transfer of undertakings and variations of employment contracts

by Roderick Ramage, solicitor,

first published in New Law Journal ( on 14 June 1996

update on contracting out added 6 August 2008


This article is not advice to any person and may not be taken as a definitive statement of the law in general or in any particular case. The author does not accept any responsibility for anything that any person does or does not do as a result of reading it.

This article has been altered to reflect the consolidation the Employment Protection (Consolidation) Act 1978 and other employment legislation in the Employment Rights Act 1993. .

Employment lawyers are no longer surprised to find cats amongst the pigeons but the St Helens decision (Wilson and others, Sanders and Wallace v St Helens Borough Council [1996] IRLR 320 EAT) may cause a little more than the usual momentary panic amongst all involved in the sale of businesses. The legal principles may be clear, obvious and inescapable but the decision itself seems to be seriously flawed. However, as it is an effective decision of the EAT, practitioners must worry with good reason whilst they and their present and prospective clients fervently hope for a correction.


The facts

Lancashire County Council controlled a community home, which the EAT referred to as the School, but decided to withdraw its support because it cost too much. St Helens Borough Council agreed to assume control on condition that running the school would not be a charge on its resources. Out of 169 employees at the school somewhat less than half were offered employment in the new structure after the transfer. One element of the new terms of employment resulted in lower levels of pay. There were no express agreements to vary the employment terms, but the employees worked under them in some cases for about six months before indicating that they did not accept the new terms whilst others did not object until over 18 months after the change.


Key legal issues

There had been a transfer of an undertaking for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE). The parties had wrongly assumed in their negotiations for the transactions that TUPE did not apply. Regulation 5(1) of TUPE says that: "The contract of employment of any person employed by the transferor in the undertaking ... shall have effect after the transfer as if originally made between the person so employed and the transferee". Therefore the employees' contracts with Lancashire CC applied to St Helens BC.

In the Daddy's Dance Hall case(Foreningen AF Arbejdsledere I Danmark v Daddy's Dance Hall A/S (1988) ECR 739, [1988] IRLR 315 ) the court said: "An employee cannot waive the rights conferred upon him by the mandatory provisions of the Acquired Directive 77/187/EEC even if the disadvantages resulting from his waiver are offset from such benefits that, taking the matter as a whole, he is not placed in a worse position. Nevertheless, the Directive does not preclude an agreement with the new employer to alter the employment relationship, in so far as an alteration is permitted by the applicable national law in cases other than the transfer of undertakings."

Regulation 12 of TUPE states: "Any provision of any agreement ... shall be void in so far as it purports to exclude or limit the operation of reg(s) 5)".

The "economic, technical or organisational reason involving changes in the workforce" in reg 8(2) of TUPE applies only in the case of dismissals because of the relevant transfer and has no application to changes of employment terms because of the transfer.

It follows as a matter of law that if there is a change in employment terms caused by a transfer of an undertaking that change, even if agreed to by all parties, is ineffective as a void attempt to contract out of the regulations. Therefore, if as a result of the change employee's pay is reduced, the employee will have a claim under the Employment Rights Act 1996 for an unlawful deduction from wages.



The EAT decision in the St Helens case is in effect the conclusion reached in the preceding paragraph of this article. The EAT's conclusions are summarised towards the end of its decision as follows:

"In brief, there was no break in the causal link in the variation between the terms and conditions and the transfer of the undertakings. The cause of the variation was the transfer itself. For that reason the variation was ineffective. The terms of the original contracts of employment with the County Council remained in force."

The individual cases have not been decided and have been remitted to the industrial tribunal to determine the entitlement of individual applicants.


The flaw in the argument

The key to this matter is in the words "There was no break in the causal link in the variation ... and the transfer ....". This is repeated in several places and in several different ways for instance:

"... The crucial point in the case is the identity of the reason for the alteration or variation in the terms of the contracts of employment ...".

"It is clear from the findings of fact by the tribunal that the reason for the alteration in the terms and conditions of employment was the transfer."

"If the operative reason for the variation is the transfer of the undertaking, then the variation will be ineffective. In this case there was no evidence before the tribunal that the reason for the variation, which took place at the time of the transfer, was anything other than the transfer itself."

The flaw to this argument lies in the so called causal link. The EAT stated that there was no evidence before the tribunal that the reason for the variation was anything other than the transfer itself. Equally, the EAT decision does not record that there was any evidence that the reason for the variation was the transfer. Indeed, according to the transcript, the EAT decision records:

"The tribunal correctly applied the law stated in Daddy's Dance Hall and came to a conclusion of fact (namely, that the reason for the variations was not the transfer) which was open to them on the evidence and which cannot be disturbed on an appeal to this tribunal."

Whether that is correctly reported or not, it is too superficial to look merely at the transfer and the change of terms and say that, because they coincide one is the reason for the other. It is as nonsensical as saying that, if I hold my index and middle fingers of one hand above a parapet and then move my hand to one side, the movement of my index finger is the reason for the movement of my middle finger: the cause is the movement of my hand not that of my index finger.

In the present case the cause of the transfer (as the EAT said) "was that the school cost too much to keep up." The only sensible cause of the change of employment terms (but the EAT did not say this) was the "cost too much" factor. Thus the reason for both the transfer and the change of employment terms was the economic difficulties which affected the community school, so both the transfer and the change in employment shared a common cause. That argument cannot be extended, without stretching logic beyond breaking point, to the conclusion reached by EAT, that the transfer was the cause of the change in employment terms.

If the arguments in this article are wrong and the decision is right, employers are going to have almost insurmountable problems, if they wish to change employment terms adversely to employees in anticipation or after a transfer of an undertaking, but at least we know where we stand. If the :decision is defective and needs correction we have the same difficulty plus uncertainty. In the meantime practitioners and their clients must be wary and scrupulous in ascertaining and documenting any reasons for changes in employment terms.


What to do now

Rumour has it that the St Helens decision will not be appealed [but see the PS below]. Here are some suggested courses of action.

Do nothing. Simply accept that the old terms continue to apply until such time as some other factor leads to a change.

Change the employment terms for reasons other than the transfer. In other words ensure that the transfer is not the cause of the change and that there is evidence to satisfy the tribunals of this fact - if at all possible.

Incorporate into the new terms a written consent to a deduction from wages (Wages Act 1966, s1(1(b)) to permit the deduction resulting from the change in terms: this proposal was inspired by a chance comment over lunch during the Employment Lawyers Association annual conference on April 30,1996. Alternatively keep the old terms, but obtain a written consent to a deduction. The effect of using one statute to defeat another may be uncertain, particularly if a robust tribunal regards it as a lawyer's device to get round the plain intention of the law.

Pay the employee a cash sum in consideration for agreeing to the change. This may persuade the employee, but does nothing to overcome the "Contracting out" hurdle: under Daddy's Dance Hall it is irrelevant that the employee is no worse off overall.

Alter the terms under a compromise agreement (ERA 1996, s203(3)). There are serious doubts whether s203 can apply to TUPE claims. Regulation 12 in TUPE simply prohibits contracting out and has no exceptions corresponding to those in s203. It could be argued that reg 8 by providing that employees shall be treated for the purposes of the ERA 1996 as unfairly dismissed, enables s203 to be applied to TUPE, at least for unfair dismissal. If reg 8 has this effect there would be no need for reg 12, so one could infer from the existence of reg 12 that s203 does not apply to TUPE, with the consequence that neither ACAS conciliation nor a compromise agreement will work. Moreover, even if reg 8 does apply s203 to TUPE it would do so only for unfair dismissal and not for the purposes of reg 5 (continuation of the pre-transfer employment terms), on which the St Helens problem is established.

Of these it seems that only the first (the do nothing) suggestion can be relied upon anal the matter is litigated further.

update 6 August 2008

The current version of TUPE (SI 2006/246) has resolved the problem about contracting out.  Regulation 18, replacing regulation 12 in the 1981 version, is as follows.

18  Restriction on contracting out

Section 203 of the 1996 Act (restrictions on contracting out) shall apply in relation to these Regulations as if they were contained in that Act, save for that section shall not apply in so far as these Regulations provide for an agreement (whether a contract of employment or not) to exclude or limit the operation of these Regulations.

Although s203 is made applicable one should be cautious of assuming that it allows all TUPE derived rights to be compromised.  For instance it would be surprising if it were intended to allow the parties to exclude the obligation to inform and consult as opposed to compromising a claim based on a breach of that obligation.



(28 June 1997)

St Helens has been appealed. The latest indications on LINK are that a decision may be given soon.

In the Meade and BNF case (Meade and Baxendale v British Nuclear Fuels, EAT 652/95) the EAT reached a commercially practicable but superficially contradictory decision. Employees were dismissed before the transfer and after it were offered new contracts in their old jobs, but some terms were less favourable. Although TUPE makes dismissals related to the transfer automatically unfair, it does not invalidate them. Therefore no contracts of employment were passed to the transferee and there were no existing terms to alter.

The moral, until we receive further guidance from the House of Lords in St Helens, is that a buyer of a business prepared to risk the possibility of unfair dismissal claims should insist that the seller dismisses those employees, whose terms the buyer wishes to alter. Once again the law, in its eagerness to protect the vulnerable, has thrown a boomerang encouraging even good employers to do things not obviously in their employees' interests, which they would not have done if left to act sensibly and reasonably.


copyright Roderick Ramage


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