Introduction

This month we report on a case where senior employees of a transferor deliberately enhanced the benefits and conditions with a view to passing them on to a transferee. How often has that happened to you, or a client transferee? Well, a recent UK EAT decision suggests the transferring employer/employee might not be able to get away with it.

The Ferguson case

Ferguson v Astrea Asset Management Ltd UKEAT/0139/19 is massively important. The EAT has held that when directors/employees improved their contractual benefits in view of a pending transfer, these variations were either void or fell foul of the EU abuse of law principle.

Reg 4(4) of TUPE, properly interpreted in a “broad purposive” way consistently with EU law, rendered void all contractual variations made because of a transfer and not just those adverse to the employee as contended by the Claimants.

Alternatively the transferee, Astrea, could rely on the EU abuse of law principle to prevent Claimants relying on the new contractual terms since (i) the purpose of the EU rules (safeguarding employee rights) had not been achieved, but rather some other purpose (i.e. substantially improving the rights of the Claimants) and (ii) their intention was to obtain an improper advantage by artificially obtaining variations to their contracts of employment in contemplation of the transfer.

Let us look first at HHJ Shanks’ opinion of the TUPE point in this case:

“The clear purpose of the Directive, based on the wording of the title and the recital quoted, is that of "safeguarding employee's rights in the event of transfers of undertakings …"; I observe immediately that, generally speaking, "safeguarding" involves the prevention of something negative or undesirable, as distinct from improving something or making it better. It is also noteworthy that if Art 3.1 were itself interpreted literally it would mean that contractual changes made between the transferor and the employee before the transfer, even if clearly adverse to the employee and made because of the anticipated transfer, would apply as between the transferee and the employee after the transfer. But no-one has suggested that such an outcome is required by the Directive and it seems plain that a purposive interpretation would allow for and indeed require that adverse changes made by the transferor employer because of the transfer should be considered void…

“I have come to the view, applying the European "broad purposive" approach to its interpretation, that the words "any purported variation" in regulation 4(4) should be interpreted to cover all types of variation and not just those which are adverse to the employee, as suggested by the Claimants. In summary my reasons are as follows:

(1) This interpretation is consistent with the main purpose of the underlying Directive, as derived from the Directive itself and the EU case-law, which is to safeguard employee's rights, not to improve them;

(2) It is not contrary to any European or English authority when properly analysed;

(3) It avoids difficult questions which otherwise potentially arise as to whether a (purported) variation is or is not "adverse" to the employee and reduces the possibility of confusion as to what the terms of an employee's contract are from time to time and the matter being subject to the whim of the employee;

(4) In so far as it might otherwise cause a deserving employee any kind of injustice there are other answers which are likely to cover the situation; and it would tend to reduce the possibility of injustice to a transferee employer in circumstances like those that have arisen in this case;

(5) It appears to be consistent with other provisions within TUPE;

(6) Finally, it is entirely consistent with the literal words used by the legislator”

If that were wrong, HHJ Shanks held that the benefits conferred by the transferring executives breached the EU abuse of law principle. This was his analysis:

“Astrea say that, even if they were otherwise valid, the Claimants were precluded from relying on the new contractual terms because of the EU "abuse of law" principle, which says that EU law cannot be relied on for abusive or fraudulent ends. It was not disputed that this principle was capable of applying to a claim in the employment tribunal based on TUPE and that, if it applied, it would in effect render the new contractual terms void as against Astrea; but the Claimants say that on the facts the principle had no application in this case.

“I was referred to numerous authorities from the European and English courts where the principle has been described, ending with Skatteministeriet v T and Y [2019] 2 CMLR 31, a decision of the Grand Chamber, where the European Court was specifically asked what the constituent elements of an "abuse of rights" are and how they can be established. The Court stated:

"[97] As is clear from the Court's case law, proof of an abusive practice requires first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved and, secondly, a subjective element consisting in the intention to obtain an advantage from the [EU] rules by artificially creating the conditions laid down for obtaining it …

[98] Examination of a set of facts is therefore needed to establish whether the constituent elements of an abusive practice are present, and in particular whether economic operators have carried out purely formal or artificial transactions devoid of any economic and commercial justification, with the essential aim or benefiting from an improper advantage ..."

“The Claimants say … that on the facts of the case neither the first nor second requirement was satisfied: in relation to the first, the variation of the contractual terms furthered the purpose of the EU rules, which was to safeguard employees' rights in the event of a transfer, rather than not achieving that purpose; and on the second, the tribunal was not concerned here with an artificial transaction at all: these were (ex hypothesi) valid contracts of employment. Further it was said that the advantage, that is the enhancement of contractual rights, was obtained without any reliance on TUPE.

“As to the first requirement, as discussed above in relation the proper interpretation of regulation 4(4), the purpose of the Acquired Rights Directive is to safeguard the rights of employees in the event of a transfer, not to improve them. Absent the application of the abuse of law principle, the effect of the transactions we are concerned with would have been to vastly improve the rights of the Claimants when the transfer took place rather than to safeguard their rights as employees; it seems to me that in those circumstances it can properly be said that the purpose of the EU rules (safeguarding employee rights) has not been achieved, but rather some other purpose (ie substantially improving the rights of the Claimants).

“As to the second requirement, namely the intention to obtain an improper advantage by carrying out a purely formal or artificial transaction, there was ample material to support the conclusion that this was the Claimants' intention. The fact that the new contracts of employment were valid on the face of it does not assist the Claimants: the very reason that the abuse principle is relevant at all is that there has been formal observance of the rules, such that on the face of it the Claimants would be entitled to what they claim by virtue of TUPE. It was clearly open to the EJ to find that there was no legitimate commercial purpose in Lancer agreeing the new terms and that the Claimants were acting dishonestly in awarding themselves the enhanced contractual terms knowing that it would be paid at the expense of Astrea; those facts, combined with the agreement between the Claimants that the new terms would not apply in relation to any of them who did not transfer to Astrea (see reference to Mr Kevill's email dated 30 August 2017 at para 7 above) lead inevitably in my view to a finding that the Claimants had the requisite intention…

“It therefore seems to me that the requirements of the EU abuse of law principle were satisfied and that, although not ideally expressed [by the ET] the EJ's implicit conclusion that the Claimants' case in relation to the new contractual terms involved an abuse of EU law was one she was fully entitled to reach on the evidence. The Claimants were therefore precluded from relying on the new contractual terms as against Astrea following the TUPE transfer on this ground as an alternative to the regulation 4(4) ground.”

The rationale of the Daddy's Dance Hall case (Foreningen af Arbejdsledere i Danmark v Daddy's Dance Hall A/S. [2007] 4 All ER 354, [2007] ICR 970, [2007] IRLR 226 (codified in reg 4(4) of TUPE 2006) is to protect employees from a detriment suffered as a result of the transfer and to protect them from having to waive any of their rights. Employers and employees often ask whether this is a rule that also prevents employees agreeing to changes in their favour (e.g. pay rises or the like) following a transfer.

To prevent employees relying upon such favourable variations post transfer would be absurd. In Power v Regent Security Services Ltd UKEAT/0499/06: (EAT):  [2007] EWCA Civ 1188 (CA); the then President of the EAT, Elias J, settled the point at least as far as TUPE 1981 was concerned. This was a case which predated the Employment Equality (Age) Regulations 2006, when, under the now repealed s 109 of the Employment Rights Act 1996, an employee would be barred from claiming unfair dismissal once he had reached ‘the normal retirement age’ in the employer’s undertaking. In this case, the employee was employed to manage a particular estate under a contract which stipulated that his contractual retirement age was 60. The part of the business in which he was employed was transferred. The employee agreed with the transferee a change in his contract which provided that, thereafter, the contractual retirement age would be 65. In the end, the transferee sought to compel him to retire on his 60th birthday. He brought a claim for unfair dismissal, but the transferee contended that 60 was his normal retirement age and, since he had reached that age, he was precluded from pursuing the claim by virtue of the now (now repealed) s 109 of the ERA 1996. The employee contended that his normal retirement age was 65, both because of the contractual variation and also because he had been given various additional assurances that he would not be retired until the property for which he was responsible was redeveloped. The transferee argued that the contractual variation, which would have been powerful evidence (albeit not conclusive) that the normal retirement age was 65, was invalid because it was a change made by reason of the transfer. Because the employee was the only employee transferring, and therefore in a unique position, the normal retirement age, the employer argued, was the contractual retirement age. It remained at 60 because the contractual variation to 65 was invalid by virtue of the Daddy's Dance Hall rule. The employment tribunal accepted the employer’s submission. The EAT agreed that if the variation were void the employment tribunal was right, in this particular case, to find that the normal retirement age was the previous contractual retirement age. However, the EAT held that the contractual retirement age had been validly varied to 65 and was enforceable by the employee. The variation was perceived by the employee as being for his benefit and therefore Daddy’s Dance Hall did not prevent reliance on the varied term, since the rule only applied to prevent variations by reason of the transfer which were to the detriment of the employee. Elias J stated the position in thorough and thoughtful terms as follows:

The EAT’s decision was upheld by the Court of Appeal (Lord Justice Mummery, Mr Justice David Richards and Sir Paul Kennedy; [2007] EWCA Civ 1188).

Mummery LJ commented (at para 29) as follows:

“The safeguarding of an employee’s acquired rights on the transfer of an undertaking means that a transferred employee, who wishes to take the benefit of the original retiring age of 60 agreed with the transferor, is entitled to do so as against the transferee. If the retiring age is then varied by agreement with the transferee, the employee must be treated as obtaining an additional right not as waiving an acquired right. His acquired right to retire at the original retiring age of 60 is transferred by TUPE. The acquired right cannot be removed by his agreement on the transfer of the undertaking or by reason of it. There is, however, nothing in the EC or domestic legislation to prevent the employee from obtaining an additional right. Neither the public policy reflected in the Directive and TUPE nor the reasoning in the authorities cited by Regent prevent an employee from reaching an agreement with the transferee employer under which he obtains an additional right by reason of the transfer. The transferred employee can then choose between enforcing the transferred acquired right or the newly obtained right.”

The rule against variation of contracts by reason of the transfer is, as discussed, contained in reg 4(4) of TUPE 2006, which, subject to reg 4(5) (permitted variations), now makes void ‘any’ purported variation of the contract in such circumstances. In our view reg 4(4) is amenable to the interpretation by Elias J of the Daddy’s Dance Hall rule that, on ground of public policy, a new  employer should not be able to take advantage of the rule in Daddy’s Dance Hall (reg 4(4)) to welch on promises made to a newly transferring employee. This at least seems to be the position adopted by the revised version of the BIS Guidance on TUPE 2006, which states, at p 21, that changes are permitted:

“when changes are entirely positive from the employee’s perspective. The underlying purpose of the Regulations is to ensure that employees are not penalised when a transfer takes place. Changes to terms and conditions which are entirely positive are not prevented by the Regulations.”

So, a new employer may be able to challenge opportunistic changes put in place before the transfer, but not those freely granted by a transferee after the transfer.

Ferguson means that the controllers of the transferor cannot foist contrived beneficial changes purportedly made before the transfer on to a transferee.

https://assets.publishing.service.gov.uk/media/5ebe91fde90e071e2e067fd9/Duncan_Ferguson_and_Others_v_Astrea_Asset_Management_Ltd__UKEAT_0139_19_JOJ.pdf