Can directors award themselves substantially enhanced employment terms in anticipation of a TUPE transfer and expect the unwitting transferee to honour them?
No, ruled the Employment Appeal Tribunal (EAT) which upheld an employment tribunal’s decision that the directors could not rely on TUPE to burden the new business owner with ‘golden parachute’ terms they had awarded themselves in anticipation of the transfer.
Relevant legal principles
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) introduced a definition of a service provision change for transfer of undertakings purposes. In a TUPE transfer, a service provision change occurs when activities carried out by one provider on behalf of a client are taken over by a new provider.
When TUPE applies, the employees of the outgoing employer automatically become employees of the incoming employer and should continue to enjoy the same terms and conditions of employment with the incoming employer. In particular, the new employer should not change employees’ terms if the change is related to the TUPE transfer. This protection derives from regulation 4(4) of TUPE which provides that any purported variation of a contract of employment that is, or will be, transferred is void if the sole or principal reason for the variation is the transfer.
In the following case, an employment tribunal had to decide whether pre-TUPE transfer changes which were beneficial to an employee were voided by reg. 4(4).
Lancer managed the Berkeley Square Estate (the “Estate”) in London on behalf of the Estate’s owners. The Estate owners served notice on Lancer of their intention to transfer management of the Estate to Astrea, triggering a TUPE transfer of Lancer’s employees.
Prior to the TUPE transfer, Lancer’s four directors (who were also its owners) signed new employment contracts, including generous guaranteed bonuses and termination payments, which were conditional on their employment transferring to Astrea under TUPE. The enhanced terms were notified by Lancer to Astrea a month before the TUPE transfer. On the transfer date, Astrea summarily dismissed three of the directors for gross misconduct; the fourth director did transfer but was informed a few days later that he was dismissed for gross misconduct in relation to the new contracts.
The directors brought claims against Astrea in the employment tribunal (ET) for unfair dismissal and unlawful deductions from wages, seeking awards based on their enhanced terms. Astrea argued that the variations to the directors’ contracts were void under reg 4(4).
The issue before the ET was whether regulation 4(4) invalidated the variations to the directors’ contracts.
The ET ruled that the new bonus and termination terms that the directors had awarded themselves were not for any legitimate commercial purpose of Lancer, but to compensate themselves for loss of the contract with the Estate’s owners. The directors were acting dishonestly in awarding themselves the enhanced terms. As the changes were made because of the TUPE transfer, they were void.
The directors appealed to the EAT. Their case was that reg. 4(4) was only intended to invalidate variations which were ‘adverse’ to the employee. They relied on a line of European authority in which the European Court had ruled that workers could not, even voluntarily, diminish their rights. The Court had not, however, addressed the question of whether an agreed variation would be void where it was considered advantageous to the employee.
The EAT did not accept the directors’ submissions. Instead, the EAT concluded that the words “any purported variation” did, in fact, mean ‘any’ variation – whether adverse or beneficial to the employee. This was consistent with the main purpose of the Acquired Rights Directive, which was to safeguard employee rights, not to improve them and avoided difficult questions, such as whether a particular variation is ‘adverse’ to the employee.
Accordingly, the EAT upheld the tribunal’s decision that the changes made by the directors to their employment contracts were void under reg 4(4) TUPE.
Ferguson & Ors v Astrea Asset Management Limited UKEAT/0139/19/JOJ
Given the wording of reg. 4(4) (“any purported variation of a contract…. shall be void if the sole or principal reason for the variation is…the transfer itself…”) and the ET’s finding that the reason for the changes to the directors’ contracts was the anticipated transfer, the variations were void and the incoming employer was not obliged to honour them.
The decision will be welcomed by contractors who take over contracts for the provision of services. It reduces the risk of the incumbent provider of the service changing employees’ terms and conditions before a TUPE transfer as a poison pill to discourage businesses from switching service providers.
Warning: this news item is not a substitute for legal advice. The information may be incorrect or out of date and does not constitute a definitive or complete statement of the law. This news item is not intended to constitute legal advice in any specific situation. Readers should obtain legal advice and not rely on the information in this article.