An employee’s bid to use an objection to a TUPE transfer to gain freedom from his lengthy garden leave clause failed in the recent decision of ICAP Management Services Limited v (1) Dean Berry and (2) BGC Services (Holdings) LLP). The case provides a useful reminder to employers of how employees can use the fact of a TUPE transfer to seek to get out of their contractual obligations.
Many employers need to protect their confidential information, client base, workforce and business from being either damaged or taken by a departing employee. To do so, employees can ensure that employment contracts allow them to: (i) put employees on garden leave during their notice periods and (ii) to restrict their activities after the end of their employment.
To be enforceable, the limitations on the employee’s activities must go no further than is reasonably necessary to protect the employer’s legitimate business interests, as we’ve previously explained here and here.
So far, so good, but employees are often reluctant to delay starting working for a new employer, particularly when there is a long notice period and they have been placed on garden leave to keep them out of the business. There are two key ways in which employees may try to extract themselves from the application of garden leave clauses and/ or restrictive covenant
1. Relying on a breach of a term of the employee’s contract: if an employer commits a serious breach of the employee’s contract (whether of an express or implied term) and the employee accepts the breach (e.g. by resigning), then the employee will no longer be bound by the terms of the employment contract, including garden leave provisions and post termination restrictions.
2. Objecting to a TUPE Transfer: where there is a transfer of an undertaking or business, or a service provision change within the scope of the TUPE Regulations, an employee assigned to that undertaking or the activities being transferred will also transfer to the new employer. However, employees have the right to object to the transfer, which means that their contract of employment will be terminated on the transfer date but the employee will not be treated as having been dismissed. This does not release the employee from post termination restrictions, but provides an early release mechanism for an employee who wants to avoid having to serve out a notice period.
Employers may be familiar with the first scenario, but employees taking advantage of a TUPE transfer to object and exit without serving full notice is less common.
Nevertheless, it is this tactic that an interdealer broker, Mr Berry, tried when he wanted a quick release from a 12 month period of garden leave imposed on him by his employer, ICAP Management Services Limited. This case is also useful as it highlights a) how to distinguish to between a share sale and a TUPE transfer; and b) when lengthy garden leave clauses might be enforced.
Mr Berry had been employed by ICAP as CEO of a division of ICAP. His contract of employment required him to give 12 months’ notice in writing and stated that during his notice period his employer was entitled to put him on garden leave. The contract of employment also included post-termination restraints. In July 2016, Mr Berry handed in his 12 months’ notice and he was put on garden leave.
Whilst Mr Berry was serving out his notice on garden leave, shares in ICAP plc, the company which ultimately owned his employer, ICAP Management Services, were sold to another company, Tullet Prebon plc.
In October 2016, Mr Berry wrote to his employer explaining that he considered the this to be a TUPE transfer and that he objected to it, with the result that his employment would terminate when the transfer occurred. After the share sale had been finalised, Mr Berry notified his employer that he considered that a TUPE had taken place and that his employment had terminated on the transfer date. However, Mr Berry confirmed that he would abide by his post termination restrictions and he told his employer that he would not start work for another 10 days, which is how long he considered they had left to run.
ICAP disagreed that there had been a TUPE transfer and took the view that Mr Berry remained their employee (on garden leave) until July 2017 and that his post termination restrictions applied thereafter. It sought and obtained an injunction upholding the garden leave clause.
Mr Berry challenged the decision, which effectively prevented him from working for his new employer BCG, but failed. The court agreed that because there had only been a share sale, there had been no TUPE transfer that Mr Berry could object to.
As a general rule TUPE only applies where there has either been a service provision change or where there has been a transfer of an undertaking or business to another person. However TUPE has been found by the courts to apply to share sales in very limited circumstances. In making its decision, the court gave some useful guidance as to when a TUPE transfer is deemed to have taken place in the context of a share sale. The key points were that no TUPE transfer will take place unless the new party:
-has become responsible for carrying on the business
- has incurred the obligations of employer
- has taken over the day to day running of the business
In brief terms the court said that the question was ‘Has the new party stepped into the shoes of the employer’. In this case, although following the share sale the two companies had a common ownership, they remained distinct competing brands and Mr Berry’s employer remained responsible for its business and its employees: there was no new owner who had stepped into their shoes.
Turning to the garden leave provisions, the court considered that the employer did have a legitimate business interest in protecting its confidential information (it was evident that Mr Berry could recall rather a lot it) so decided to enforce the full garden leave provisions and also the post termination restrictions.
When trying to protect client information:
- make sure that contracts are updated when employees are promoted: the question of whether any restriction goes further than is necessary to protect a legitimate business interest is judged based as at the time when the provisions were entered into
- consider using garden leave clauses to protect a business but remember that the same principles apply to garden leave clauses as to post termination restrictions, so that they must not excessively restrain the employee
- keep garden leave and post termination restrictions in line with competitors as this will be of assistance when trying to prove that they are reasonable. This case clarifies that lengthy garden leave clauses may be unpopular with employees but may also be enforceable. Mr Berry’s new employer had required him to sign up to similar provisions, which did not help his argument that they were unreasonable
- when TUPE is engaged, whether as a result of a sale, group restructuring or outsourcing, be alert to the risk of employees opting out of the transfer to avoid the impact of notice periods/garden leave.