to resolve any right to work issues prior to completion. Although potential liabilities for illegal working are commonly covered in the warranties or indemnity provisions of a transaction agreement, these may be of little practical comfort where a large number of time-consuming dismissals are required post-completion or where the new employer's Tier 2 or 5 sponsor licence is jeopardised due to the previous employer's immigration compliance failings.

In transactions where TUPE applies, what difference, if any, has been made by the extension from 28 to 60 days to make right to work checks, since 16 May 2014?

It is a good thing insofar as employers now have longer to carry out these checks, particularly for those inheriting large numbers of staff. It's important to note it has always been the case that the new employer cannot rely on checks carried out by a previous employer - it must carry out its own checks.

What is the effect of a corporate restructure on employees sponsored under Tiers 2 or 5 and what steps should be taken to protect their immigration status?

The key thing is to establish whether the restructure will bring about a change of employer and/or sponsor.

If a sponsored employee is transferred under TUPE to another employer, then their sponsorship can be transferred to that new employer without a new certificate of sponsorship (CoS) or application for leave providing that the new employer already has a sponsor licence (or applies for one within 20 working days) and makes the correct notifications via the SMS. If the new employer fails to do this, the employee's permission to work and reside in the UK could be reduced to 60 days. The same requirements to have, or apply for, a sponsor licence and make similar notifications within 20 working days will be triggered if, as a result of a demerger or sale of part of a business, a sponsored migrant's employer remains the same but their sponsor changes.

If a sponsored employee is moving from one employer to another within the same group of companies both of which are included on the sponsor's licence, it will usually be sufficient to inform the Home Office via the SMS that their place of work has changed and there should be no effect on the employee's sponsorship.

In any of these scenarios, however, it's important to ensure that the sponsored employee will continue to fill the same or a materially similar role with the new employer/sponsor so that they can remain within the same occupational SOC code specified on their CoS at the outset of the sponsorship process. If an employee's role changes materially, this may move them into a different SOC code which would require a new sponsorship process, including (in some cases) completing an entirely new resident labour market test.

A further issue to be aware of is that when a sponsored migrant whose sponsor has recently changed travels out of the UK, the name of the new sponsor may not have been updated on the system to which immigration officers have access by the time they return to the UK. To avoid any confusion, therefore, it is a good idea if such employees travel with a 'comfort' letter from the new employer to explain the background to the change in sponsor and confirm that all notifications have been made to the Home Office.

The Home Office's position as stated in its sponsor guidance seems to be that a new sponsor licence is required in every instance where there is a sale of the controlling number of shares?

That's right - the wording in paragraph 13.5 of the Tier 2 and 5 sponsor guidance states:

'If there is a change in ownership of your organisation or business, for example if it sold as a going concern or a share sale results in the controlling number of shares being transferred to a new owner, your sponsor licence will be revoked. The new owners must then apply for a new sponsor licence, unless they already have one, if they wish to continue employing any migrants that you were sponsoring.'

However, the Home Office seems to have misunderstood the difference between a share sale and asset sale:

Share sale

If the shareholders of a company with a sponsor licence sell the majority of shares in the company or the shares of its subsidiary, this does not by itself mean there is a change of employer or sponsor for its sponsored employees--it just means there is a change in ownership of the company (or its subsidiary).

Asset sale

An asset sale, however, is likely to trigger a TUPE transfer of employees to another employer, in which case the new employer will need a sponsor licence for any sponsored employees it inherits. In the absence of a change in sponsor or employer for sponsored employees, we cannot see how a sale of shares can practically or legally trigger an obligation to apply for a new sponsor licence.

Does this seem to be 'overkill'?

We think that is putting it politely. We can only imagine that the Home Office is thinking of one of the scenarios mentioned earlier where an entity within a group linked by common ownership is the sponsor of non-EEA staff who are actually employed by another named entity in the group. If, in that case, a sale of shares means the employer of sponsored employees is no longer linked through common ownership to the entity which holds the sponsor licence, then the employer will need to obtain its own sponsor licence. However, this is a distinct scenario where the sponsored employees are subject to a change in employer or sponsor--this certainly won't be the case on every occasion where there is a sale of the controlling number of shares in a company.

Is this policy followed in practice?

We are aware of cases where sponsor licences have been revoked following the sale of the controlling number of share in a company, particularly where the sponsor has not reported this to the Home Office. Although such a revocation would be in line with paragraph 13.5 of the Tier 2 and 5 sponsor guidance, where there has been no change in a sponsored migrant's employer or sponsor, we would seek to challenge the Home Office's approach on the grounds that it is entirely disproportionate to require a new sponsor licence application where it is not necessary. In the meantime, we would strongly recommend that any organisation with sponsored migrants undergoing a change in ownership notifies the Home Office well in advance of the change to clarify what further applications/notifications are required.

Are there any other practical tips or pitfalls?

Where a sponsored employee is transferred under TUPE to a new employing sponsor, even once the correct SMS notifications have been made, the sponsorship details of this employee won't appear on the new sponsor's SMS account. Instead, their details will remain lodged on the old sponsor's SMS account until the new sponsor needs to assign a new CoS when their leave to remain in the UK needs to be extended. In the meantime, the new sponsor will need to make any SMS reports relating to sponsored employee activity by emailing Tier2&5migrantrep@ukba.gsi.gov.uk with the old sponsor's name, licence number, employee's details and details of relevant change or employee activity.

If an employer inherits a large number of sponsored employees, they may need to request an increased CoS allocation for those employees whose sponsorship is due to expire before 5 April of the following year. CoS allocations can often take a number of weeks to be processed and the Home Office has begun to request increasingly detailed business reasons before granting them so sponsors should provide specific and detailed reasons for their requests to avoid unnecessary delays.

If a sponsor no longer needs its sponsor licence because all of its sponsored employees have been transferred to another employer and it has no intention of sponsoring non-EEA employees in the future, it should apply to surrender its licence via the SMS.

Interviewed by Jon Robins.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Originally featured on Lexis PSL Immigration

 

 

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