254: Pre-transfer improvements to directors’ contractual benefits were void under TUPE

Under TUPE, changes to contracts of employment are void where the sole or main reason for the change is the transfer (Regulation 4(4)). In Ferguson and others v Astrea Asset Management Ltd, the EAT had to consider whether this provision applies to changes which are beneficial to employees, as well as detrimental changes.

The four claimants in this case were employees of their own company, which provided estate management services to a single client. When the client terminated its contract and moved to Astrea Asset Management Ltd, this amounted to a service provision change under TUPE. Two months before the transfer, the claimants awarded themselves substantially enhanced ‘golden parachute’ terms, including guaranteed bonuses of 50% of salary, generous new contractual termination payments, and enhanced notice periods. They were subsequently dismissed by Astrea for gross misconduct in relation to these new contracts and brought various claims, including a claim for their contractual termination payments.

The Employment Tribunal found that the amendments to the claimants’ terms of employment had been made by reason of the anticipated transfer and had no legitimate commercial purpose. The changes had been designed to compensate them for the loss of their business, knowing this would be paid at Astrea’s expense. As TUPE provided that ‘any’ change due to a transfer is void, their claim failed.

The claimants appealed to the EAT, arguing that TUPE only applied to changes which were detrimental to employees. The EAT rejected this argument on two separate grounds. First, the relevant wording in TUPE refers to ‘any’ change, which on a literal interpretation includes both detrimental and beneficial changes. Second, the purpose of the EU Directive underlying TUPE is to safeguard the existing rights of employees, not to improve them. The claimants had acted dishonestly in seeking an improper advantage and this amounted to an abuse of the TUPE legislation.

Most business sale agreements contain a provision that the seller will not change employees’ terms and conditions for a specified time prior to the transfer without the buyer’s consent. Outsourcing agreements also usually include a similar restriction on the contractor making any pre-transfer changes. Whilst the facts of this case are somewhat extreme, the decision confirms that even without contractual protection, any changes made by reason of the transfer will be unenforceable, whether they are adverse or beneficial. This gives additional protection to buyers and incoming contractors where contractual benefits and notice periods have been enhanced by senior employees who suspect they may be dismissed after the transfer. However, it may also have anomalous consequences where incentives or other contractual changes are agreed with employees to persuade them to remain with the business.