The ECJ has ruled that UK courts must adopt a 'static' rather than 'dynamic' approach to collectively agreed terms on a TUPE transfer. This is good news for transferees on a public sector outsourcing.
The long running case of case, Alemo-Herron and others v Parkwood Leisure Ltd C-425/11, considered the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) which implemented the Acquired Rights Directive 77/187/EEC (the Directive) in the UK. The Directive has since been updated, as has TUPE. However, the same main principles continue to apply so the decision is relevant for the future.
Where there is a transfer of employees under TUPE the new employer is bound by the existing terms of employees' contracts of employment.
If there is a "dynamic" clause which provides that terms and conditions of employment will be in accordance with collective agreements negotiated "from time to time", the UK courts previously held that TUPE renders such a clause enforceable against any new employer.
There is however conflicting European case law, Werhof v Freeway Traffic Systems GmbH & Co KG (Case C-499/04)  ECR I-2397 (Werhof). Werhof held that the Directive did not bind the transferee to any collective agreement made after the transfer so that the position as regards collective agreement was "static", i.e. the new employer was only bound by the actual terms that applied at the date of the transfer.
The employees were originally employed by the London Borough of Lewisham in the Council's leisure department. The council subscribed to the National Joint Council for Local Government Services (the NJC) and the employees' contracts provided that their,
"terms and conditions of employment will be in accordance with the collective agreements negotiated from time to time by the NJC .".
Importantly, the employees' pay was determined by pay scales agreed under such collective agreements.
In 2002 the Council outsourced its leisure services to a private company and the employees continued to be paid in accordance with pay scales agreed under the existing NJC Agreement until 31 March 2004. In May 2004 the employees transferred again under TUPE to Parkwood Leisure Limited.
Later in 2004 a new NJC collective agreement (the 2004 Agreement) was negotiated covering rates of pay for the period 1 April 2004 to 31 March 2007 and providing for further pay increases.
Parkwood played no part in the negotiations of that Agreement as it was a private sector employer and not part of the NJC. It argued that it was not bound to pay its employees at the new rates agreed under the 2004 Agreement. The employees brought claims for unlawful deductions from wages, arguing that, as a result of TUPE, Parkwood was obliged to increase their pay in line with the 2004 Agreement.
The employees' claims for unauthorised deduction from wages were dismissed by the Employment Tribunal but, an appeal to the Employment Appeal Tribunal was successful. However, the Court of Appeal restored the tribunal's decision relying on the decision of the European Court of Justice in Werhof.
An appeal was made to the Supreme Court to try and establish whether the domestic, dynamic approach or the European, static approach was correct. However, the Supreme Court declined to answer the question and made a reference to the Court of Justice of the European Union (ECJ) for a preliminary ruling to determine what the correct interpretation of the Directive should be. In February 2013 the European Advocate General (AG) delivered an opinion that endorsed the "dynamic" interpretation.
The ECJ's decision
It is uncommon for the ECJ to disagree with an opinion by the AG but earlier this month the ECJ delivered its decision that the static interpretation was correct. It held that European law prevented Member States,
".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 concluded after the date of the transfer."
The basis of the Court's reasoning was that the Directive had to be interpreted in line with an employer's right to conduct a business under Article 16 of the Charter of Fundamental Rights of the European Union which includes the freedom to enter into a contract. In the circumstances of the case the ECJ felt that in allowing a dynamic interpretation,
"., the transferee's contractual freedom is seriously reduced to the point that such a limitation is liable to adversely affect the very essence of its freedom to conduct a business."
The ECJ also considered that to allow a dynamic approach would undermine the fair balance between the interests of the transferee and the employees.
Private companies involved in public sector outsourcing will breathe a sigh of relief at this decision as they no longer face the prospect of being bound, after a TUPE transfer, by terms subsequently agreed by unrelated parties and having had no influence over negotiations. Transferees will however still be bound by terms which are in existence at the date of the transfer until such time as they expire and the position in each case will depend upon the precise circumstances and wording of the employees' contracts.
Alemo-Herron and others v Parkwood Leisure Ltd C-425/11