TUPE: Advantageous changes to contractual terms void

A transferee employer was not bound by beneficial changes the transferor made to employees’ contracts before the transfer. 

Outgoing contractor agrees enhanced terms 

In Ferguson and others v Astrea Asset Management Ltd, directors employed by an outgoing contractor updated their employment contracts shortly before the change of service provider to give themselves an increased notice period and entitlement to a termination payment.  

The change in service provider was a service provision change under TUPE. Following the change, the incoming contractor dismissed the directors for gross misconduct. The directors brought a claim in the employment tribunal for the contractual termination payment. 

Beneficial changes agreed before the transfer are void 

The employment judge rejected their claim, ruling that the changes were void as the TUPE transfer was the sole or principal reason for the change. It also referred to the EU abuse of law principle which prevents EU law (such as the Acquired Rights Directive which TUPE implements) being used for abusive or fraudulent ends.

The directors appealed to the Employment Appeal Tribunal (EAT) and the EAT dismissed their appeal. It ruled that Regulation 4(4) TUPE, which states that any change to a transferring employee’s employment contract is void if the transfer is the sole or principal reason for the change, invalidates beneficial as well as detrimental changes. Previous case law which said that a transferee was bound by beneficial changes it agreed with transferring employees after the transfer does not mean that only detrimental changes are void under Regulation 4(4).   

The EAT also considered that even if the changes were not void, the employees were prevented from enforcing the varied terms by the EU abuse of law principle. The purpose of the Acquired Rights Directive is to safeguard employees' rights not improve them and there was ample evidence that the directors' intention was to obtain an improper advantage by varying their contracts in contemplation of the transfer.

Implications

The decision is good news for transferees concerned about transferors giving employees enhanced terms and conditions before a TUPE transfer so that that the transferee will be stuck with them after the transfer. Transferring employers cannot make any changes to employment contracts of transferring employees, if the transfer is the sole or principal reason for the change. It makes no difference whether the change is beneficial or detrimental to the employee.  Any purported changes will be void.

Although there was dishonesty in this case on the part of the directors of the transferor, the decision does not appear to be limited to such cases.  

It remains the case that contractual changes beneficial to an employee agreed by the transferee after the transfer are likely to be valid (even if the transfer is the sole or principal reason for the change).  The Employment Appeal Tribunal explained that the purpose of the Acquired Rights Directive is to ensure a fair balance between the interests of transferring employees on the one hand and those of the transferee on the other. A transferee needs to be protected against a transferor agreeing enhanced terms with transferring employees, but there is no need to protect a transferee who chooses to agree beneficial changes themselves.