In a landmark ruling, the EAT has held that all changes to terms and conditions of employment which are made ‘solely or principally’ because of a TUPE transfer are void, not just those changes which are detrimental to the employee.

The Facts

Under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (or “TUPE”), changes to terms and conditions which are made ‘solely or principally’ because of a TUPE transfer will be void, even if made with employee consent. However, because of case law relating to the 1981 version of TUPE, it has long been thought that employees can rely on TUPE related changes which are advantageous to the employees.

The four claimants in this case were directors and owners of Lancer Property Asset Management Ltd, which managed the Berkeley Square Estate on behalf of the estate’s owner. The Berkeley Square Estate comprises around 140 properties in Mayfair and Knightsbridge and is ultimately owned by the Abu Dhabi royal family. Lancer lost the contract to Astrea Asset Management Ltd.   TUPE applied to the transfer of the estate management from Lancer to Astrea. Before the transfer took place, the four directors made beneficial changes to their own terms and conditions of employment, including increases to salaries, adding guaranteed bonuses and contractual termination payments amounting, in the case of one director, to £768,000 and in the case of two of the directors also increasing their notice periods to twenty four months. There was also an agreement that they would revert to their previous terms if any of them did not transfer to Astrea.

On the day of the transfer, Astrea dismissed two of the directors for gross misconduct, and said that the two other directors did not transfer under TUPE because they were employed by their own service companies.

The directors claimed in the employment tribunal that (among other things) they were entitled to the enhanced contractual payments.

The employment tribunal found the variations had not been made for any legitimate commercial purpose, but that the essential aim of the exercise had been to compensate themselves for loss of the contract to Lancer, and that the directors were acting dishonestly in “…awarding…themselves [a guaranteed 50% rise in salary], knowing that it would be paid at the expense of Astrea” (e.g. through a guaranteed bonus equivalent to 50% of salary, as well as a right to be considered for a discretionary bonus). Under a principle of European law (“the abuse principle”), EU law cannot be relied on for abusive and fraudulent ends. In light of the abuse principle, the employment tribunal held, as the changes were made because of the TUPE transfer, they were void and the directors were not entitled to the enhanced payments.

The directors appealed unsuccessfully to the EAT. The EAT agreed with the employment tribunal that the changes were void. This was on two separate grounds, the first of which will be of particular interest to employers involved in TUPE transfers.

1. Under TUPE, all changes to terms and conditions of employment made ‘solely or principally’ because of a TUPE transfer will be void. This applies both to changes which are detrimental to the employee, and those which are beneficial.
2. The directors would not be able to rely on the relevant provisions in TUPE because the changes to their contracts had been made for “abusive or fraudulent ends”.

The EAT also agreed with two other interesting points determined by the employment tribunal:

1. that one of the directors conduct contributed to his dismissal, despite the Tribunal finding that the ‘reason or principal reason for his dismissal’ was the TUPE transfer. As a result, his unfair dismissal compensation was reduced by 100% for his contributory fault (for example, his deliberate obstruction of the owner’s requests for information about the estate and use of racist language towards the owners) and in the alternative that a proper process would have been carried out and he would have been dismissed within three weeks (a Polkey finding); and 
2. that because there were no union or appointed representatives for the purposes of TUPE consultation, the award for the failure to inform and consult could only be made in favour of the claimants bringing the claims and not in favour of all Lancer’s employees.

What Does this Mean for Employers?

The likely upshot of this case is that beneficial changes made because of a TUPE transfer could be void, even if the changes were not made for abusive or fraudulent reasons. The transferee employer will not therefore be bound by them. This will hopefully prevent unscrupulous transferor employers from improving employees’ terms and conditions pre-transfer in an attempt to increase costs for the incoming transferee. Changes to terms and conditions made for economic, technical or organisational reasons entailing changes in the workforce, or which are not made solely or principally because of a TUPE transfer, will still be binding. Indeed, in this case the employment tribunal found the variations to the directors’ salaries, made at the same time as the introduction of the guaranteed bonuses and contractual termination payments, were not void, as the directors had not benefitted from annual pay rises for several years (unlike the other transferring employees) and so were just catching up.

Ferguson and others v Astrea Asset Management Ltd UKEAT/0139/19