Employment highlights - Changing terms and conditions post transfer - where are we now?

February 2012

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Introduction

The transfer of an undertaking, whether on the purchase of a business, part of a business or on an outsourcing, can cause debate amongst employers and lawyers alike. Two recent cases have considered the difficult question of the extent to which employers can change the terms and conditions of employment after the transfer of an undertaking. This edition of Employment Highlights will consider these cases and provide guidance to employers on how best to achieve the desired outcome.

Background

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) give effect to the EU Acquired Rights Directive. Their purpose is to protect employees and this includes restricting the imposition of new terms of employment by reason of a transfer. An employee will transfer to the new employer or new service provider with the terms and conditions of his employment intact and the ability of employees or employers to change those terms and conditions is extremely limited. In fact, case law has granted employees a level of protection that goes further than provided for by the Acquired Rights Directive. The cases of Foreningen af Arbejdsledere i Danmark v Daddy’s Dance Hall [1998] IRLR 315 and Wilson v St Helen’s Borough Council [1997] 2AC 52 have established that where employees are transferred on the transfer of an undertaking, their terms of employment cannot be varied lawfully for a reason connected to the transfer even if the employees consent to the variation and, it seems, regardless of how long after the transfer the variation is made. On the other hand, the cases do make it clear that variations by agreement between the parties are not prevented where the reason is unconnected to the transfer. However, in Martin v Southbank University [2004] IRLR 74, the European Court of Justice held that a variation that was merely intended to harmonise the terms of transferred employees with those of existing employees was by reason of the transfer and therefore void.

There is therefore significant constraint upon the ability of the transferee to standardise terms and conditions of employment. These principles have now been codified in regulation 4(4) of TUPE which states that any purported variation of the contract of employment is void if the sole or principal reason for the variation is either (1) the transfer or, (2) a reason connected with the transfer which is not an economic, technical or organisational (ETO) reason entailing changes in the workforce.

An employer can, of course, standardise terms and conditions of employment if the reason for the change is not the transfer. For example, this would arise if it is the result of a general job evaluation study for equal pay purposes. However, advice given to employers is that only a change clearly unconnected with the transfer will be safe from challenge.

The recent cases discussed in this edition of Highlights have shown that there is scope to make changes. Although they are not new law, they challenge the assumption that harmonising terms and conditions can never be done and provide examples of circumstances where genuinely non-TUPE related variations may occur.

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Smith and others v Trustees of Brooklands College

In this case, Smith and others v Trustees of Brooklands College (UK EAT/0128/11) the EAT had to consider the employment tribunal’s decision that the consensual variation of the contractual rates of pay of a number of employees following the transfer was void because it was by reason of a transfer or for a reason connected with the transfer.

The employees were teaching assistants at a college. Their pay was calculated on the basis that they were employed on a full time contract even though they worked part time. These rates of pay did not reflect the practice anywhere else in the education sector and were contrary to their own trade union’s guidance. The employees were subsequently transferred to a new college under TUPE. The HR director of the new college reviewed the rates of pay and believed that the generous pay arrangements were a mistake. Negotiations were entered into with the employees who eventually reluctantly agreed to a phased reduction in their pay. However, having agreed to the reduction, the employees then brought unlawful deduction claims on the basis that the consensual variation of their salary was void under regulation 4(4) as the reason for the change was the TUPE transfer to the new college.

The employment tribunal found that the employee’s rates of pay were not a mistake. It held that the real reason for the variation was the HR director’s belief that the claimants had been mistakenly paid this rate and that the pay rates were not in line with the rest of the education sector. The transfer was therefore not the reason for the change and the employees claim for unauthorised deductions failed.

The employees appealed and the EAT upheld the employment tribunal’s judgment. It held that the reason for a change is a question of fact for the employment judge to determine. It confirmed that the test is not whether the change would have been made “but for” the transfer. The question to be asked is what was the reason for the change? If the answer is not “the transfer” then regulation 4(4) does not apply.

On the facts of this case, it was possible to argue that the reason for the change was the mistaken belief of the HR director that the terms and conditions were a mistake. However, there is a fine line between this reason and a simple desire to bring terms into line with standard practice, which would effectively be harmonisation. As we have seen in the case of Martin referred to above, where the reason for a change was harmonisation, the change was considered to be void.

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Enterprise Managed Services Ltd v Dance & others

The case of Enterprise Managed Services Ltd v Dance & others (UK EAT/0200/11) considered the question of whether a wider reorganisation, which has nothing to do with a transfer, may mean that the harmonisation of terms and conditions was unconnected with the transfer.

The employees worked for a company providing property maintenance services. On a re-tendering their employer lost the contract and they transferred under TUPE to EMS which had already been providing similar services. Some months prior to the transfer, EMS had reviewed the terms of employment of its staff and proposed the introduction of performance related pay and different hours in order to achieve improvements in service delivery and efficiency. Following the transfer, EMS decided to implement the same changes for the transferred employees in order to meet the productivity requirements of the service. Some of the employees did not agree to the changes and were therefore dismissed.

The employment tribunal held, by a majority decision, that the principal reason for the change (and the dismissals) was harmonisation. They considered whether there was an ETO reason, but since this needed to “entail changes in the workforce” which  would generally require a change in the numbers, functions and levels of employees, there was no ETO reason and the dismissals were therefore automatically unfair.

The EAT allowed the employer’s appeal. It held that the question to be asked was what was the reason in the minds of the management for proposing the changes to the terms of the transferring employees. The employment judge (in the minority in the tribunal) had held that the principal reason for the change was the increase in productivity and efficiency rather than harmonisation and therefore the dismissals were not automatically unfair. In order for the correct question to be considered, the EAT remitted the case to a fresh employment tribunal.

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Steps for employers

Although these cases may provide some hope of flexibility when considering the validity of changes to employment terms after the transfer of an undertaking and give examples of circumstances in which it is possible to vary terms, the main point for employers to bear in mind is that the reason for the changes to terms and conditions should genuinely be unconnected to the transfer or, if they are connected, should be for an ETO reason. Employers should therefore note the following;-

  • Consider at the outset what the reason for the change is to be. If the change is to establish greater productivity, which can already be shown to have operated, then this should be paramount in the employer’s mind and clear in its discussions with employees.
  • Although the passage of time since the transfer will not be sufficient to break the connection with the transfer, the longer the gap between the date of the transfer and any reorganisation, the greater the chance that any cause or connection between the two will be broken. There is no specific period after which to it is safe to say that the connection has been broken. However, the longer that any change can be left, arguably, the better.
  • Consider the nature of any terms being amended. If, for example, only beneficial changes are being made then it is highly unlikely that employees would challenge these. However, if changes are also to their detriment, the employees may object solely to the detrimental changes and still continue to enforce the beneficial new terms. Employers should therefore consider whether to specify expressly that the benefits of the new contract will be subject to the ongoing acceptance of any detrimental changes.
  • If, the employer needs to impose key changes and is concerned that they will be considered to be linked to the transfer then it should consider whether to dismiss the employees and re-engage them on new terms and conditions, entering into a compromise agreement to compromise any automatic unfair dismissal claim arising from the dismissal.
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Future developments

The Government is aware that employers are concerned about their inability to amend terms and conditions following a transfer. Therefore in its call for evidence on the effectiveness of TUPE published last year, it had asked for responses as to whether the lack of provision for post transfer harmonisation is a significant burden to parties. Many commentators have suggested that any amendment to terms and conditions could be approved if negotiated with the trade unions or elected employee representatives (as is already permissible in circumstances where the business is insolvent under regulation 9 of TUPE). The responses to the call for evidence have now been submitted and we will wait to see whether this results in any amendments to TUPE.

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Conclusion

The key point to remember in harmonising terms and conditions post transfer is to consider whether the change would have taken place irrespective of the fact of the transfer. The purpose of TUPE should not be to prevent employers from doing anything that they would have done for good business reasons.

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