5. The effect on terms and conditions

Summary

The main purpose of the TUPE regulations is to protect employee terms and conditions when their employment transfers to a new employer. The effect of a transfer, set out in Regulation 4, is to treat the existing contract of employment as if it had been made with the new employer (the transferee).

Under Regulation 4(4) of TUPE, any variation of the contract will be void if the sole or principal reason for the variation is either:

• the transfer itself; or

• a reason connected with the transfer that is not an economic, technical or organisational (ETO) reason entailing changes to the workforce.

The new employer takes over the contracts of employment of all employees employed in the “organised grouping” of resources or employees immediately before the transfer, or who would have been employed if they had not been unfairly dismissed because of the transfer. The new employer cannot pick and choose which employees to take on.

Continuity of service is preserved and will run from the date employment began with the old employer. There are some exceptions to the rule that existing terms and conditions are maintained. Specifically, occupational pension schemes are excluded by Regulation 10 and do not transfer; changes can be agreed if the employer has an economic, technical or organisational reason for the change, entailing “changes in the workforce”; and special rules apply to insolvent businesses.

All the old employer’s rights, duties and liabilities to his employees transfer automatically to the new employer. These include, for example, liability for acts of discrimination or for personal injury. The law behaves as if these acts were done by the new employer. Advice should be taken to make sure any claim to the tribunal is brought against the correct employer. Criminal liability does not transfer.

The new employer takes over any collective agreements in force immediately before the transfer date between the old employer and any recognised union, covering the transferring employees. This is looked at in more detail below.

Background to Regulation 4

Regulation 4 prevents “harmonisation” or “standardisation” of terms and conditions on a transfer. In other words, it prevents changes being introduced solely in order to achieve consistency between the two workforces that combine following the transfer. The introduction of the “ETO reason”, giving employers scope to justify some limited contract variation post-transfer, was strongly resisted by unions, because it would dilute employee protection. Unions argued that employees on a business transfer would be in a particularly weak position to challenge employer moves to reduce pay and other terms and conditions.

The TUC, Unite, GMB and NUT also argued that the change was not compatible with the Directive. These arguments were rejected by the government of the day. Indeed in its response to the public consultation on the draft Regulations, the government went further, indicating that it saw “considerable merit in employment relations terms in permitting an employer and an employee to agree to vary terms and conditions to achieve greater harmonisation, as long as the employee is left no worse off overall” and that it would be lobbying other member states to amend the Directive to pursue this “eminently sensible policy”.

The government was attracted to the CBI’s argument that employers face extra costs in running separate payment systems for different groups of employees and that having different terms for employees doing the same or similar jobs could give rise to “grievances and workplace disharmony”.

In any event, at the time of writing, the Directive has not been amended and “harmonisation” of contracts on a transfer, in the absence of an ETO reason entailing “changes to the workforce”, remains unlawful.

The rest of this Chapter looks in more detail at some of the implications of the protection offered by Regulation 4.

What if the employer attempts to impose changes to terms and conditions because of the transfer?

An employer’s attempts to impose changes to the employees’ terms and conditions because of the transfer will be void (unenforceable). (Foreningen af Arbejdsledere i Danmark v Daddy’s Dance Hall A/S Case C-324/86 ([1988] IRLR 315). For example, a variation that attempts to change wages, overtime pay, holiday entitlement, notice periods or retirement dates, cannot be enforced by the employer if the only reason for making the change is to bring the two sets of employment terms in line with each other. However, reps should note that the law has been modified, in an important decision which is helpful to employees — Power v Regent Services Limited ([2007] UKEAT/499/06). This is looked at further below.

What if the employer pays for change – for example through a pay increase?

Changes to terms and conditions due to the transfer will be void regardless of whether the employer has “paid” for the changes by, for example, increasing pay.

What if employees have agreed to the changes?

Changes to contractual terms due to the transfer will be void even if the employees have agreed to them (but see the important qualification in the Power case discussed below). This is because European law does not allow employees to opt out of the rights given to them by the Directive.

This rule was confirmed in the case of Wilson and others v St Helens Borough Council ([1998] IRLR 706). Employees at a local authority home were made redundant and re-engaged on different terms after management of the home transferred. Although they had accepted the new terms, the House of Lords held that the variation to their contract was invalid because it had been made as a result of the transfer.

What if an employee benefits from the change and wants to enforce it?

An important case, Power v Regent Services Limited ([2007] UKEAT/499/06) has established that changes to contractual terms as a result of a transfer are void only where those changes are “to the employee’s detriment”. Whether or not a change is detrimental to the employee depends entirely on the employee’s personal opinion: The test is “simply a question whether the employee wishes to rely on it… He must be the best judge of his own interests”. This means the same change could be viewed as beneficial (and therefore enforceable) by some employees, but detrimental (and therefore void) by others.

In Power, the original contract of employment contained a contractual retirement age of 60. After a TUPE transfer, the new employer raised the contractual retirement age to 65 (a change which was void based on the rule in Wilson v St Helens). When the employee reached 60, the employer tried to forcibly retire him, arguing that the contractual retirement age was still 60, because his attempts to increase the retirement age to 65 were void. The tribunal disagreed, finding against the employer.

The 2009 government guidance on TUPE states: “The underlying purpose of the Regulations is to ensure that employees are not penalised when a transfer takes place. Changes to terms and conditions agreed by the parties which are entirely positive are not prevented by the Regulations”. This may not be an absolutely accurate reflection of the Power decision, because it does not reflect the fact that under Power, it is up to the employee to decide whether a change is entirely positive.

Power is a frankly nightmarish decision for employers, because it suggests that employees may, in theory at least, be able to pick through a basket of negotiated changes put together as a package, enforcing those they like and rejecting those they do not like. Employers are sometimes tempted to offer incentives or inducements to employees to change contract terms on a transfer, and Power creates the prospect of employees being able to insist on keeping the benefit of any inducement offered, while simultaneously treating as void any “detrimental” change to terms, even if it is has been agreed. The Power case makes employers even less likely to embark on an exercise of “harmonising” contracts after a TUPE transfer, as it could be very costly.

It is not open to the employer to argue that changes to contract terms should be read “as a whole”, and that the overall “value” of the package of terms is not changed by the variation.

How long are terms protected

There is no time limit on the right to maintain terms and conditions under TUPE. However, only changes due to the transfer are invalid. The more time that passes since the transfer, the more difficult it will be to show that the transfer is the reason for any contractual change. Over time, an employer can start to point to reasons unrelated to the transfer, for example, difficult economic conditions, to justify the change.

However, basic “harmonisation” of terms to bring them into line with those of other employees will always be unlawful, no matter how much time has passed.

What if the contract terms for the new employer’s existing staff are better than those of the transferring employees? Can transferring staff rely on TUPE to ask for the better benefits?

No. The effect of a TUPE transfer is to protect the transferred employee’s existing rights with the transferor. In Jackson v Computershare Investor Services plc ([2007] EWCA Civ 1065), an employee transferred into a company where existing employees had the benefit of an enhanced redundancy scheme. After being made redundant by the new employer, she was refused the enhanced redundancy package, because it had never been a part of her employment contract with her old employer.

Interpreting terms and conditions — what about, for example, mobility clauses or restrictive covenants

TUPE transfers the whole contract of employment — both rights and obligations — so that the new employer takes the place of the old employer. However, two interesting cases show how it is always important to look closely at the wording of the contract, especially where it imposes restrictions on the employee, for example through mobility clauses, or restrictions on dealing with customers after the employment has ended (often referred to as “restrictive covenants”).

The new employer will inherit the benefit of mobility clauses, restrictive covenants and other contractual limitations on employee activity, alongside the rest of the contract of employment. When interpreting these clauses, the tribunal will try to establish what the parties intended at the time of entering into the original contract. However, where TUPE transfers the original contract to another employer, the guiding principle is that the employee must not end up worse off than was the case before the transfer. Otherwise, the primary purpose of the Directive — protecting the rights of employees — would be defeated.

A basic “mobility clause” is an express term of a contract of employment under which the employee agrees to be willing to relocate his or her place of work (temporarily or permanently) at the request of the employer within the limits of the clause. A court will attempt to interpret a mobility clause by looking at its express wording. In any particular case, the literal meaning of the clause may well be limited by considerations of good faith and trust and confidence — for example, to give reasonable notice of a relocation request, or not to relocate an employee in circumstances that present serious practical difficulties to the employee (United Bank v Akhtar [2989] IRLR 507). Tapere v South London and Maudsley Hospital Trust (UKEAT/0410) looks at the effect of TUPE on mobility clauses.

In Tapere, Ms Tapere’s employment contract with her old employer, a PCT, contained a mobility clause which stated: “There may be occasions when you are required to perform your duties either temporarily or permanently at other locations within the Trust”. Because of a TUPE transfer, Ms Tapere’s place of work changed from Camberwell (inner London) to Beckenham (outer London). All other terms remained the same.

However, as a single parent with complicated school pick-up and drop off arrangements, the new location represented a significant hurdle for Ms Tapere, even though purely from a geographical perspective, the distance was not that great. She resigned and brought a tribunal claim. One of the issues the tribunal needed to decide was whether the new employer, a Hospital Trust, could rely on the mobility clause in Ms Tapere’s employment contract to force her to relocate.

The precise wording of the contract entitled Ms Tapere’s original employer, the PCT, to move her place of work to other locations “within the Trust”. Interpreting the words “within the Trust” to mean “within the geographical area of the new employer”, would have significantly increased the geographical area within which she could be asked to work.

The EAT concluded that this could not be the correct interpretation of the mobility clause, because it would result in TUPE altering the contract to Ms Tapere’s disadvantage — and leaving her less protected after the transfer than she was before. “Within the Trust” must therefore have meant “within the geographical area of her original employer, the PCT”. This interpretation of the mobility clause meant that forcing Ms Tapere to relocate to an area outside the geographical area of her original employer was a breach of contract.

A similar result was reached in Morris Angel & Sons Limited v Hollande ([1993] IRLR169), a case about the scope of a restrictive covenant following a TUPE transfer. The relevant clause prevented the employee dealing with “any person, firm or company who [during the previous 12 months] has done business with the group”.

The question for the tribunal to consider was: does “group” refer to customers of the old employer or the new employer? The Court of Appeal concluded that the covenant must be interpreted by asking what the parties intended at the time they entered into the contract. The parties must have intended “the group” to mean “the group at the time the contract was entered into” — i.e. that of the old employer.

This interpretation thwarted the new employer, who wanted to use the clause to stop the employee dealing with customers of the new group.

What changes are allowed

Changes unconnected to the transfer

Variations to the contract unconnected with the transfer are allowed, but they must be agreed, in the same way as they would in any non-transfer situation.

Changes for an economic, technical or organisational reason entailing changes to the workforce

Changes are allowed where the reason is connected with the transfer but is an economic, technical or organisational reason (an “ETO reason”) entailing changes to the workforce.

What does “changes to the workforce” mean?

It is not enough to establish that the change is for an “economic, technical or organisational reason. The employer must also show that the change involves “changes to the workforce”.

The leading case on the meaning of “entailing changes in the workforce” is Delabole Slate Ltd v Berriman ([1985] IRLR 305). This case established that simple rationalisation (or harmonisation) of terms and conditions is not an ETO reason, because although it is an “organisational” reason, it does not involve changes to the workforce.

Mr Berriman was a quarryman with a guaranteed weekly income. The new employer proposed a change to his pay, to bring it into line with the terms of an existing collective agreement. This meant a substantial pay cut. Mr Berriman refused to accept the change and resigned, claiming constructive unfair dismissal.

The Court of Appeal upheld his claim because, although the employer had established an organisational reason for the pay cut (namely a desire for standardisation), it did not entail changes in the workforce. The Court of Appeal held that there was no change to the workforce if the numbers or functions of the workforce do not change.

An ETO reason does not have to entail changes to the whole workforce. This was confirmed in the case of Nationwide Building Society v Benn ([2010] UKEAT0273). The case came about through the acquisition of the Portman Building Society by Nationwide. The claimants were managers at the Portman. For them, the transfer meant reduced job content, and the replacement of the bonus scheme with a significantly less favourable one.

On the evidence before the tribunal, the Nationwide carried a more limited product range than the Portman, and this was the main reason why it was much harder to earn a substantial bonus under the Nationwide scheme. The change in the contractual bonus scheme as a result of the more limited product range was an “organisational reason”. However, only the managers were affected. The EAT concluded that the more limited product range could still qualify as a reason “entailing changes to the workforce”, even though the managers only represented part of the workforce.

Collective agreements and pay bargaining arrangements

Do collective agreements transfer under TUPE?

Yes. Under Regulation 6, collective agreements between a recognised union and the old employer transfer to the new employer. They are treated in the same way as if they had been made with the new employer.

Any transferred employee who was covered by an agreement before the transfer will continue to be covered by it afterwards. This means, for example, that the new employer must follow the procedures contained in the agreement. It also means that any parts of the agreement that were legally enforceable before the transfer will remain legally enforceable after the transfer. For more information about the legal status of collective agreements see LRD’s booklet: Contracts of employment — resisting changes.

Will transferred employees get the benefit of contractual terms negotiated by their previous collective body, after the transfer date?

Unfortunately not, according to the law at the date of writing. In an important change to the law on this issue, in Parkwood Leisure Limited v Alemo-Herron ([2010] IRLR 298), the Court of Appeal decided that a transferee is not bound by terms negotiated by a union and the transferor after the transfer. Instead, the transferee is bound only by collectively negotiated terms in existence at the time of transfer. The decision represents a reversal of the previous position and is bad news for the many employees whose jobs are outsourced to the private sector.

In Parkwood, employees of the London Borough of Lewisham worked in the council’s Leisure Department on standard terms, which provided for terms and conditions to be determined under collective agreements negotiated by the National Joint Council (NJC) for Local Government Services (a body including representatives from the trade unions and the local authority employers). Following a TUPE transfer into the private sector, at first the employees continued to receive pay increases in line with NJC pay settlements. However, after a second TUPE transfer, this time to Parkwood, the new employer refused to follow NJC pay settlements. Parkwood did not recognise the employees’ union, UNISON, and argued that it was not required to pay in accordance with NJC pay settlements because it was not a direct party to the NJC and was not involved in the negotiations.

The Court of Appeal said that if they had not been bound by an earlier ECJ decision, Werhof v Freeway Traffic Systems Gmbh (IRLR 400 ECJ) that supported the employers’ case, they would have decided this case in favour of the employees. This is because TUPE is supposed to ensure that terms and conditions of employment are preserved post-transfer, and it is supposed to prevent transfers eroding those terms. As a matter of contract law, there is no reason why a new employer should not be bound by a term requiring him to fix wages in accordance with a pay agreement reached by a third party. The fact that the new employer is not a party to those negotiations is, as the Court of Appeal noted, “neither here nor there”.

Ironically, this result gives weaker protection to collectively agreed terms than to individually agreed terms, even though both are, as a matter of law, equally valid. It also undermines the Directive’s basic purpose of safeguarding the rights of employees.

Recognition agreements

Under Regulation 6 of TUPE, trade union recognition transfers on a TUPE transfer, but only if the group of transferring employees retains a separate “identity” in the hands of the new employer. If the undertaking does not maintain a separate identity, then the recognition agreement lapses and the union must negotiate a new one. It is therefore important that reps use the consultation period to get agreement on recognition following the transfer.

Most union recognition agreements are not legally binding, so all this means, in practice, is that the new employer is bound “in honour” to respect existing recognition agreements, in the same way as the old employer was. In any event, it is useful to get an agreement from the new employer that recognition will continue.

Where both transferor and transferee recognise the same union for the group of transferring employees, that union will continue to be recognised post-transfer. However, since there will be two recognition agreements, these should be reviewed and it would normally be sensible to negotiate a single agreement.

Where the old employer recognised a union but the new employer does not, the transferee should be encouraged to recognise the union and to invite employees to join.

Pensions

Any provisions relating to old age, invalidity or survivors’ benefits under an occupational pension scheme are specifically excluded from TUPE by Regulation 10 and do not transfer.

More limited protection of pension rights is provided instead by the Pensions Act 2004 and the Transfer of Employment (Pension Protection) Regulations 2005 which came into force on 6 April 2005. Under these regulations, if the old employer provided a pension scheme, the new employer must provide some form of pension for those who were eligible to join. It does not have to be equivalent, but must be of a minimum standard specified in the Act.

Employees in the public sector who transfer are covered by the Cabinet Office statement of practice on staff transfers in the public sector and A fair deal for staff pensions available at http://www.civilservice.gov.uk/Assets/stafftransfers2_tcm6-2428.pdf. The government’s policy is that public sector employees who transfer to the private sector should continue to have a “broadly comparable” pension. The Government Actuary’s Department (GAD), which is responsible for assessing whether an alternative scheme is broadly comparable, has set out its approach in its Statement of practice, assessment of broad comparability of pension rights.

However, note that although the protection of pension rights for staff who transfer from the public sector remains in place at the time of writing, these arrangements are currently under threat. In particular “A Fair Deal for Staff Pensions” is currently under review by the Public Service Pension Commission chaired by Lord Hutton.

Early retirement provisions

Early retirement provisions do transfer under TUPE according to a ruling by the ECJ in the case of Beckmann v Dynamco Whicheloe Macfarlane (C-164/00). The case concerned rights for over-50s. The NHS scheme provided that employees aged over 50 who were made redundant would receive an early retirement pension. The ECJ held that early retirement benefits are not old-age, invalidity or survivors’ benefits and are not covered by the pensions exclusion, which it said must be narrowly interpreted.

This principle was applied again by the ECJ in the case of Martin and others v South Bank University (Case C-4/01 ([2004] IRLR 74):

Staff at Redwood College of Health Studies were entitled to enhanced benefits and compensation on redundancy under their NHS scheme. When they transferred to South Bank University, they were required to move their pension, but the new scheme did not provide the same benefits when they were subsequently made redundant.

The ECJ held that the employees were entitled to the same early retirement benefits as they would have been under the NHS scheme. It said that only benefits paid when an employee reaches the end of his or her working life can be classified as old-age benefits.

Checklist for representatives

• Seek agreement to automatically improve terms and conditions in line with those offered by the old employer (this will be more difficult following the Parkwood case).

• Make sure early retirement pensions are protected on transfer and remain part of any redundancy pay packages.

• Negotiate for new employees to benefit from the same terms as transferred staff (difficult in the current economic climate).

• Seek agreement that existing terms and benefits will not be lost through promotion.