The variations enigma – TUPE and pre-transfer changes

In the case of Ferguson and others v Astrea Asset Management Ltd, four directors and shareholders of an estate management company fell foul of the TUPE – Transfer of Undertakings (Protection of Employment) – Regulations and were dismissed for gross misconduct.

The four claimants were directors and senior employees of Lancer Property Asset Management. The Asset Management company had a single client which was an estate in Mayfair and Knightsbridge worth around £5 billion. The client gave 12 months’ notice to terminate the management contract.

A different company, Astrea Asset Management, was due to take over the contract which amounted to a service provision change. In these situations, the TUPE provisions would apply so the directors and employees of Lancer (being the transferor) would transfer to Astrea (the transferee).

Shortly before the transfer, the four Lancer directors, who were to transfer to Astrea, updated their employment contracts to improve them substantially, including the right to an annual bonus of 50% of their salary, enhanced termination payments and a longer notice period.

The ET found that the pre-transfer variations to the contracts were void, and this was upheld on appeal.

As a result of their actions, Astrea dismissed the directors for gross misconduct following the transfer. The four brought proceedings in the Employment Tribunal (ET) for various claims relating to their dismissals, including that the termination payments should be based on their varied (and more favourable) contracts.

The ET found that the pre-transfer variations to the contracts were void, and this was upheld on appeal. These variations were void by virtue of Regulation 4(4) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE Regulations), which provide that a variation of a contract will be void if the sole or principal reason for the variation is the transfer. Regulation 4(4) applies to any contractual change, not just those that are averse to the employee.

Our opinion

The ET’s decision in this case constitutes a stripped-back approach to the regulation whereby the court, rather than dissecting the variations to establish whether they were of benefit to the employee, simply assessed whether the variation was made in contemplation of the transfer.

The decision also strikes a good balance between protecting both the transferring employees and the transferee company.

Our employment, corporate and commercial teams work closely together, which enables us to handle these types of transactions with the utmost care and efficiency.