In New ISG Ltd v Vernon and others the High Court has recently considered at what point in relation to a TUPE transfer an employee must exercise his right to object so that he does not automatically transfer over to become an employee of the transferee.

The employer (ISG) was in the specialised business of recruitment in the rail industry. The employees had restrictive covenants in their contracts to the effect that they should not solicit or canvas business from, or deal with, ISG customers for 12 months after leaving ISG.

ISG got into financial difficulties and was put into administration. Its assets were sold to a new company - New ISG - which was a wholly-owned subsidiary of a company called UKRS. The transfer happened on a Friday and the employees were only informed after the transfer had taken place. On the next Wednesday they all resigned. They did not wish to work for UKRS.

New ISG wished to enforce the restrictive covenants in their contracts. Initially New ISG was granted an interim injunction by the High Court for this purpose.

However the employees have now successfully argued that their contracts did not transfer over to New ISG under TUPE because they objected to the transfer.

Reg. 4(7) of TUPE states that there is no automatic transfer of the employee’s contract if the employee 'informs the transferor or the transferee that he objects to becoming employed by the transferee'.

The Judge held that there is nothing in TUPE to say that the employee must register his objection before the transfer takes place - particularly in a case such as this where the employees did not even know the identity of the transferee until after the transfer had taken place. The employees had validly exercised their right to object to transfer, so New ISG had never become their employers and could not enforce the restrictive covenants. The old employer no longer existed. The injunction was lifted and the employees are now free to compete against New ISG.

Points to note:

  • The TUPE regulations apply to the sale of assets by an administrator just as they may apply to any other transfer of an organised grouping of employees. It is only in the case of a liquidation that the TUPE regulations do not apply at all. The Court in New ISG specifically stated that the mere fact that it was an administration situation (where decisions have to be made fast) did not in itself mean that ‘special circumstances’ existed which would mean that the duty to inform and consult with employees ‘in good time’ before the transfer (TUPE reg.13) would be limited only to what was ‘reasonably practicable’.
  • There is no prescribed method by which an employee must notify an objection under Reg.4(7). Where an employee wants to do so before the transfer takes place, he can do so at any time. Where he is exercising his right to object after the transfer has taken place, he must do so as soon as he becomes aware of the fact that the transfer has taken place. In New ISG the EAT considered that the delay of just two working days, between the time when the employees knew of the transfer and the time when they handed in their resignations, was not excessive. In particular, it was noted that they had not actually done any work for the transferee in the meantime.
  • This case demonstrates that penalties for employers for failing to inform and consult may go beyond the mere award of compensation under Reg.15. The employees in New ISG were able to leave and compete post-transfer where they otherwise might not have been able to do so. The failure to inform and consult led to the employee objection that was fatal to the enforceability of the restrictive covenants.(As to the more general effect of a TUPE transfer on employee restrictive covenants, see Spotlight on restrictive covenants and TUPE)