Case update (1): TUPE – Beneficial variations void

Summary:  Are beneficial (as well as adverse) variations to an employment contract void where the principal reason is a TUPE transfer?

Yes, held the EAT in Ferguson & Ors v Astrea Asset Management Limited (available here).

Background:  Regulation 4(4) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) renders any variation of a contract of employment void if the sole or principal reason for the variation is the TUPE transfer itself.

Facts:  The individuals were both directors and employees of Lancer Property Asset Management Ltd (‘LPAM’). In September 2016, LPAM were given 12 months’ notice of termination in respect of their only contract for estate management services. LPAM were informed that Astrea Asset Management Ltd (‘AAM’) would be the new provider of the estate management services from September 2017. The change in provider of estate management services was a service provision change for the purposes of TUPE.

Prior to the transfer of their employment from LPAM to AAM, the directors made a number of variations to their existing employment contracts. These variations were designed to compensate each director for their anticipated loss of shareholder dividends as a result of the transfer to AAM and, broadly speaking, the changes included:

• salary increases;
• guaranteed bonus payments;
• new termination payments; and
• a 24 month notice period.

In September 2017 AAM took over the management of the estate and the directors’ employment transferred to AAM. AAM dismissed the directors for gross misconduct and they brought claims against AAM for unfair dismissal and contractual termination payments, based on their varied employment contracts.

Tribunal decision

The Tribunal held that the pre-transfer variations to the directors’ employment contracts were void under regulation 4(4) of TUPE. The Judge found that the directors had dishonestly awarded themselves benefits at the expense of AAM following the transfer, thus taking undue advantage of TUPE.

EAT decision

The directors appealed against the Tribunal’s decision on the basis that regulation 4(4) should only apply in situations where the changes to the employment contract are adverse to employees.

The EAT held that, on a correct reading of regulation 4(4), all contract variations by reason of a TUPE transfer are void (whether adverse or beneficial). The EAT noted that the purpose of the Acquired Rights Directive (the EU Directive which TUPE implements into national law), was to safeguard employees’ rights on transfer rather than to improve an employee’s position.

The EAT considered that interpreting regulation 4(4) such that it applies to all variations would avoid uncertainty and difficult questions that may arise as to what is or isn’t “adverse”.  i.e. whether a contractual change is adverse or beneficial can be considered subjective, with the employee potentially wishing to change his/her mind at a later stage.

Previously it had been thought that beneficial changes could be relied upon, based on a previous EAT decision and Government guidance.  However, the EAT in this case said that its previous decision in Regent Security Services Ltd v Power dealt with the ability for employees to obtain additional rights; it was not authority for the proposition that regulation 4(4) should apply only to changes that are adverse to the employee.

Further, the EAT noted that the current Government guidance (which states that an employer may vary terms and conditions “when changes are entirely positive from the employee’s perspective“) is only of limited persuasive value.

Implications:  This is good news for transferees/new service providers in that they may be able to challenge as void changes made by the transferor to provide enhanced terms pre-TUPE transfer.

This decision indicates 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).

However, this decision does not clarify whether more favourable contract terms agreed between the transferee/new service provider following the transfer, will also be void.  Employers will have to wait for a decision on this in future cases and, in the meantime, may seek to rely on the previous EAT decision, Power, which allowed employees to obtain additional rights.

Ultimately, employers should carefully consider whether to agree beneficial variations with employees in connection with a TUPE transfer.  Even these may not be enforceable, but particularly where there is dishonesty and the changes go beyond merely a safeguard for transferring employees.