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Pre-TUPE transfer beneficial changes to employees’ terms and conditions void!

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Pre-TUPE transfer beneficial changes to employees’ terms and conditions void!

Pre-TUPE transfer beneficial changes to employees’ terms and conditions void!

In the case of Ferguson & Ors v Astrea Asset Management Limited, the Employment Appeal Tribunal (EAT) has held that changes to terms and conditions made prior to a TUPE transfer and which were beneficial to 4 directors, were void.

In the first case to consider whether pre-TUPE transfer changes which are beneficial to an employee are void, the EAT ruled that the directors could not rely on TUPE to burden the transferee (Astrea) with enhanced terms and conditions which the directors had awarded themselves knowing that the transfer would go ahead.

The 4 claimants were company directors, employees and owners of Lancer. Lancer was an estate management company which solely managed one estate, Berkeley Square Estate (the Estate). In 2016, the owners of the Estate, gave 12 months’ notice to terminate its agreement with Lancer and to appoint a new manager to manage the Estate. The change of service provider constituted a service provision change for the purposes of TUPE.

Shortly before the transfer, the 4 directors varied their contracts significantly to provide for guaranteed bonus payments, generous new termination payments based upon length of service and a 24 month notice period. They did this as, after the transfer, whilst they would remain as employees, they would no longer be director-shareholders, so the new terms were designed to compensate them for their anticipated loss of dividends.

The transfer went ahead, but Astrea dismissed all directors on or soon after the transfer. The directors pursued claims in the Employment Tribunal (ET) for, amongst other matters, unfair dismissal and contractual termination payments. The question therefore arose as to whether the variations put in place pre-transfer were valid.

The ET ruled that as the changes were made “by reason of” the TUPE transfer, they were void. In the ET’s view, the purpose of TUPE was not to allow owner-directors to agree new terms that would fix the transferee with substantial additional liabilities.

The claimants appealed the decision. The EAT upheld the Employment Tribunal’s judgment. The EAT confirmed that the changes made by the directors to their terms and conditions of employment before the TUPE transfer were void on two separate grounds:

  1. under TUPE, all contractual changes (not only those which are adverse to an employee) made because of a TUPE transfer are void; and

  2. if that interpretation was wrong, on the facts of the case, Astrea could rely on the EU abuse of law principle to prevent claimants relying on the new contractual terms since (i) the purpose of the EU rules (safeguarding employee rights) had not been achieved, but rather some other purpose (i.e. substantially improving the rights of the Claimants) and (ii) their intention was to obtain an improper advantage by artificially obtaining variations to their contracts of employment in contemplation of the transfer.

In relation to the EU Abuse Principle, the parties accepted that EU law cannot be relied on for abusive or fraudulent ends, and that this could, in theory, apply to a TUPE claim before the Employment Tribunal. The EAT held that even if the enhanced terms were not void under TUPE, they were void under the two limbs of the EU Abuse Principle (both of which needed to be satisfied). The two limbs consist of an objective element (the purpose of EU rules not being achieved) and a subjective element (the intention to obtain an advantage from EU rules by artificially creating the conditions laid down to obtain it).

The EAT found that if the enhanced terms were allowed to stand, the effect of the transfer would have been to vastly improve the directors’ employment rights, rather than to safeguard them – which, broadly speaking, is the purpose of TUPE. Therefore, the purpose of the Directive (i.e. to safeguard employee rights) would not have been achieved, because another purpose (i.e. a substantial improvement in employment rights) would have been achieved instead.

The EAT said that the Employment Tribunal was entitled to find that “…there was no legitimate commercial purpose in Lancer agreeing the new terms and that the Claimants were acting dishonestly in awarding themselves the enhanced contractual terms knowing that it would be paid at the expense of Astrea”.

As both limbs of the EU Abuse Principle test had been satisfied, the directors were precluded from relying on the new contractual terms as against Astrea following the TUPE transfer.

This case is good news for companies taking over the provision of services (where TUPE applies) and who are concerned about pre transfer contract changes being made. This case makes it clear that transferors seeking to saddle transferees with onerous terms, and which have been put in place by reason of the transfer, will not be permitted.

For more information on this update, please contact Employment Legal Director, Sophie Clarke