The long running saga of the transfer of rights derived from collective agreements continues. The Supreme Court handed down its judgment yesterday on this issue in the case of Parkwood Leisure Limited v Alemo-Herron, but there is no resolution yet.

Background Facts

Parkwood Leisure Ltd v Alemo-Herron concerns the transfer of rights deriving from a collective agreement in the context of a second generation outsourcing. The 24 claimants were previously employed by the London Borough of Lewisham. Their contracts expressly incorporated local government National Joint Council (NJC) terms and conditions and specifically provided that their salary would be "in accordance with collective agreements negotiated from time to time" by the NJC.

Under the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE), the claimants transferred first to CCL Ltd in 2002 then to Parkwood in 2004. At the time of the first transfer, collectively agreed NJC terms were already in place. These set out the claimants' pay rates for the period 1 April 2002 to 31 March 2004. The transfer to Parkwood took place in May 2004.

In June 2004 (after the transfer to Parkwood), fresh NJC negotiations began in relation to the rates of pay applicable for the period 1 April 2004 to 31 March 2007. The negotiations involved the Council and various unions, including UNISON of which the claimants were members. The negotiations concluded and agreed terms were announced on 14 July 2004.

The employment tribunal described the new terms as "a comprehensive revision of terms relating to pay, training and development and other aspects concerning working relationships".

Parkwood did not recognise UNISON and was not a party to the negotiations. As a private sector employer, it cannot belong to the NJC or be represented in it. Parkwood refused to pay the increased pay rates negotiated by the NJC post-transfer. The claimants lodged claims for unlawful deduction from wages.

Case History

The claimants' case

As their contracts with the Council included a provision referring to pay increases negotiated 'from time to time' under the NJC collective agreements, the employees argued that they were contractually entitled to the post-transfer negotiated pay increases. Regulation 5 of TUPE made Parkwood liable for them, just as the Council would have been were it still the claimants' employer. The claimants relied on domestic decisions in which similar claims succeeded, such as Whent and others v T. Cartledge Ltd [1997] IRLR 153.

Parkwood's case

Cases such as Whent were fatally undermined by the decision of the ECJ in Werhof v Freeway Traffic Systems GmbH & Co KG [2006] IRLR 400, which postdates the domestic decisions upon which the claimants relied. Under Werhof article 3(1) was held to have a narrower meaning than had previously been assumed. As a result, regulation 5 of TUPE must now be interpreted in a similarly limited way.

Parkwood accepted that it was contractually bound to honour the terms and conditions of the claimants' contracts so far as they incorporated terms that had already been collectively agreed at the time of the transfer to it. It also accepted that if, for example, at that time the terms and conditions included pre-determined pay increases spread over a future period, it would be bound to honour those increases when they fell due for payment.

However, Parkwood disputed that it was bound to honour new terms and conditions that were only agreed afresh in a collective bargaining process conducted after the transfer. Specifically, Parkwood's point is that Werhof shows that it cannot be made liable for pay or other employment obligations that have resulted from post-transfer collective bargaining processes, to which it was not, could not be and did not wish to be a party.

In the language of Werhof, Parkwood's position is that Werhof shows that its obligations to the claimants are only of a static nature. In contrast, the claimants claim to make it answerable on a dynamic basis.

Employment Tribunal and Employment Appeal Tribunal findings

The tribunal came down in favour of the 'static' approach and rejected the claimants' argument. It found that the terms negotiated by the NJC in 2004 amounted to a fresh collective agreement. Following Werhof, only contractual obligations existing 'on the date of a transfer' transferred. In other words, terms referring to a collective agreement negotiated by a third party only operate until the agreement expires, terminates or is replaced.

The EAT, however, disagreed with the tribunal, and plumped for the 'dynamic' approach. It noted that domestic decisions showed that the TUPE regulations provide transferring employees with greater rights than were recognised in Werhof. It was open to the UK Government to grant greater protection to employees when implementing the Directive. The EAT also drew support from the fact that domestic law had already approved the 'dynamic' approach to employment contracts.

Court of Appeal decision

The Court of Appeal agreed with the tribunal: it held that the 'static' approach was the right one. In allowing the appeal, the Court of Appeal held that domestic cases such as Whent were wrong in the light of Werhof. That decision meant that article 3(1) must have always required a 'static' interpretation of clauses in employment contracts which refer to third party collective agreements, even though this was not apparent until 2006 when Werhof was decided.

Thus the UK had no obligation to provide any stronger protection for employees when implementing the Directive and there was nothing to suggest that the UK had actually enhanced employees' article 3(1) rights when enacting the relevant provisions of TUPE. The Court inferred that TUPE simply implemented what article 3(1) required and so should be construed, so far as possible, in line with the Directive and its interpretation by the European Court of Justice (ECJ) in Werhof.

Supreme Court decision

The Supreme Court decided that it could not determine the issue without a prior reference to the ECJ.

The main elements of the judgment were that:

  • Although domestic case law supports the view that a "dynamic" interpretation is possible if that is what the contract requires, the Supreme Court held that it could not look at this in isolation. Domestic law must be read together with the relevant regulations in TUPE and article 3 (1) of the Directive.
  • Regulations 5(1) and 5(2) of TUPE were not intended to be more generous than article 3 (1) of the Directive. However, provided article 3(1) of the Directive and the decision in Werhof does not preclude it, it is open to the national courts to interpret regulation 5 of TUPE more generously.
  • In Werhof, the ECJ had taken into account the new employer's right not to join an association or union, protected by article 11 of the European Convention on Human Rights. That had been of relevance there because of the way German employment law deals with collective agreements. That is not a concern in this case.
  • Werhof only decided that article 3(1) did not preclude a "static" interpretation. Werhof did not consider whether the transfer of "dynamic" contractual rights is inconsistent with article 3 (1) of the Directive.

So, the unanswered question is whether it is open to the national courts to extend the scope of national legislation. Can national courts implement the Directive to areas not covered specifically by the Directive, provided there is no other provision of European Union law which precludes that?

Specifically, can a member state extend the protection afforded to employees on transfer, so as to provide a "dynamic" protection, where that would be the case if that member state's national law was applied? This is the question which will now be referred for a preliminary ruling to the ECJ.

Note: While this case relates to TUPE 1981, the same principles would apply to cases under the current TUPE 2006 Regulations.

Where does this leave employers? Our employment experts suggest some action points pending the resolution of the issue.