The perils of harmonising terms and condition of employment following a TUPE transfer

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Enterprises that undertake serial M&A or outsourcing activity can find themselves with a diverse workforce with differences in pay and other terms and conditions of employment applying to different categories of employees across the business. This can lead to inefficiencies such as the cost of administering different benefit plans as well as dissatisfaction amongst groups of employees who consider themselves to be, rightly or wrongly, worse off than their colleagues. For this reason, we are often asked to help with developing and implementing plans designed to harmonise terms and conditions of employment across a client’s business.

Each harmonisation plan must be carefully considered. In the UK an employer’s ability to make changes to an employee’s terms and conditions of employment has always been challenging, particularly where an employee transfers pursuant to the Transfer of Undertakings (Protection of Employment) Regulations (“TUPE Regulations”). (Similar laws apply across the European Community although there can be marked differences.) This can be frustrating for an employer trying to integrate the new transferred employees into its existing workforce – because managing employees on different terms can often lead to issues in the workplace – and employers also need to provide a pay and benefits system which is not unlawfully discriminatory.

The UK government purported to provide a solution to this problem when it revised the TUPE Regulations in 2006. The 2006 regulations allow changes to be made to an employee’s contract (albeit with the employee’s consent) if they are unconnected to the transfer. Alternatively, if the changes are connected to the transfer they are still permitted if they are for an economical, technical or organisational (“ETO”) reason entailing a change in the workforce. However, the reality is that the employer’s ability to make changes to terms and conditions of employment for the purpose of harmonisation is very limited. The desire to achieve harmonisation is usually connected to the transfer itself and the ETO defence will not apply unless the employer can point to a workforce reduction or change in the employee’s function.

The recent decision of the Employment Appeal Tribunal (EAT) in Enterprise Managed Services Ltd v Dance & others UKEAT/0200/11 provides some hope to employers that, in certain circumstances, contract changes which lead to harmonisation of employment terms and conditions can be made if the sole or principal reason for making the change is unconnected to the transfer. In this case, the employer required changes to the transferring employees’ terms and conditions relating to their hours and performance related pay to meet a pre-transfer productivity requirement under the service contract. The employer dismissed those employees who did not agree to the changes.

At the Employment Tribunal, the employer argued that there were sound business reasons for making the changes and that the changes were not connected to the transfer. On appeal, the Employment Appeal Tribunal (EAT) found that the majority Tribunal decision was flawed because it was inconsistent. The majority Tribunal had found that that employees were automatically unfairly dismissed because the employer wanted to harmonise the employment terms and conditions (which as a consequence would improve productivity) even though it also found that the requirement to improve productivity was a pre-transfer requirement under the service contract. Instead, the EAT agreed with the minority tribunal decision that the changes to the employees’ terms were to improve productivity and were not driven by the desire to harmonise terms and conditions of employment, even though this was the consequence. Essentially this was a reversal of the sequence of events put forward by the majority Tribunal judges. However, the EAT did not substitute the Tribunal decision with its own finding but instead remitted the case to a fresh employment tribunal to decide, leaving it open for another tribunal to come to a different decision.

While there will also come a time when it will be safe to make agreed changes to employees’ contracts on the basis that with the passage of time the link to the transfer is broken, there is no ‘rule of thumb’ or defined period of time used by the courts or specified in the TUPE Regulations after which it is safe to make this assumption. In the case of London Metropolitan University v Sackur 2009 the court held that a two-year interval was not sufficient to break the link between the contract change and the transfer, and the desire to harmonise terms and conditions could be traced back to the original transfer.

Until the courts or government are prepared to provide clearer guidance on when it is safe for employers to harmonise terms and conditions of employment following a TUPE transfer, employers embarking on this exercise should proceed with caution. While beneficial changes or giving employees some form of consideration may keep them happy and minimise the risk of claims but, if challenged, any change made solely or principally because of the transfer or a reason connected with the transfer that is not for an ETO reason entailing a change in the workforce will be void, even if the employee had consented to the changes. If such changes result in dismissal, the employees would be automatically entitled to claim unfair dismissal.