Thu 04 Jun 2020

TUPE catches both beneficial and detrimental contract changes

The EAT have considered whether beneficial contract variations occurring solely because of a transfer are void.

TUPE is well known for protecting employees from dismissal and preventing variations to employees' contracts if the sole reason for the change is a transfer.  The voiding of such variations was legislated for in Regulation 4(4) of the 2006 Regulations.  The earlier 1981 incarnation of the Regulations did not contain a directly comparable provision.  Cases decided under the 1981 Regulations indicated that where beneficial changes were made employees may be able to cherry pick either their pre-existing contractual term or the new term if they thought it more beneficial.

In Ferguson & Others v Astrea Asset Management Ltd the employees in question were both employed by and owners of Lancer, a "single client" company that managed the Berkeley Square Estate.  When Lancer was served notice that management of the estate was to transfer to Astrea the employees (using their status as owners of the company) updated their contracts to provide for significantly enhanced terms including guaranteed bonuses and new termination provisions, assuming these liabilities would be picked up by Astrea.

On the transfer taking place the employees were dismissed, ostensibly for gross misconduct relating to the changes made to the contracts.  They made claims to the employment tribunal for (amongst other things) unfair dismissal and payment of their new contractual notice provisions.  Astrea argued that Regulation 4(4) rendered the changes void.  The Employment Judge found that although two of the claimants were successful in their unfair dismissal claims, the contractual variations were void under Regulation 4(4). 

The Claimants appealed on various grounds.  In relation to the Regulation 4(4) finding they argued that it was only intended to invalidate variations that were adverse to an employee.  They relied upon EU case law stating that where the Acquired Rights Directive was applicable workers could not, even voluntarily, diminish their rights.  They also relied on the case of Power v Regent Security (which was decided under the 1981 Regulations) in which the employer was prevented from seeking to avoid a variation raising the employee's retirement age.

The EAT rejected the claimant's submissions.  The Power case could be distinguished as it was decided under the different provisions of the 1981 Regulations and related to variations introduced by the transferee after the transfer, rather than the employee/owners prior to the transfer.  The proposed solution in that case - letting the employee decide whether to rely on the old or new contractual term - would not always be satisfactory and opened the door to contractual rights being decided upon by the subjective (and possibly changing) view of employees.  Further, the Court in Power did not go so far as to say that variations that are advantageous to an employee cannot be deemed void.  Instead, it confirmed that transferees and employees are not prevented from agreeing beneficial terms by reason of the transfer.  The EAT concluded that Regulation 4(4) applies to any variation whether adverse or beneficial. 

BEIS guidance on the 2006 Regulations that was published in January 2014 states that an employer may vary terms and conditions when changes are entirely positive from an employee's perspective, and that such changes are not prevented by the Regulations.  However, the EAT noted this guidance as being of only limited persuasive value.  The EAT was also mindful of the EU case law confirming the Acquired Rights Directive seeks to ensure a fair balance between the interests of transferring employees and the interests of the transferee.  It was clear in this case that the changes went beyond safeguarding the rights of transferring employees and were harmful to the transferee. 

This case doesn’t necessarily spell the end of beneficial changes being made to contracts.  The facts in this case, where the employees who transferred were able to amend their own contracts in advance of the transfer, are unusual.  Depending on the particular circumstances, where changes are made post transfer with the agreement of the transferee, beneficial changes may still be possible.

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