Service contracts, strategic sourcing and the wide reach of AI
05 November 2025
Every week brings new predictions on how AI will transform service delivery in almost every sector of the economy. AI already boosts productivity through automating routine tasks, streamlining processes and freeing employees to focus on strategic and creative activities. Unsurprisingly, service providers see it as a key means of driving down costs and increasing profitability.
At the same time, estimates of jobs likely to be lost as a result of AI are widespread. Numbers vary considerably - for example, the Tony Blair Institute forecasts between 1 and 3 million UK jobs may be displaced, whereas the Institute for Public Policy Research suggests the figure is nearly 8 million. Although it is impossible to predict exact figures, there is no doubt that the impact of AI within the workforce is likely to be profound. New roles will be created, existing roles will be reshaped and some roles may be displaced altogether.
The impact of AI on service delivery and the workforce directly interacts with existing UK employment laws . One piece of legislation that is particularly relevant in the services sector is the Transfer of Undertakings (Protection of Employment) Regulations 2006 (commonly known as 'TUPE'). TUPE applies to protect the employment of staff when services are moved from one contractor to another.
In this article, we consider how the increased use of AI in service delivery could impact on the application of TUPE and what this means for customers and service providers when they are considering their contractual arrangements.
How does TUPE operate?
TUPE protects employees where their employer changes due to a business sale or service transfer. Broadly TUPE transfers all rights, powers, duties and liabilities under or in connection with a contract of employment to the new employer except for criminal liabilities and certain pension rights. Effectively, the employment contracts of in-scope employees, who do not object to the transfer, will automatically transfer to the new employer.
Outside of corporate transfers, TUPE is most often triggered when businesses outsource work to a third party, reassign a contract for services, or bring services back in-house, provided that the activities remain "fundamentally or essentially the same". Where the services are fundamentally the same, if there is an organised grouping of staff who are dedicated to performing the services, they will be in scope to transfer under TUPE.
What is meant by activities remaining "fundamentally or essentially the same"?
In some cases, this can be difficult to determine. The question of how much of a change is necessary to determine whether TUPE applies and where the line is drawn has come before the courts on different occasions and the answer will depend on the specific circumstances – even where services are split out across multiple providers TUPE may still apply to the transfer. The primary focus is on the fundamental nature of the activities and minor changes in the way in which activities are carried out will not prevent TUPE from applying.
When will the use of AI affect the interpretation of whether services are the same?
AI can deliver big gains in any service provision arrangement. Used strategically, it allows service providers to cut costs and time, reduce human error, increase productivity, and easily scale services up or down to reflect demand. AI-enabled solutions allow routine tasks such as customer service, data entry, network monitoring, and document processing and invoicing to run quickly, accurately and consistently. In some cases downtime may be eliminated.
Where a supplier uses AI to optimise service delivery in this way, TUPE is likely to apply as the services being provided are still likely to look and feel the same. However, some AI models are capable of much more and may ultimately change the nature or ethos of the services themselves so that TUPE may no longer apply. By way of illustration, case law has found that TUPE did not apply when residents of a NHS Trust care home were subsequently rehoused in their own homes and staff duties changed, for example, from being awake on night shift duty to sleeping in the resident's accommodation. The services provided were found not to be fundamentally or essentially the same after the change as there was a change in the ethos and organisation of the care.
Deciding whether or not TUPE applies will require context-specific analysis but the question is likely to be acute where a service provider subject to benchmarking or continuous improvement obligations replaces job roles with AI-based solutions in its efforts to drive down costs and boost performance.
When TUPE applies, does this mean that service providers cannot reshape their workforce?
In situations where TUPE does apply and the new employer wants to introduce AI systems that either change an employee's existing role or possibly replace it altogether, it is not necessarily the case that the new employer's hands are completely tied.
The starting point is that if the new employer wants to make changes to the contractual terms of the transferred employees' employment these will be void if the reason for the change is the transfer itself and any dismissal will be automatically unfair if the sole or principal reason for the dismissal is the transfer.
However, both of these situations are subject to an ‘ETO’ reason exception (where changes to the workforce are for an economic, technical or organisational reason entailing changes in the workforce). Although an ETO reason is not defined in TUPE, it has been held that it must be concerned with the day-to-day running of the business.
Following careful analysis, the new employer may decide that their AI-driven changes fall within an ETO reason exception. This means that changes to contractual terms can be made provided the employee consents. In addition, a genuine redundancy situation can also fall within the ETO exemption, although employers also need to be careful to follow a fair dismissal procedure.
Actions to consider
With the future being AI-driven, the possibility that AI may redesign the future workforce during the course of the contract should be front and centre in contract negotiations.
Parties should give thought to whether AI advances could give rise to role eliminations during the term of the contract, and if that is the case, then liability for these costs will need to be considered as part of the contract terms.
Additionally, whilst TUPE may apply at the end of the contract term to transfer all employees who are engaged in the provision of the services to a new supplier, if there is a fundamental change in how the services are to be provided, then (as highlighted above) TUPE may not be triggered. If TUPE does not apply, the current supplier risks being liable for the redundancy costs of all the employees it has deployed to the contract if they cannot be re-allocated. It is therefore essential to specify in the contract how the employees will be treated on expiry or termination and who is to pay for any redundancy and dismissal costs arising as a result.
In summary, organisations should not underestimate how much automation and, in particular, AI is disrupting service delivery models. The standard TUPE clauses that have been used in previous contracts may no longer hit the spot. As managing these new risks becomes ever more important, now may be a good time for businesses to rethink their approach to negotiating and drafting long-term services and sourcing arrangements.
