On 18 July, the Court of Justice of the European Union (ECJ) handed down its long-awaited judgment in Alemo-Herron v Parkwood Leisure Ltd. The ECJ held that employees who TUPE transfer to a new organisation are not entitled to benefit from collectively agreed terms where such terms are agreed after the date of transfer and where the transferee employer is not a party to collective negotiations. The judgment will be welcomed by transferee employers, particularly those who have received employees from the public sector.
The claimants’ contracts of employment with the London Borough of Lewisham contained clauses to the effect that they would be entitled to the terms and conditions (in particular in relation to pay) negotiated from time to time by the National Joint Council for Local Government Services (the NJC) for local government. Their employment transferred twice under TUPE under first and second generation outsourcings, ultimately to Parkwood Leisure Ltd (Parkwood).
A new agreement was reached with the NJC in June 2004. The agreement awarded pay increases to a group of employees from April 2004 to March 2007. Parkwood was not a party to the negotiations for the new agreement. As such, it elected not to comply with the new NJC terms.
As a result, the claimants issued proceedings claiming unlawful deductions from wages. They argued that, under TUPE, the contractual terms incorporating the NJC collective agreement had transferred to Parkwood, and, therefore, Parkwood was obliged to increase their pay.
Progress through the UK courts
The view that an employer is bound by post-transfer collectively agreed terms is referred to as the ‘dynamic’ view, the opposing view being known as the ‘static’ view. Parkwood, of course, argued for the static view to prevail. The claimants pushed for a dynamic interpretation.
At first instance, the employment tribunal dismissed the claims based largely on the previous ECJ decision of Werhof v Freeway Traffic Systems GmbH & Co KG. The Tribunal held that Werhofconfirmed that updates to collective agreements could not bind an employer that had inherited employees as a consequence of TUPE. The claimants then appealed to the Employment Appeals Tribunal (EAT), arguing that the tribunal had failed to take account of English case law which favoured the dynamic approach. The EAT allowed the appeal, following which Parkwood appealed to the Court of Appeal. There, Parkwood successfully argued that TUPE only binds employers to collectively agreed terms that were in force at the date of the transfer and not any renegotiated terms that were agreed to after the transfer. The claimants then appealed to the Supreme Court. However, the Supreme Court was of the view that the law in this area was not clear. Therefore, in August 2011, the UK proceedings were stayed and the issue was referred to the ECJ.
Advocate General’s Opinion
In February 2013, the Advocate General gave his opinion on this matter (the Opinion). The Opinion favoured the ‘dynamic’ approach, provided that the transferee’s obligation to accept future collectively agreed terms is not ‘unconditional and irreversible’. The Opinion acknowledged the UK’s primary means of enforcing collective agreements, through individual contracts of employment. Therefore (whilst the matter would ultimately need to be decided by the English courts), the Opinion noted that, under English law, the transferee’s obligation is unlikely to be ‘unconditional and irreversible’ because the parties are (at least in theory) free to agree to vary the contract by removing the reference to collective negotiations.
The Opinion was not all bad news for private sector transferees, however. The Opinion indicated that it would be open to the UK to use the option provided for under Article 3(3) of the Acquired Rights Directive (the Directive) of expressly limiting the post-transfer effects of collective agreements to one year (as is the case in Germany). This is the option favoured by the government in its consultation on proposed changes to TUPE.
The ECJ’s judgment has been hotly anticipated since the Opinion was published, and it was thought highly like the judgment would follow the Opinion. In fact, the ECJ disagreed with the Advocate General. It held that the Directive precludes a member state from providing:
‘in the event of a transfer of an undertaking, that dynamic clauses referring to collective agreements negotiated and adopted after the date of transfer are enforceable against the transferee, where that transferee does not have the possibility of participating in the negotiation process of such collective agreements.’
In reaching this conclusion, the ECJ (following Werhof) noted that the Directive does not aim solely to safeguard the interests of employees in the event of transfer of an undertaking, but seeks to ensure ‘a fair balance between the interests of those employees… and those of the transferee’. The ECJ held that the transferee must be in a position to make the adjustments and changes necessary to carry on its operations.
A dynamic clause intended to regulate changes in working conditions in the public sector is liable to limit considerably the room for manoeuvre necessary for a transferee to make such adjustments. Holding that the Directive must be interpreted in accordance with the Charter of Fundamental Rights of the European Union, the ECJ stated that such a clause would be liable to undermine the fair balance between the interests of the transferee, on the one hand, and those of the employees, on the other. Transferees must be able to ‘assert [their] interests in a contractual process’. Since Parkwood was unable to participate in the collective bargaining process, it was unable to assert its interests in this way. A ‘dynamic’ approach to the Directive would seriously reduce the transferee’s contractual freedom, and adversely affect the very essence of its freedom to conduct a business.
The ECJ’s judgment marks a subtle shift in the ECJ’s interpretation of the Acquired Rights Directive from pure protection of workers’ rights to an increasing acknowledgement of the real practical difficulties of this area of law, particularly in the arena of outsourcings from the public sector and in other industries affected by collective bargaining.
The ECJ’s upholding of the Court of Appeal’s ‘static’ interpretation of TUPE means that private sector transferees which do not participate in collective bargaining arrangements are not bound by collective bargaining pay rates and increases agreed post-transfer. When transfers are contemplated, the fact that transferred employees may have no right to continue to have applied to them collectively agreed terms agreed post transfer should be notified to employees.
The case will now return to the Supreme Court for final determination. In light of the ECJ’s conclusion, the case will almost certainly be decided in favour of Parkwood, affirming the Court of Appeal decision and reasserting the static interpretation of contract terms.
The government’s response to its consultation paper on TUPE, designed to remove red tape and perceived ‘gold-plating’ in the UK’s enactment of the Directive, is expected by September. We anticipate that such response will consider the Parkwood case. The consultation paper proposed two key changes which may be impacted by this judgment:
- To provide that a transferee and an employee can agree contractual changes in the same way as an employer and employee are able to if no relevant transfer has taken place.
- To limit the future applicability of terms and conditions derived from collective agreements to one year from the date of transfer, as permitted by Article 3(3) of the Directive.
The government may think that the application of Article 3(3) of the Directive is unnecessary in light of the Parkwood decision. On the other hand, it should be noted that ECJ did not rule that dynamic clauses would never be enforceable against a transferee employer. Whilst the ECJ has articulated a strong preference for the static approach, incorporating a one-year limit would offer certainty for transferees particularly where the facts are not on all fours with this case.