Responsibilities to employees if you buy or sell a business

Changing terms and conditions after a business transfer


In a business transfer situation, employees' existing terms and conditions are transferred to the new employer from the start of the new employment.

Employees should therefore not be disadvantaged by a transfer, ie by having less favourable terms and conditions in their new roles.

Economic, technical or organisational reason

If you are the new employer, you can only vary a contract for a reason related to the transfer if it's an economic, technical or organisational (ETO) reason entailing changes in the workforce.

There is no legal definition of an ETO reason. However, it might relate to, for example:

  • the profitability or market performance of your business - an economic reason
  • the nature of the equipment or production processes which you operate - a technical reason
  • the management or organisational structure of your business - an organisational reason

Note that you can't vary the contracts of the transferred employees in order to harmonise their terms and conditions with those of your existing employees in equivalent roles or grades. A pay cut does not count as an ETO. The transfer of a business subject to insolvency proceedings is a different matter however - it is covered below. However, you could change terms and conditions - by agreement - if the changes are positive, eg fewer working hours or additional holiday entitlement.

Changing terms and conditions over time

After a certain period, eg six months, you might be tempted to consider it 'safe' to vary the contracts of the transferred employees as the reason for the change cannot have been by reason of the transfer.

However, there is no set period for this and no 'rule of thumb' used by the courts or specified in the regulations to define a period of time after which it is safe to assume that the transfer will not impact directly or indirectly on the employer's actions.

Changing terms and conditions after the transfer of an insolvent business

Note that there is greater flexibility to change terms and conditions if the business being transferred is insolvent - see transfers of insolvent businesses.