Beneficial variations invalidated by TUPE transfer

May 18th, 2020 by Simon Devonshire QC

What is the position if business owners employed by their own company award themselves substantially enhanced ‘golden parachute’ terms in advance of a TUPE transfer, confident in the expectation that those liabilities will be picked up by the unwitting transferee?

This was the principal issue answered by the EAT (HHJ Shanks) in its wide-ranging judgment in Ferguson & Ors v Astrea Asset Management Ltd, handed down last Friday.  In short, those terms could not be relied upon.  The EAT upheld the Tribunal’s conclusion that the owners of the former manager of the Berkeley Square Estate (“the Estate”) could not rely on TUPE to burden the Estate’s new manager with significantly enhanced contractual terms they had awarded themselves in anticipation of the transfer, and which served no legitimate commercial purpose.

That was the key finding of the EAT in Ferguson & Ors v Astrea Asset Management Ltd (judgment here):

Background facts

The Estate’s ultimate owners were based in Abu Dhabi.  From 2004, the Estate had been managed by Lancer.  The four Claimants (Appellants) were the beneficial owners of Lancer’s holding company, and were directors of both Lancer and the holding company.  Two of the Claimants were employed directly by it (Messrs Ferguson and Kevill), and two via their own service companies (Messrs Pull and Lax).  Lancer was a ‘single client business’, managing only the Estate, although the wider Lancer group (including the holding company) did also own a number of other property companies, through which the Claimants traded their own property portfolio.

In September 2016 the owners of the Estate served notice on Lancer with the intention that management of the Estate be taken on by a new company, Astrea, from September 2017.

In June 2017 the Claimants ‘updated’ their contractual terms with Lancer (whether directly or via their service companies), and signed contracts in July.  These provided for new guaranteed bonuses amounting to 50% of salary, and new contractual termination payments amounting to a month’s salary for every year served as a Lancer director or in the case of Messrs Lax and Pull, as directors of their service companies.  These were not supplied to Astrea until 1 September 2017.  Mr Kevill had also proposed to his fellow directors that if any of them did not transfer to Astrea, their contracts would revert to their original terms – the others readily agreed.

The EJ found that the new bonus and termination terms were not agreed for any legitimate commercial purpose of Lancer, but merely to compensate the Claimants for the loss of the business contract (and in Mr Kevill’s case also to punish the owners for using TUPE to acquire the management of the Estate).  She concluded that the “essential aim” was to obtain an “undue advantage and that the Claimants were acting dishonestly in effectively awarding themselves contractual advantages, knowing that these would be paid at the expense of Astrea.

Astrea wrote to Mr Kevill, terminating his employment immediately on transfer for gross misconduct; it did not accept that Messrs Lax and Pull would transfer under TUPE, but if they did, they too were summarily dismissed.  Mr Ferguson did transfer on 29 September, but was informed by Astrea on 2 October that he was dismissed for gross misconduct in relation to the new contracts.

Findings below and issues on appeal

The Claimants brought proceedings against Astrea for (amongst other things) unfair dismissal, payment of their contractual termination payments on the basis of the new contracts and 13 weeks’ pay as compensation for breach of Regulation 13(4) TUPE.  They reserved the right to bring wrongful dismissal claims in the civil courts).  Astrea argued (amongst other things) that the purported variations were void, on various grounds, including the proper application of reg 4(4) and/or having regard to the EU abuse of rights principle.

The EJ found that:

  1. The contractual variations were void because they were varied by reason of the transfer, “considering Regulation 4(4) in light of the abuse principle”.
  2. Mr Ferguson was unfairly dismissed.
  3. Mr Kevill was unfairly dismissed by virtue of Regulation 7(1) TUPE since the reason for his dismissal was the transfer. However, she reduced his award by 100% ‘for conduct’, and found on a Polkey basis that, in any event he would have been fairly dismissed within three weeks of the transfer.
  4. Messrs Lax and Pull had no claim against Astrea because they were not assigned to the relevant grouping of employees and so did not transfer under Regulation 4(1) TUPE.
  5. Astrea was to pay the Claimants each three weeks’ pay for breach of Regulation 13(4).

The Claimants appealed in respect of findings (1) and (3)-(5) above.  The core, and most interesting, issue in the appeal was ground (1): the validity or otherwise of the purported contractual variations.

The central issue: Regulation 4(4)

Construction of Regulation 4(4)

The issue of whether Regulation 4(4) served to invalidate the contractual variations was at the heart of the appeal and is likely to be the EAT’s finding of greatest interest.

It is undoubted that, given the wording of Regulation 4(4) (“any purported variation of the contract shall be void if the sole or principal reason for the variation is…the transfer itself…”) and the EJ’s finding that the reasons for the changes was the anticipated transfer, a literal interpretation of the provision would render the variations void.

The EAT – and the parties – agreed that the Regulations were to be interpreted applying the “broad purposive” approach applied in the sphere of EU law, and in line with the Acquired Rights Directive (2001/23/EC) from which TUPE is derived.   However, that rather begged the question – what was the purpose lying behind the ARD/TUPE, properly understood?

The Claimants’ case was that Regulation 4(4) was only intended to invalidate variations which were ‘adverse’ to the employee.  They relied on a line of European authority going back to Daddy’s Dance Hall [1988] IRLR 315, in which the CJEU held that where the Directive was applicable workers could not, even voluntarily, diminish their rights.  The Court had not, though, addressed the question of whether an agreed variation would be void where it was considered advantageous to the employee.  Neither did the Court of Appeal do so in Suisse First Boston (Europe) Ltd v Lister [1999] ICR 79.  Closer was the judgment of Mummery LJ in Power v Regent Security Services Ltd [2008] ICR 442, in which an employer (c.f. the present case) was prevented from seeking to avoid a variation raising the employee’s retirement age.

The EAT did not accept these submissions.  The variation in Power v Regent Security had been presented by the transferee after the relevant transfer; and the case was decided under the previous TUPE 1981, not Regulation 4(4) TUPE 2006.  In any event, the judgment in Power points to the difficulty in identifying what constitutes an ‘adverse’ or ‘beneficial’ term.  The proposed solution of letting the employee decide would not always be satisfactory and could leave open the possibility that contractual rights were dependent on a fluid, subjective view.  The Claimants were taken no further by guidance issued by the then-Department for Business, Enterprise and Regulatory Reform, on its views of the effects of the TUPE amendments in 2006 and 2014.  Instead, the EAT came to the conclusion that the words “any purported variation” did, in fact, mean ‘any’ such variation – whether adverse or beneficial to the employee.  It did so on a “broad purposive” approach to the legislation, on the basis that:

  • This was consistent with the main purpose of the Acquired Rights Directive, which was to safeguard employee rights, not to improve them (see Alemo-Herron v Parkwood Leisure Ltd [2013] ICR 1116; Scattolon v Ministero dell’Instruzione, dell’Universita e della Ricerca [2012] CMLR 17).
  • On a proper analysis it was not inconsistent with any European or English authority.
  • It avoids difficult questions, such as whether a particular variation is ‘adverse’ to the employee and reduces uncertainty as to an employee’s contractual terms at any given time.
  • Other mechanisms would prevent injustice to employees, while the possibility of injustice to the transferee employer is also maintained.
  • It is consistent with the other provisions of TUPE.
  • It is consistent with the literal words of the legislator.

EU abuse principle

If the Judge was wrong about the construction of Regulation 4(4), such that TUPE did not invalidate variations beneficial to employees, then on the present facts the EU ‘abuse’ principle would operate to prevent the Claimants from relying on the new contractual terms.

The abuse principle consists of both an objective element (the purpose of EU rules not being achieved) and a subjective one (the intention to obtain an advantage from EU rules by artificially creating the conditions laid down to obtain it): Skatteministeriet v T and Y [2019] 2 CMLR 31

The EAT again relied on its finding that the purpose of the Acquired Rights Directive was to safeguard and not improve employee rights.  Were the abuse principle not engaged, TUPE would have served to vastly improve the Claimants’ rights.  On that basis, the EAT concluded that the purpose of the Directive would not have been achieved, but rather some other objective – i.e. substantially improving the rights of the Claimants – thus meeting the objective limb of the test for the abuse principle.

The Judge added that there was “ample material” to support the conclusion that the subjective limb was also met, given that the EJ had found that there was no legitimate commercial purpose to the purported variations; that the Claimants were acting dishonestly in awarding themselves the enhanced terms, knowingly at Astrea’s expense; and that they had agreed that the terms would not apply in relation to any of them who did not ultimately transfer.

Accordingly, even if TUPE did not invalidate the purported variations; then the EU abuse principle would.

As an endnote, the EAT also “without hesitation” dismissed the Claimants’ argument that Regulation 15 entitled the Employment Tribunal to order compensation for a failure to inform or consult in respect of an employee who was neither a claimant in his or her own right, nor represented by a union or employee representative.

Simon Devonshire QC and Daniel Isenberg acted for Astrea before the EAT, instructed by David Speakman and Nicholas Marshall of Linklaters LLP (Simon Devonshire QC appeared with Edward Capewell before the Employment Tribunal).

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