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Can restrictive covenants survive a TUPE transfer or are they TUPE’doed?

24 April 2019

“To be, or not to be: that is the question.” Many will know these to be Hamlet’s words early in the eponymous play. TUPE or not TUPE (with respect to restrictive covenants) is a thought that most buyers of a business have, but often too late in the day. What do these two have in common? Potentially tragic consequences.

First act: setting the scene

When TUPE (The Transfer of Undertakings (Protection of Employment) Regulations 2006) applies, any employees principally assigned to the acquired business transfer automatically from the seller to the buyer. Each employee’s existing terms and conditions are preserved. Therefore, notionally, the benefit of any restrictive covenants - contractual terms restricting an employee’s post-termination activities - passes to the buyer. Thinking itself to be adequately protected, the buyer may think of the issue no more, and get down to business.

Second act: circumstances change

Getting down to business, the buyer will likely conduct a post-transfer reorganisation and assimilate the acquired business into its wider operations. The transferred employees will integrate and interact with clients, suppliers and other employees of the buyer. Circumstances may change. But crucially the wording of the restrictive covenants will not.

Third act: the betrayal

Further into the future, business is booming for the buyer and the acquisition appears to have been a wise one. Unfortunately, one day, key transferred employees leave and promptly work in competition against the buyer – perhaps even soliciting clients and using its suppliers. The buyer refers to those ex-employees’ employment contracts and is relieved to be reminded that they contain restrictive covenants. However, on closer inspection, it realises, or is advised, that the covenants refer to an employer company which was no longer employing those individuals just before they left and a business which has been changed by assimilation with the buyer’s.

Fourth act: tragedy strikes

Prevailing case law (most notably, Morris Angel and Son Ltd v Hollande (1993) EWCA) suggests that the courts will not be inclined to afford the buyer adequate protection in such circumstances. At best, the covenants will only apply to the acquired business and the customers it had and the suppliers it used. The covenants will not apply to the wider business of the buyer and customers and suppliers which were not exclusively those of the acquired business. Therefore, the greater the change, the more the relevance and the enforceability of the covenants will be diminished.

Fifth act: lessons learned

A business transfer buyer should usually try to ensure that the senior transferred employees enter into new restrictive covenants. However, this is an area of law which requires delicacy. Introducing new covenants on a TUPE transfer should only be done when based on expert advice. Otherwise, the buyer could be faced with more immediate problems, such as claims for constructive or unfair dismissal. Advice obtained at the outset should mean that a Shakespearean tragedy ending is avoided.

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