At last a ruling by the EAT has been handed down on how TUPE applies to profit-related
pay schemes, but uncertainly still reigns
Occasionally, a seemingly everyday question of law remains untested for many
years, with lawyers and HR professionals being left to advise in a vacuum.
One such question is whether the purchaser of a business – or the employer
who makes the successful tender in an outsourcing scenario – has to replicate a
profit related pay (PRP) scheme tied to the profits of the previous employer.
In Mitie Managed Services Ltd v French and others, 12 April 2002, EAT/408/00,
this issue has finally come before the courts.
The case of PRP
Ms French and her colleagues were employed by Sainsbury’s. Their employment
transferred to Pitney Bowes Management Services and then to Mitie under the
Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE).
While at Sainsbury’s they had been eligible to receive cash or shares
(tax-free) under an Inland Revenue-approved PRP scheme. Theoretically, awards
under the scheme were discretionary but they had been made 19 years in
succession at the time of transfer. Awards were strictly tied to Sainsbury’s
TUPE requires all the outgoing employer’s liabilities to transfer to the
incoming employer. Literally interpreted, that would have required Pitney Bowes
and Mitie to continue making awards of cash and/or Sainsbury’s shares
(dependent on Sainsbury’s performance) even though the recipients no longer
worked for the chain and Mitie had no interest in the retailer’s performance.
Pitney Bowes and Mitie refused to ‘shadow’ Sainsbury’s scheme. Instead it
offered its own schemes, which was dependent upon both company (that is Pitney
Bowes/Mitie) and individual performance. The scheme was not Revenue approved
and so any awards were subject to tax.
The staff sought a declaration that their terms incorporated Sainsbury’s
scheme and that they were entitled to awards of PRP accordingly.
They succeeded at the employment tribunal. However, the EAT allowed the
employer’s appeal on the grounds that the tribunal’s decision produced an
absurd outcome that would be impossible for Mitie to perform.
The EAT said that commercially sensitive information was required to
calculate entitlements under the scheme and Mitie had no power to issue
What, then, did transfer? The EAT would only say the employees should be put
in a position of "substantial equivalence rather than literal
identity". The difficult question of whether the new scheme met that test
was sent back for the tribunal to decide.
Effects of the decision
This is a bad decision that goes against previous case law and generates
unwelcome uncertainty, since the test of "substantial equivalence" is
too vague to have a predictable meaning.
As Sainsbury’s is a plc, the information could have been gleaned from its
accounts. Likewise, its shares could have been purchased on the open market.
The curiosity of employees being left with remuneration dependent upon the
performance of a company they no longer worked for may well have played on the
minds of the EAT.
But would that really be such an absurd outcome? The staff would have worked
at least some of the year for Sainsbury’s in expectation of benefiting under
the scheme. Moreover, it is always open to an employer to try to agree a change
to a scheme – albeit under TUPE the method is rather tortuous.
Instead, employers are left to guess what a tribunal might regard as
"substantial equivalence". In practice, the best way to deal with
this issue is for the incoming employer to negotiate a substantially equivalent
scheme based on its own performance with staff representative. But the fact
that something is good practice does not necessarily make it good law.
Gareth Brahams is a partner in the employment department of Lewis Silkin