When will changes to terms because of a TUPE transfer be void?

The key risks of changing terms on a TUPE transfer – even when they are beneficial to the employee.

The purpose of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and the European Directive which it implements is to protect the terms of employment of employees who transfer from one employer to another when a business or part of a business transfers.

A key provision of TUPE is therefore that any changes to an employee's contract will be void if the sole or principal reason for the change is the TUPE transfer. This means there is a risk that changes to terms which are made before or after a TUPE transfer might be challenged by employees in a court or tribunal and that transferee employers might not be able to enforce the new terms, even if they have been agreed with the transferred employees.  

When can changes to terms be made in the context of a TUPE transfer?

There are some circumstances where changes to terms which happen in the context of a TUPE transfer will not be void. These include:

- The reason for the change is an "economic, technical or organisational reason entailing changes in the workforce" (an ETO reason). This only applies when the variation is made because there  is a change in the numbers, place of work or functions of the workforce, and when the employer and employee agree to the change. In practice, this exception does not often apply.

- The employment contract permits the employer to make the change. For example, there is a clause in the contract which allows the employer to move the employee to a different workplace.

- The contractual term which is changing is incorporated from a collective agreement and the change takes effect more than one year after the transfer. This will only apply if the terms, when considered together, are no less favourable to the employee than the former terms.

- In some cases where the outgoing employer is insolvent.

A change to terms will also not be void where it is made for a reason other than the transfer. For example, if market conditions lead to a reduction in pay, or if hours are reduced because of a drop in demand from a key client.

Key risks on changing terms following a TUPE transfer

Employers who are planning changes to terms in the context of a TUPE transfer should take legal advice on the risks. Case law suggests that there may be no safe time period after transfer date when a transferee can make changes, if those changes are because of the transfer and an exception does not apply. The question is whether the transfer was the reason for the change, no matter when the change occurred. This is why the harmonisation of employee terms following a TUPE transfer is always risky. The reason for levelling up the terms of existing and transferred employees will usually be the transfer, and there is unlikely to be an ETO reason, so the changes will very likely be void.  

Employees whose terms have been changed may bring claims for breach of contract or for unlawful deductions from wages. They can wait to accrue losses (underpaid wages) before doing so, meaning there could be a considerable time of uncertainty for the employer. Breach of contract claims can be brought within 6 years of the breach. Claims for unlawful deductions from wages can be brought within 3 months of the last of a series of deductions. Where pay has been reduced, the three month window for a claim reopens after each pay date. However, regulations brought into force in 2015 impose a two-year backstop period on unlawful deductions from wages claims relating to contractual pay and benefits.

Case law shows that, where a variation is found to be void and the new employer has entered into a valid contractual agreement for changed terms, employees can cherry pick the most favourable terms from those in place before and after the change.

Can changes be made to terms if they are wholly beneficial?

BEIS Guidance states that changes to terms which are entirely beneficial from the perspective of the employee are not prevented by TUPE. It may be difficult to imagine circumstances where a beneficial change to terms is challenged. However, a recent case has explored just this scenario and clarified that all changes to terms which are by reason of the transfer and do not fall into an exception will be void, whether they are beneficial or otherwise.  While the circumstances of this case are quite unusual, it provides a helpful reminder of the risks of changing terms because of a transfer.

Case details: Ferguson and others v Astrea

An estate management company (Lancer) carried out estate management for owners of a considerable property portfolio in London. Lancer had no other clients. The property owners gave 12 months' notice to terminate the contract and appointed a new estate management company (Astrea). It was accepted that this would be a TUPE transfer.

The CEO of Lancer tried unsuccessfully to persuade the property owners to extend the contract or to buy out the business. The CEO then hatched a plan along with other directors/employees of the company to improve their contractual terms, believing that Astrea would be bound by these terms following the transfer. These improvements included a 15% salary increase, guaranteed bonuses of 50% of salary (in the region of £500,000), generous termination payments and extended notice periods. There was also an agreement between the colleagues that their terms would revert to the former terms if their employment did not transfer to Astrea.

The TUPE transfer took place on the change of contractors.  Astrea dismissed the CEO and his colleagues shortly after the transfer for gross misconduct relating to the new contractual terms, obstructive behaviour prior to the transfer and contemptuous / racist language towards the owners. They brought claims against Astrea for unfair dismissal and contractual termination payments as well as a claim relating to Astrea's failure to provide information to Lancer about any proposed TUPE measures.

The employment tribunal found that some of the improvements to terms were made by Lancer solely by reason of the transfer (in particular the bonuses and termination payments). It found that these changes had no legitimate commercial purpose but were designed to compensate the claimants as owners of the company for the loss of the contract, trying to gain an undue advantage through TUPE protections. It found that these new terms were void on this basis and stated that the claimant's attempt to vary their own terms before the transfer was an abuse of EU law. The tribunal considered that the 15% increase in salary, on the other hand, was not void as it was in line with market conditions and was not by reason of the transfer.

Although the tribunal found that the CEO had been unfairly dismissed, it reduced compensation by 100% because of contributory fault (including his actions in hatching the change of terms plan and lack of cooperation prior to the transfer) and because the CEO could have been fairly dismissed three weeks after the transfer in any event.

Interestingly, the tribunal awarded the claimants 3 weeks' pay each for the failure of Astrea to provide information to Lancer as required under Regulation 13(4) of TUPE.  As the tribunal considered that there was tactical delay in providing information on both sides, it did not make a higher award (the maximum for a failure to inform and consult is 13 weeks' pay).

On appeal, the EAT agreed with the tribunal's decision that the terms were void and made clear that TUPE makes void all contractual variations made because of a transfer (unless an exception applies) whether or not they are to the employee's benefit. It also agreed with the award of 3 weeks' pay to each claimant. The EAT remitted the question of whether the CEO's conduct had "caused or contributed to" his dismissal to the same tribunal but agreed that his compensation could be reduced on the basis that he would in any event have been dismissed fairly some three weeks after the transfer.

Other considerations for transferor employers considering a change to terms

It is important to note that it is not only the TUPE rules which might limit the changes an outgoing employer can make to its employees' terms.

In the context of a service provision change, where the client has decided to bring in a new contractor, it is common for the existing contract between the client and the outgoing employer to include restrictions on making changes to terms in the notice period, or in the last few months of the contract. In some cases, changes to employment terms may be possible under the contract if the prior consent of the client is obtained. There may also be restrictions on dismissals or recruitment in the period before the transfer.

Similarly, where a business or property sale effects a TUPE transfer, the transfer agreement may include warranties, undertakings or indemnities which limit the seller's ability to change employment terms pre-transfer.

Outgoing employers should take legal advice on any contractual obligations they may be under as the contract comes to an end or the sale takes place. Contractual claims arising from such changes to terms, where they are beneficial to the employees, are much more likely to come from the commissioning client or buyer than from employees.