How did all this start?

Under the Transfer of Undertakings (Protection of Employment) Regulations 1981 (and subsequently 2006) (TUPE), the transferee (new employer) inherits the obligations of the transferor (original employer) under any applicable collective agreement. The UK courts had followed a line of case law that said changes post-transfer to these agreements bound the new employer (Whent v Cartledge and Hughes v Cumbria County Council). For example, a contractor to a council inherits council staff under TUPE; the National Joint Council (NJC) later agree a pay rise for council employees with the unions; that rise is binding on the contractor, even though he is not a member of the NJC.

"Dynamic" v "Static" collective agreements: Europe helps employers

TUPE is the UK domestic legislation implementing the original EU legislation, the Acquired Rights Directive. When interpreting the Directive, the European Court of Justice (ECJ) had taken a different approach to the UK. In Werhof v Freeway Traffic Systems the ECJ ruled that where the original employer is a party to an industry-level collective wage agreement, but the new employer is not, the new employer is only bound by the terms in force at the date of transfer ("Static" rights). Employees do not have the right to benefit from a pay rise as a result of a renegotiation of that collective agreement after the date of the transfer, unless it is a party to the negotiation ("Dynamic" rights).

The ECJ said that:

a. The Directive

The Directive does not intend that a new employer be bound by collective agreements other than the one in force at the time of the transfer. The objective of the Directive is to safeguard the rights and obligations of employees on the day of the transfer. The Directive does not intend to protect mere expectations of rights or, therefore, hypothetical advantages flowing from future changes to collective agreements.

b. The transferee's interests

The interest of the new employer to be in a position to make the adjustments and changes necessary to carry out his operations cannot be disregarded.

c. Freedom of Association (which includes the right not to join an association)

This is a fundamental right. A "dynamic" interpretation of the contract (which would mean that future collective agreements apply to a transferee who is not a party to a collective agreement) could affect his fundamental right not to join an association. This is on the basis that a dynamic interpretation would have the effect of binding the transferee to terms which it did not negotiate and over which it had no say. A static interpretation safeguards the transferee's right not to join an association.

Therefore, the ECJ held that a new employer who is not a party to the agreement is not bound by future changes to the collective agreement.

So why is the UK different?

The latest case, Alemo-Herron v Parkwood Leisure, is about the rights of public sector employees to protection of their conditions on competitive transfer to the private sector on a second generation outsourcing. Essentially the employees were claiming for unauthorised deductions from the appropriate rate of pay.

The employees were previously employed by the London Borough of Lewisham. Their contracts expressly incorporated local government NJC terms and conditions. Their work was outsourced in 2001 and then the contract was transferred to Parkwood in 2004. TUPE applied so as to transfer their employment to Parkwood. Parkwood did not recognise the trade union nor was it a party to the pay negotiations and it refused to apply pay increases agreed by the NJC covering the period 2004-2007. The claimants argued that in accordance with the decision of the Employment Appeals Tribunal (EAT) in Whent v Cartledge, collective agreements incorporated into a contract of employment transferred under TUPE. The employers argued that Whent was overruled, in effect, by the judgment of the ECJ in Werhof and that transferees, who are not members of an employer's association, do not have to apply new collective agreements entered into by the association after the transfer.

The case revolved around the contractual construction of the clause which entitled employees to pay:

"in accordance with collective agreements negotiated from time to time by the NJC".

This right to pay increases negotiated after the transfer was protected under TUPE. Depending on the actual clause, this might extend to other rights, such as holiday entitlement.

The approach taken by the EAT was simply one of contractual construction. The judge was of the view that there is nothing wrong with dynamic, contractual clauses, even when they are outside the control or influence of the employer. For example, a contractual clause which said that employee's wages will increase in line with inflation each year is enforceable. "There is no reason why parties cannot, if they choose, agree that matters such as remuneration be fixed by processes in which they do not themselves participate", including binding to public sector pay rates. The EAT observed that it was not uncommon for an employer to agree with employees that it will abide by wages set in a different forum by a third party. Therefore, clauses where wages are fixed by an external benchmark determined by collective bargaining are preserved under TUPE just as much as the rate of pay in force at the time of the transfer.

The ECJ's decision in Werhof did not affect this.

The EAT said:

a. The Directive

TUPE does not include the permitted limitation in Article 3(2) of the Directive (which allows a new employer to be bound for a minimum of one year or, until the earlier expiry of the relevant collective agreement or replacement with a new collective agreement). The German domestic legislation, on the other hand, did include that limitation. The limitation is irrelevant in the UK and the UK's position is simply more favourable to employees than that in the Directive (which is permitted by Article 7). The UK's domestic right to a dynamic contractual wage-fixing clause cannot be removed by a subsequent narrower interpretation of the Directive. In the UK, collective agreements are not enforceable by the parties (as they are, for example, in Germany). The way a collective agreement becomes enforceable is by incorporation in an individual's contract. Both TUPE and the Directive are aimed at safeguarding employees' rights. The EAT said that the UK Parliament can recognise the fact that collective agreements are not binding unless specifically incorporated into the contract and that they did this by not including the limitation on the transfer of collective agreements which is permitted under Article 3 (2).

b. The transferee's interests

This was covered by the considerations below.

c. Freedom of Association

The EAT decided that there is no danger of the rights of the new employer to freedom of association being infringed.

This is because of the choices available to the new employer. Those choices are to:

  • negotiate a separate agreement;
  • abstain from the collective bargaining structure (which it may be excluded from in any event as a private employer);
  • give notice to terminate the contract of employment; or
  • seek to negotiate a variation. This last option is key and is explored in more detail below.

So there's a 'get-out' for employers: the contracts can be varied by agreement?

Maybe, but it's not at all simple.

The EAT itself said that termination of contracts on notice and issuing fresh ones may, of course, lead to claims for unfair dismissal, but that is a commercial consideration. There are other risk factors as well.

To be valid under TUPE, a contractual change needs to be agreed with the employee/trade union and either for a reason unconnected to the transfer (and time is not of itself enough to prove this) or for a reason connected with the transfer which is an economic, technical or organisational reason entailing changes in the workforce (an "ETO Reason").

In respect of variation of contract, the EAT said that the distance in time from the transfer "might well be sufficiently immune from it being connected with the transfer". In other words, it might mean that the employer does not fall foul of the restrictions within TUPE.

We think this needs to be treated with caution as the time between the transfer and a subsequent contractual change (even if agreed with the employees) is not, of itself, sufficient to make the change valid. Long-standing case-law confirms this. We recommend you seek legal advice before relying on this argument.

Wragge & Co's employment experts provide action points to consider in light of this judgment.