TUPE: advantageous contractual changes void


In the important decision of Ferguson and others v Astrea Asset Management Ltd the Employment Appeal Tribunal held that changes to terms and conditions that were beneficial to employees were void as they had been made by reason of the TUPE transfer.

The EAT considered Regulation 4(4) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), which provides that a variation of contract will be void if the sole or principal reason is “the transfer.” This wording is relatively new and previous cases which dealt with this issue were decided under TUPE 1981, which did not include an equivalent provision.

The EU Abuse Principle was also considered; confirming that the principle that EU law cannot be relied on for abusive of fraudulent ends can apply to a TUPE claim before the Employment Tribunal.

Background

The four claimants were company directors of Lancer Property Asset Management (Lancer) which managed the Berkeley Square Estate (BSE) on behalf of its owners.

In September 2016 Lancer was given 12 months’ notice that their management contract with BSE would be terminated and that a new estate management company, Astrea Asset Management Ltd (Astrea) would take over. This triggered a TUPE transfer of employees from Lancer.

Prior to the TUPE transfer, the four claimants undertook a review of Lancer’s staff contracts and made substantial improvements to their own contracts, including a guaranteed annual bonus of 50% of their salary,  a termination payment calculated by reference to their length of service and enhanced notice periods. These changes were conditional on their employment transferring to Astrea under TUPE.

The transfer went ahead but shortly afterwards, the four claimants were dismissed for gross misconduct. They brought various tribunal claims including for termination payments based on their varied contracts. At the Employment Tribunal it was held that, in light of Regulation 4(4) and the EU Abuse Principle, the variations were void.

The claimants appealed to the Employment Appeal Tribunal (EAT), arguing that Regulation 4(4) must be taken to apply to adverse changes only.

Decision of the EAT

The appeal was dismissed.

The EAT held that regulation 4(4) applies to any contractual changes and not just those adverse to employees. The reasons given for this decision were as follows.

  • On taking a purposive approach to TUPE, and the Acquired Rights Directive on which it is based (the EU Directive), it was considered that the aim of the Regulation is to safeguard employees’ rights – this does not extend to improving employees’ rights.
  • It was possible to distinguish previous UK case law (Regent Security Services Ltd v Power) which held that variations were permitted after the transfer. This was because in that case the varied term had been put forward by the transferee and agreed between the transferee and the transferred staff (but, regardless, there was no comparable Reg 4(4) at the time). In addition, in Power, it was decided that the Acquired Rights Directive allowed employees to obtain additional rights; but the Directive does not require that beneficial variations cannot be deemed void.
  • An interpretation that 4(4) applies to all variations avoids potential uncertainty in the future and difficult questions that may arise as to what is or isn’t “adverse.”

EU Abuse Principle

The EAT held that even if the enhanced terms were not void under Reg 4(4) of TUPE, they were void under the two limbs of the EU Abuse Principle. These are:

  • a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved; AND
  • a subjective element consisting of the intention to obtain an advantage from the rules by artificially creating the conditions laid down for obtaining it.

Both parts were satisfied in this case. As outlined above, the purpose of the EU Directive was to safeguard employees and if the variations were permitted this would not be achieved (as employee rights would be improved rather than merely safeguarded). In addition, the claimants were acting dishonestly in giving themselves the enhanced terms, knowing they would need to be paid by Astrea.

Comment

The decision will be welcome news for transferees who are concerned that that transferors may give employees enhanced terms pre-TUPE transfer, which they are subsequently stuck with. It seems that where the “sole or principal” reason for enhanced contractual changes is the transfer itself, and specifically where these will be harmful to the transferee, they will be void under Reg 4(4) and (depending on the circumstances) under the EU Abuse Principle too.

The case doesn’t quite go as far as confirming what might happen should an employee be entirely “innocent” in respect of improved terms prior to a transfer. Current BEIS guidance states that an employer may vary terms and conditions "when changes are entirely positive from the employee's perspective. The underlying purpose of the Regulations is to ensure that employees are not penalised when a transfer takes place." (BEIS guidance: Employment rights on the transfer of an undertaking, page 21). The EAT in Ferguson notes that this guidance, which appears to be based on Power, "can only be of limited persuasive value”.

It should be kept in mind that the facts of Ferguson are quite unusual and that the claimants were acting dishonestly to benefit themselves, at the transferee’s expense and this may have helped to persuade the EAT to find against them.

The case does suggest that should such any variations occur (however innocent), Employment Tribunals are likely to consider the impact of the changes on both “the transferring employees on the one hand and those of the transferee, on the other.” This comes from the European Court of Justice case of Alemo-Herron and others v Parkwood Leisure Ltd which highlighted that the spirit of the EU Directive was to strike a “fair balance” between the employers and employees: contrary to common perception, the aim of the TUPE regulations is to protect both parties rather than to provide protection for employees exclusively.

Changes made in advance of a TUPE transfer should, therefore, be carefully considered in the light of the Ferguson judgment: additional rights which are agreed with employees may be enforceable; but even beneficial variations may not be enforceable, particularly where there is dishonesty and the changes go further than providing a safeguard for transferring employees.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions


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