The Employment Appeals Tribunal (“EAT”) in England recently handed down judgment dealing with the opportunistic improvement of employees' terms and conditions of employment shortly before a transfer of business in terms of the UK's Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”). The TUPE regulations are similar to the provisions of section 197 of the Labour Relations Act, 1995 (“LRA”).

Ferguson and others v Astrea Asset Management Ltd and others: background

Two of the claimants in this matter were employed by Lancer Property Asset Management Limited, a single-client estate management company managing a relatively valuable estate in London. They were employed as CEO and Head of Asset Management, respectively. The two other claimants were employed as Chairman and Finance Director through two associated service companies, namely Abbotstone and IMS.

In September 2016, the owners of the estate managed by Lancer served notice that management of the estate would be taken over by a new company, Astrea Asset Management Limited from September 2017. This constituted a transfer of undertaking under TUPE.

Around June 2017, the two claimants employed by Lancer signed new employment contracts with Lancer on far more advantageous terms, including guaranteed bonuses amounting to 50% of their salaries; new contractual termination payments amounting to a month's salary for every year served as a director of Lancer and an increase in the contractual notice period from 12 to 24 months. The improved terms and conditions would fall away if the transfer to Astrea did not take place. The other two claimants signed similar agreements with Abbotstone and IMS.

The new contracts were supplied to Astrea on 1 September 2017, a month before the transfer of the business. When Astrea became aware of the changes, it took the view that the employees were guilty of misconduct and dismissed two of the claimants immediately after the transfer of the business took place. Astrea also took the view that the other two claimants had not transferred to it by virtue of TUPE. The claimants subsequently brought claims against Astrea for unfair dismissal. For the purposes of this discussion the EAT's finding with regard to the two first mentioned employees is of interest.

EAT's finding

The EAT dismissed the unfair dismissal claims on two grounds, namely regulation 4(4) of TUPE and the “abuse principle” applied in the law of the European Union (“EU”).

Regulation 4(4) provides that “any purported variation of a contract of employment that is, or will be, transferred by paragraph (1), is void if the sole or principal reason for the variation is the transfer” [our emphasis added].

The EAT found that regulation 4(4) should be interpreted to cover all types of variation and not just those that are adverse to the employee. The agreements concluded between the claimants and Lancer were therefor void.

The court also went on to state that, even if its interpretation of regulation 4 was incorrect, the EU abuse principle was applicable. This provides that EU law cannot be relied on to achieve purposes that are fraudulent or an abuse of law. The EU courts have laid down a two-legged test to establish an abuse of law:

  1. whether, despite formal compliance with the EU Rules, the purpose of the Rules have objectively not been achieved; and
  2. whether there was a subjective intention to artificially create the conditions for operation of the Rules in order to obtain an advantage from them.

The EAT held that the improved terms of employment were an abuse of TUPE as the clear purpose of the Regulations is to “safeguard” employees' rights, which necessarily involves “the prevention of something negative or undesirable”. Additionally, it found that the abuse provision only applies “where the sole or principal reason for the variation is the transfer itself”. In other words, it does not apply if the reason for the change is otherwise categorised. The EAT held that there was no legitimate commercial purpose for the introduction of the new terms, and found that the employees had acted dishonestly in awarding themselves the enhanced terms knowing that they would be paid at the expense of Astrea.

The South African position

There is no equivalent statutory provision in South African law that declares void an opportunistic and bad faith variation to a contract of employment in advance of a statutory transfer of business, nor is there any general statutory provision that prohibits an abuse of law.

In South African law, the employment consequences of a transfer of business (or a part of a business) as a going concern are dealt with in section 197 of the Labour Relations Act,1995 (“LRA”). If there is such a transfer, the employment of the employees associated with that business (or part thereof) transfers from the “old employer” to the “new  employer” on terms and conditions of employment that are on the whole not less favourable to the employees.

However, section 197(2) read with section 197(6) make it clear that the consequences of a transfer can be changed by agreement. In practice, most such agreements envisage the relevant employees' terms and conditions of employment being made less favourable and often the new employer would be party to the agreement. But section 197 is potentially wide enough to encompass an agreement between an employee and the old employer only that improves terms and conditions of employment. These improved terms and conditions of employment could therefore potentially transfer to the new employer despite the new employer not being party to the agreement.

It is, of course possible for the new employer to protect itself from such a potential consequence by including an appropriate provision in any commercial agreement that is concluded. However, this would not necessarily assist a new employer in the case where a change of contractors providing services to a client takes place.

The question remains whether an agreement such as that concluded in the circumstances reflected in the Ferguson decision is actually a valid agreement? If not, the improved or enhanced terms and conditions of employment would not transfer to the old employer.

It is submitted that such an agreement, which is concluded to (in effect) defraud the new employer, is contrary to public policy.

In Barkhuizen v Napier the Constitutional Court considered the meaning of public policy. It explained that “public policy represents the legal convictions of the community; it represents those values that are held most dear by the society… Since the advent of our constitutional democracy, public policy is now deeply rooted in our Constitution and the values which underlie it.”

The Constitutional Court held further that fairness, justice, equity and reasonableness are inextricably linked to public policy. Essentially, public policy is concerned with simple justice between individuals, and is informed by the concept of Ubuntu.

It is submitted, in the light of the above, that this type of agreement would be invalid. Furthermore, in NEHAWU v University of Cape Town and Others, it was stated that employers also enjoy the right to fair labour practices found in section 23 of the Constitution. It could therefore be argued that employees amending their contracts of employment prior to transfer to include terms which are manifestly prejudicial to the new employer constitutes a breach of the new employer's right to fair labour practices, and such amendments would be regarded as being contrary to public policy unless they could be justified, for example, on the basis of the old employer's operational requirements.

It the agreement enhancing employee benefits is contrary to public policy, it will be void and of no effect and the enhanced benefits contained therein would not transfer to the new employer.

Finally, it is submitted that in the circumstances reflected in the Ferguson decision, the new employer would, after the transfer has taken place, be entitled to take disciplinary action against the employees. Their conduct was of direct relevance to, and would impact on, the new employment relationship despite the fact that it took place prior to employment commenced. This conduct, would clearly undermine the relationship of trust and confidence between employer and employee, especially if the employees concealed the fact that they had concluded such an agreement.

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