Limited clarification on TUPE

The recent cases of Wilson vs St Helen's Borough Council, and Meade and Baxendale vs British Fuels gave the House of Lords the opportunity to clarify when employers can and cannot change employees' terms and conditions of employment following a TUPE transfer. Unfortunately for firms in the construction industry involved in TUPE situations, the Lords did not grasp this opportunity fully.

Nevertheless, their decision goes some way to clarifying two important questions: what rights do employees have if dismissed prior to a TUPE transfer when their employment would ordinarily have transferred: and when can an agreement after a TUPE transfer between employer and employee to vary terms of employment be legally binding? In both cases, the businesses were TUPE transferred. On transfer, the employees were dismissed and their contracts terminated. They were immediately re-employed on less favourable terms which, initially, they accepted and worked under for some time.

Later, they claimed that, as their dismissals were connected with TUPE transfer, they were ineffective. As such, their contracts should continue to apply in the new employer's hands. The Lords ruled that a dismissal is valid even if the reason for it is connected to a TUPE. The employees' argument (previously accepted by the Court of Appeal) that the dismissals were ineffective was rejected. TUPE entitles an employee to claim only unfair and wrongful dismissal.

Thus, the House of Lords ruled the important point of principle: it is the employee's right to claim compensation for the dismissal that transfers, not the right to be employed. Since the dismissal was effective and the workers were re-employed, the new terms and conditions the employees accepted were binding.

The Lords did little to clarify the issue of an agreed variation connected to the transfer where there is no dismissal. Following the European Court of Justice case of Daddy's Dance Hall, the Lords held that even a variation agreed by the employees will not be binding if it was made for a reason connected with the transfer. It is a question of whether the variation and transfer are connected.

• TUPE entitles an employee to claim only for wrong or unfair dismissal
• Employees cannot agree to a detrimental transfer variation

Unhelpfully, the Lords emphasised that each decision was up to the tribunal, depending on the facts of the case.

The Lords offered little firm guidance as to when a variation is connected to a transfer, although it stated that the time lag between transfer and variation is important. Even if employees receive adequate compensation for giving up their old contracts, this will not ensure validity of the new terms.

The Court of Appeal's recent decision in Credit Suisse First Boston (Europe) vs Robert Lister held that employees cannot agree to a detrimental variation connected to a transfer, even in return for new rights that benefit them.

So, where does this leave employers? First, a variation will be effective if employees are dismissed and re-employed – but employers will run the risk of unfair and wrongful dismissal claims. If the dismissals are connected to the transfer, they will be automatically unfair unless they are for an "economic, technical or organisation reason entailing a change in the workforce". The employer could argue that the employees' unfair dismissal award should be reduced to account for the employee's rejection of new terms and conditions on offer. Whether a tribunal considers the employee unreasonably refused this offer of employment will defend largely on the terms offered.