This decision concerns a request for a preliminary ruling regarding Article 3 of Directive 2001/23/EC (“Directive Transfer of Undertaking”). In brief, the question concerned is whether in the event of a transfer of undertaking the acquirer may be bound under national law by provisions in collective agreements that were determined after the transfer of undertaking.
In 2002, one of the London borough councils, Lewisham London Borough Council (“Lewisham”), contracted out its ‘leisure’ services to a private sector undertaking, CCL Limited (“CCL”) In May 2004, CCL sold that business to Parkwood, another private sector undertaking. Provisions in collective agreements applied to the employment agreements of Lewisham’s services. These collective agreement provisions were determined by the NJC. The NJC is a body for collective negotiations for local authorities.
During the first transfer of the services to CCL the dynamic collective agreement provisions applied. These had been determined for the period from 1 April 2002 up to and including 31 March 2004. In May 2004 the undertaking that exploited this service was transferred to Parkwood. Parkwood has not been involved in the negotiations of the collective agreement provisions, in particular because Parkwood is not a public service but a private sector undertaking.
In June 2004 a new agreement was reached within the NJC, which entered into force with retroactive effect as of 1 April 2004 to 31 March 2007. This agreement was therefore concluded after the relevant undertaking came into the hands of Parkwood. Thus, Parkwood concluded that the new collective agreement did not apply to it. Parkwood informed the employees of this fact and refused to pay the salary increase that had been determined by the NJC for the period until 31 March 2007.
The parties conducted legal proceedings about this issue up to the Supreme Court in England. Next, the Supreme Court posed a number of questions to the European Court of Justice (“ECJ”).
Judgment of the ECJ
The ECJ issued a declaratory judgment stating that in the event of a transfer of undertaking the acquirer cannot not be bound by collective agreement provisions that were determined after the transfer of undertaking and during which the acquirer had no chance to attend the negotiations.
The ECJ considered that the Directive Transfer of Undertaking not only intends to protect employees, but also wants to ensure that there is a balance between the employees’ interests and those of the acquirer. In this connection it is important to observe that if a public-sector undertaking is transferred to the private sector it must be assumed that the acquirer will not be able to continue its activities without making considerable adjustments and changes, since there are unavoidable differences between these two sectors in the field of employment conditions. A dynamic clause referring to collective agreements that are determined after the relevant transfer of the undertakings may considerably limit the maneuvering space a private acquirer needs to take such adjustment measures.
In addition, when interpreting the Directive Transfer of Undertaking the freedom of entrepreneurship and the freedom of contract of the parties must be taken into account. The freedom of contract may not be limited to such an extent that the freedom of entrepreneurship is threatened to be affected at heart.
In the event of a transfer of undertaking, it of the utmost importance that the buyer examines which collective agreement is applicable at the seller’s, how this collective agreement is set out in the employment agreement (does the agreement refer to a specific collective agreement with a limited term or to all future collective agreements in this sector?) and whether a new collective agreement is in the process of negotiations.