Beneficial but Bad Faith: Transferor’s Brazen Bonus-bump Void Under TUPE
Key Contact – Claire Knowles
Author – Adam McGlynn
On 15 May 2020 the case of Ferguson and others (the Claimants) v Astrea Asset Management LTD (the Respondent) taught us all a very important lesson, don’t mess with TUPE. The Claimants included two directors who transferred from Lancer Property Asset Management Ltd to the Respondent by way of a TUPE transfer when their provision of estate management services was taken over. Shortly before the transfer the Claimants varied their terms of employment to grant themselves substantially more favourable bonus entitlements among other benefits. In response the Respondents terminated their employment for gross misconduct on transfer and thus the legitimacy of the Claimants’ conduct was brought before a tribunal.
At first instance the Employment Tribunal found that the variations were not for any commercial purpose but to dishonestly gain an undue advantage and punish the estate owners for “using TUPE… rather than a purchase of the business”. This conclusion was supported by emails exchanged between the Claimants where an agreement was reached that their employment contracts would revert to their previous terms if they did not in fact transfer to the Respondent under TUPE. On appeal Judge Shanks agreed with the Employment Judge that the variations made by the Claimants were void for two principle reasons: (1) their inconsistency with the proper interpretation of Reg 4(4) of TUPE; and (2) the application of the EU abuse of law principle.
Regulation 4(4) of The Transfer of Undertakings (Protection of Employment) Regulations 2006
Regulation 4(4) states that any variation to a contract of employment which transfers under TUPE is void if the transfer is the sole or principle reason for the variation. From a literal interpretation, and following the compelling evidence that the transfer was the sole reason for the Claimants’ variations, it seems obvious at first that the changes should be void. However, the TUPE regulations must be interpreted in accordance with EU law and, in particular, the European Acquired Rights Directive. The Claimants therefore argued that regulation 4(4) must be interpreted so that only variations which are adverse to an employee should be considered void.
In summary, the purpose behind TUPE and its EU heritage is the safeguarding of employee rights or, in other words, preventing undesirable or adverse treatment. UK case law has suggested that this may allow additional rights to be granted following a transfer provided that employees are not deprived of their transferring rights. However, the current case addresses the question of advantageous variations made by the transferor, prior to the transfer. In this case Judge Shanks took the approach that the law must balance the interests of both the employee and the transferee who inherits their contract of employment. On the question of interpretation, he therefore found that regulation 4(4) TUPE should be taken literally as there are already safeguards within TUPE which allow for appropriate beneficial variations and applying an alternative interpretation could be abused by transferring employees.
The EU Abuse of Law Principle
EU laws are prevented from being relied upon for the purpose of abuse and fraud by the ‘abuse of law’ principle. This principle takes effect where an abusive practice observes EU rules but does not achieve their purpose because of an intention to exploit them by using an artificial transaction to obtain an undue advantage. Following the considerations above we understand that the purpose of TUPE is to safeguard the rights of transferring employees, not to improve their rights. Substantially increasing the Claimants’ bonus entitlements would therefore not achieve the purpose of the relevant EU rules but would achieve some ulterior motive. The contract variations can also be considered artificial transactions as they were devoid of commercial justification and, as agreed between the Claimants, would revert to the pre-existing terms should they not be transferred. As such the attempt to vary the employment contracts to gain an improper advantage at the Respondent’s expense would be considered an ‘abuse of law’ and, consequently, void.
For advice and guidance on TUPE regulations and how they might apply to your business contact our employment team.
Claire Knowles – Partner
Mark Alaszewski – Associate
Rebecca Mahon – Solicitor
Adam McGlynn – Trainee Solicitor