Most senior employees in industry have employment contracts which contain post termination restrictive covenants which prevent employees from joining competitors or more often prevent employees who join competitors from approaching customers, former colleagues or suppliers and convincing them to join the new employer, as a customer, employee or a supplier. These restrictions in some industries, particularly insurance or other annual renewal services can be enforceable for lengthy periods such as twelve months.
How does a TUPE transfer affect the enforceability of restrictive covenants?
If there has been a TUPE transfer, for example where the employer merges or is taken over by another organisation, then an employee has the option of opting not to be transferred and therefore having their employment ended by their employer on the date of the transfer.
Think carefully before signing a new contract
If the employee remains, then unless they sign up to a new contract with the new employer, the time for their post termination restrictions has begun to run. So, after 12 months, not having signed any new contract the employee is able to leave having completed the period of the restrictive covenant. The next day he/she is able to join a competitor free from the restrictions in his ‘old’ employment contract. Therefore, whether there has been a TUPE transfer or whether there has simply been an acquisition of the shares in a company with no TUPE consequences is an important assessment.
What defines a TUPE transfer?
In most cases there is some physical evidence of a TUPE transfer such as the acquisition of contracts, assets and employees, but in some circumstances, nothing changes immediately and the situation looks as if it is TUPE free.
Who is running the company now?
Once matters such as management control and procedure changes, for example if the local board no longer have the power to make business decisions and have to obtain holding company approval, there is a TUPE transfer, as the new company has effectively taken over the decision making of the company, whose shares it purchased.
Legal cases involving TUPE transfers
A string of cases starting with Millam v. The Print Factory in 1991 has been followed in ICAP v. Berry and European cases such as Berg v. Besselsen and CLECE v. Martin Valor have all confirmed this approach.
TUPE transfer or share acquisition?
The critical elements in assessing whether an acquisition of shares is simply that, or is in reality a TUPE transfer are:
- Has the new company/shareholder become responsible for carrying on the business?
- Has the new company/shareholder incurred the obligations of the old employer?
- Has the new company/shareholder taken over day to day running of the business?
Put in simple terms, ‘has the new party stepped into the shoes of the old employer’? If it has then there has been a TUPE transfer and the consequences mentioned at the first part of this article may now have come into play. Beware.
More information about TUPE transfers can be found here: https://www.gov.uk/transfers-takeovers
ENDS JUNE 2018
About The Author: Richard Keen
Richard acts for employers and employees across a wide range of employment disputes. He has acted for senior executives in disputes over termination payments, share options and bonuses, as well as for employers helping them to manage redundancies and disciplinary matters.
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