The European Court of Justice (the “ECJ”) has handed down its judgment in a key, long-running TUPE case – Alemo-Herron v Parkwood Leisure Ltd.

The decision is good news for employers who regularly inherit employees via ‘TUPE transfers’, especially where those employees were originally employed in the public sector or in sectors that are heavily unionised. Thanks to this ECJ ruling, the new employer will not be bound by the terms of any collective agreement which is negotiated after the transfer and to which it is not a party.

Background

Lewisham Borough Council contracted out its leisure services to CCL Limited, a private undertaking which, two years later, sold this business to Parkwood Leisure Ltd. Both of these transfers constituted relevant transfers for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE). Parkwood Leisure therefore ‘inherited’ employees from CCL Limited, which had itself inherited those employees from Lewisham Borough Council.

In accordance with TUPE, the employees transferred to the new employer each time with their existing terms and conditions. These terms included an express reference to an NCJ collective agreement, meaning that the terms of that agreement were incorporated into the employees’ contracts of employment, and were therefore legally enforceable. Any pay rise would be carried out by reference to the collective agreement.

Issues arose

The enforceability of the collective agreement was undisputable when the employees were employed by Lewisham Borough Council. Nor was there any issue when the employees moved to CCL Limited, because at the time of that transfer, the NJC agreement for 1 April 2002 to 31 March 2004 was still in force. The terms and conditions (and pay structures in particular) had been negotiated before the transfer to CCL Limited, and were binding on CCL Limited.

The issue arose, however, once the employees had moved to Parkwood Leisure from CCL Limited in May 2004. The NCJ agreement in question had expired by this point, and a new one had not yet been negotiated. It was not until June 2004, after the transfer of employees from CCL Limited to Parkwood Leisure, that a new NCJ agreement was finally negotiated, to apply retrospectively from 1 April 2004.

Parkwood Leisure was not a party to this new collective agreement, and was not able to participate in its negotiations. It considered that the terms of the agreement were not binding on it, and refused to apply those terms when carrying out pay reviews.

This in due course led to claims from the affected employees, seeking to enforce the terms of the new collective agreement against Parkwood Leisure.

Difficult questions

This case has been thoroughly debated in the courts – having now been considered by an Employment Tribunal, the Employment Appeal Tribunal (EAT), the Court of Appeal (CA), the Supreme Court and now the ECJ.

The question is clearly not an easy one – where employees’ terms and conditions transfer to a new employer under TUPE, and those terms expressly incorporate the terms of collective agreements “as negotiated from time to time”, should the new employer only be bound by those collective terms that have been negotiated and are in force before and at the time of the transfer (the “static” approach)?

Or, do the terms and conditions of the transferring employees mean that new/updated collective agreements (negotiated after transfer) will also bind the transferee employer, even if that employer is unable to participate in those negotiations (the “dynamic” approach)?

On the one hand it seems manifestly unfair to transferee employers if they are obliged to operate by reference to terms of a collective agreement in which they did not have any say, and which did not even exist at the time of the transfer. On the other hand, the purpose of TUPE is to safeguard employees and their interests.

Each successive decision in this case has found in favour of a different party, and the issue was ultimately referred to the ECJ.

The relevance of Werhof and the question for the ECJ

It its judgment, the CA referred to the ECJ case of Werhof v Freeway Traffic Systems, which had similar facts. The CA followed the “static” approach taken by the German courts in that case, which the ECJ had permitted. Collective terms negotiated after the transfer would not bind the transferee employer.

The Supreme Court, however, questioned whether Werhof necessarily assisted it in reaching its own decision. It therefore asked the ECJ to consider whether, in light of the Acquired Rights Directive and the Werhof judgment, a Member State is:

  • Allowed to adopt the “dynamic” approach when determining this question
  • Required to use the “dynamic” approach, or
  • Actually prohibited from adopting the “dynamic” approach

It’s all a balancing act

As the ECJ pointed out, the “dynamic” approach is of course more favourable to employees. However, the ECJ went on to find that the purpose of the Acquired Rights Directive (transposed into UK law by TUPE) is not solely to safeguard the interests of employees, but instead to “ensure a fair balance between the interests of those employees, on the one hand, and those of the transferee, on the other”.

The ECJ also found that the Acquired Rights Directive makes clear that the transferee employer must be able to make changes necessary to carry on its business after the transfer. Imposing a public sector agreement on a private sector employer who was not able to influence its terms would considerably fetter the transferee’s ability to conduct its own business as it needs to. The “fair balance” between the competing interests of the employer and employee would therefore be undermined if the “dynamic” approach were permitted.

The ECJ also went on to consider the Charter of Fundamental Rights of the European Union, of which Article 16 ensures a freedom to conduct business (including a freedom to contract). The Acquired Rights Directive must be interpreted in accordance with this Charter, and the “dynamic” approach (binding employers, as it does, to the terms of an agreement to which they were not party and into which they had no input) would seriously restrict such freedoms.

Conclusion of the ECJ

Taking all this into account, therefore, the ECJ held that Member States must be precluded from taking the “dynamic” approach.

This means that, where negotiations for collective agreements for transferring employees are concluded after the transfer, the new collective terms will not bind the transferee employer, if that employer was unable to participate in the negotiation of such agreements.

What does this mean for employers?

This is a sensible decision and good news for private sector employers. Such employers will still need to be aware of collective agreements which are in force at the time of transfer; however – these will continue to bind the transferee employer until their termination or expiry. Such terms may remain in force for a number of years, and may in particular restrict the new employer’s ability to determine salaries, etc., as it sees fit. Any change to such terms will be void, unless made for an economical, technical or organisational reason entailing changes in the numbers or functions of the workforce.

Prospective transferee employers must therefore always carry out full and detailed due diligence, analysing in particular the scope and duration of any collective agreement. Such advice does not just apply to transferees who are inheriting employees directly from public sector employers; as Parkwood Leisure discovered, it is possible to inherit public sector employees through a chain of transfers by private sector employers.