Are beneficial as well as adverse contractual changes void if by reason of TUPE?

United Kingdom

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. 

In the recent EAT case of Ferguson and others v Astrea Asset Management Ltd (2020), the directors of Lancer Property Asset Management Ltd (“Lancer”) significantly enhanced some of their terms and conditions of employment pre-transfer, so that those terms would transfer to Astrea Asset Management Ltd (“Astrea”) under TUPE. The enhancements included guaranteed bonus payments and generous termination payments. The question arose as to whether the variations agreed pre-transfer were valid. The EAT held that the variations were void by virtue of Regulation 4(4). In fact, the EAT held that under Regulation 4(4) all variations (adverse and beneficial) are void.

Facts

The claimants were four directors and employees of Lancer. Until September 2017, Lancer had as its sole client an estate in Mayfair and Knightsbridge ultimately owned by the Abu Dhabi royal family. In September 2017, Astrea took over the management of the estate. This constituted a service provision change under TUPE.

Prior to the transfer, the four directors updated their own employment contracts with very generous provisions and Astrea dismissed all four directors after the transfer for gross misconduct in relation to those contract variations. The directors brought proceedings against Astrea, including for unfair dismissal and for the contractual termination payments on the basis of the varied terms.

The directors argued that Regulation 4(4) should be interpreted as prohibiting only changes that are adverse to the employees and the beneficial changes were valid.

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).  Previously, it had been thought that beneficial changes could be relied upon. In this regard, counsel for the directors referred to the Court of Appeal decision in Power v Regent Security Services Ltd, where, after a TUPE transfer, an employee with a retirement age of 60 agreed that his retirement age should be 65. In Power, the Court of Appeal held that the employee had been given an additional right (i.e. a retirement age of 65 on top of his existing retirement age of 60) and could choose between the two. 

The EAT said that the decision in Power is not authority for the proposition that Regulation 4(4) should apply only to changes that are adverse to the employee. The EAT went on to say that in Power “the Court of Appeal do not really address the issue of what Mr Power’s contractual retirement age was after he had signed the new terms and it highlights the difficulty inherent in deciding what is an adverse and what is an advantageous or positive term. Although the solution of saying that it was open to employee to choose which of the two terms to rely on worked in the context of Mr Power’s case, this would not always be satisfactory, and it would leave open the prospect that contractual rights would be dependent on the subjective view of the individual employee, who might change his mind from time to time.”

Conclusion

In Ferguson, the EAT has taken the view that, under Regulation 4(4), all variations (i.e. where one contractual term is replaced by another) are void, but the granting of an additional right (i.e. where no terms are waived) may be enforceable.

Of course, variations are still permitted where Regulation 4(4) does not apply, e.g. where the reason for the variation is not the TUPE transfer, where there is an ETO reason, where the terms of the contract permit the variation, or where the transferor is subject to "relevant insolvency proceedings".

Comment

The judgment in Ferguson confirms that TUPE’s purpose is to safeguard employee’s rights, to prevent either improvement or detriment to an employee’s pre-transfer position. However, it seems that transferees may still be able to offer additional terms to transferring employees, relying on the decision in Power and that, if agreed, such terms can be relied upon.