Introduction

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) typically applies to business asset sales, as opposed to share sales. The purpose of TUPE is to protect employees when the business they work for changes ownership. TUPE contains various provisions which preserve the contractual terms of transferring employees and protects them against any changes being made by the employer to whom they have transferred. Restrictive covenants, salary, holiday, bonus entitlement, for example, are all preserved on transfer. This article focuses on restrictive covenants following a TUPE transfer.

Impact of TUPE transfer

On a TUPE transfer, the benefit of restrictive covenants will pass to the transferee (buyer). Although, on the face of it, the transferee may be content that the employees it has inherited will remain subject to restrictive covenants, the transferee must consider whether these covenants are enforceable. Crucially, restrictive covenants will be interpreted:

• in relation to the transferor (original company, seller) and its customers and employees;
  
  
• at the time the contract was entered into.

Often, this means that the covenants do not cover the transferee (buyer)’s customers and employees, rendering the restrictive covenants worthless. By way of illustration, if the company is defined in the restrictive covenants, which it almost always is, because the purpose is to protect the company’s contacts, clients, employees, etc. then when identifying the restrictions imposed by the covenants post-transfer, these will be construed in relation to the transferor’s business.

Do the covenants do their job?

If the restrictive covenants of the transferring employees are adequate for the transferee, the transferee simply needs to apply the standard principles to determine whether they are enforceable:

     i. does the business have a legitimate business interest to protect; and

     ii. is the protection reasonable and no more than necessary to protect the legitimate interest.

Frequently however, on a TUPE transfer, the restrictive covenants of the transferring employees are of little value to the transferee, for the reasons explained above. The knee-jerk reaction for transferees is to put the transferring employees onto new contracts or onto the same contracts as the rest of their staff (otherwise known as harmonisation). This is prohibited by TUPE. In Northern Ireland, any changes to an employee’s terms “due to reasons connected with the transfer” will be void unless there is an economic, technical or organisational reason entailing changes in the workforce, for example a redundancy situation.

There is no clear-cut rule as to the duration of time that must elapse before a transferee can alter a TUPE transfer employee’s terms (including their covenants) and safely argue that the reason was unconnected with the TUPE transfer, and therefore permitted. Each scenario should be treated on a case-by-case basis in light of all the circumstances and will vary from case to case. Transferees may think that if they are to able to, via the transferor, have the transferring employees’ contracts amended before the TUPE transfer that this will be a workaround. However, they would be mistaken, and any purported changes would remain void as they would still be connected to the transfer.

Conclusion

The benefit of a transferring employee’s restrictive covenants will assign to a transferee on a TUPE transfer. However, any real benefit may be limited since the covenants will be construed in relation to the transferor’s business.  In many business transfers, change within the transferee’s company, whether strategic or structural, will be inevitable. The more a company changes post-transfer, the less relevant and therefore enforceable the restrictive covenants will be, if they are at all.