Legal Q&A: Contractual terms under TUPE

Guy Guinan of Halliwells offers guidance on harmonising terms and conditions applied to staff involved in TUPE transfers, and how this will be affected by the new TUPE Regulations, effective from 6 April.

Q I have heard that it is common for employees to 'cherry pick' favourable contractual terms from their old and new contracts following a TUPE transfer. What does this mean?

A The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) protects employees who work for a business or other undertaking when it is transferred. This is done by making dismissals in connection with a transfer automatically unfair, by transferring contracts of employment to the purchaser, and by protecting terms and conditions after the transfer.

The problem for many purchasers is that while they are happy to keep the transferred employees, they usually want to harmonise employment terms to avoid having lots of employees on different terms and conditions.

The purchaser may decide to harmonise terms regardless of any statutory protection that applies, as the commercial risk may seem small compared with the administrative difficulties of coping with such differences in the workplace.

The consequences of adopting such a course of action may, however, be serious. The European Court of Justice has determined that an employee is entitled to claim the continuing benefit of their original terms on the basis that any transfer-related changes are simply ineffective. At the same time, the employee may seek to 'accept' (by virtue of custom and practice) those terms that are more beneficial to them under the new contract.

In this way, employees are said to be able to 'cherry pick' what terms apply.

Q Can the purchaser of a business do anything to stop employees from cherry picking terms?

A The protection given by the TUPE regulations prevents any change in terms and conditions because of a reason connected to the transfer. If the purchaser is able to wait long enough, it may be possible to persuade a tribunal that the reason for any change was not transfer-related but for some other reason. However, there have been cases where changes have been found to be transfer-related even where variations have been made as long as two years after the transfer.

A practical solution is to stipulate that the benefit of any new terms is expressly conditional upon rights under the old contract being surrendered. Should the employee later change their mind, the original terms will again apply but they will have to repay the value of the new benefits.

This is in contrast to the situation where there is no provision stating the benefits are conditional, in which case the employee will be able to reject some new terms and keep others.

Q What if the employee rejects the new terms?

A If the new terms are rejected, then the only means of introducing them, without being in breach of contract, is by dismissing the employee on notice followed by re-engagement on the new terms. The dismissal would still be automatically unfair as it is related to the transfer, but the purchaser could seek to enter a compromise agreement and settle any of the employee's claims. Often the consideration under the settle-ment agreement can be the new contract being issued. The validity of a compromise agreement in these circumstances has been confirmed by the appeal courts, although the purchaser must recognise that an employee may refuse to settle and may bring a claim for unfair dismissal.

Q Will the new TUPE regulations enable a purchaser to change terms and conditions following a transfer?

A On 6 April 2006, updated TUPE regulations come into force, which contain entirely new provisions in relation to contractual changes. In particular, they provide for three different variations. Variations for which the sole or principle reason is:

• the transfer or a reason connected with it, (other than an 'Economic Technical or Organisational' (ETO) reason. These variations are unenforceable
• not the transfer, but is a reason connected with it which is an ETO reason. These variations are potentially enforceable
• unconnected with the transfer where TUPE has no impact.

The new second option now appears to provide a mechanism under TUPE for contracts to be varied. However, the use of the term ETO is not new. The current TUPE regulations provide that a dismissal will be automatically unfair unless it is for an ETO reason. This term has been held to encompass market changes, differing equipment or production processes or organisational restructures. There is, however, a second qualification that makes it difficult to rely on the exception: that the reason given must also entail "changes in the workforce". This second phrase has been interpreted very narrowly in the past to apply mainly to functional changes that have involved a completely different type of work.