TUPE - Post-Transfer Obligations and Collective Agreements

The Court of Justice of the European Union (CJEU) has ruled that Article 3 of the European Acquired Rights Directive, which is transposed into UK law by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), must be interpreted as meaning that a ‘static’ rather than a ‘dynamic’ approach should be taken to collective agreements when there is a transfer to which TUPE applies (Alemo-Herron and others v Parkwood Leisure Limited).

Parkwood Leisure Limited had taken over a company that acquired employees of the London Borough of Lewisham’s Leisure Department following a transfer under TUPE. The employees argued that Parkwood was bound to honour pay increases negotiated with the National Joint Council for Local Government Services under a collective agreement reached after the TUPE transfer had taken place.

This ‘dynamic’ interpretation of the burden on transferees taking over employment contracts that incorporate terms fixed from time to time by collective agreements had been the favoured approach in domestic case law, but the Employment Tribunal ruled that the decision of the CJEU in a German case, Werhof v Freeway Traffic Systems, required a ‘static’ interpretation and it therefore dismissed the employees’ claims.

The Employment Appeal Tribunal (EAT) overturned this decision, finding that a contractual term entitling council employees to pay in accordance with collective agreements is protected when there is a transfer under TUPE so as to give a right to pay increases negotiated after the transfer. Whilst the Directive provides that member states may limit the transfer of collective agreements to a minimum of one year or until the earlier date of termination or expiry of the agreement or the coming into force of a new collective agreement, the EAT found that the TUPE Regulations have no corresponding provision limiting a worker’s rights. Member states are free to introduce domestic laws that are more favourable to workers than is required by the Directive they implement and Regulation 5 of TUPE imposed ‘dynamic’ obligations upon transferees. Even though the new employer was not a party to the negotiations, the employees’ terms were still so determined because it was in their contracts of employment.

The Court of Appeal disagreed and upheld Parkwood’s appeal against the EAT’s decision. In the Court’s view, the decisions in earlier domestic case law were wrong and should not be followed. A ‘static’ approach to collective agreements was required.

The Supreme Court referred the matter to the CJEU, which rejected the Advocate General’s earlier opinion and supported the ‘static’ approach. In its view, Article 3 of the Directive must be interpreted as precluding 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 new employer where the latter does not have the possibility of participating in the negotiation process.

This decision will be welcomed by employers considering acquiring undertakings that were previously part of the public sector. As the Government is carrying out a consultation exercise with a view to simplifying the TUPE legislation, it may decide to set a limit on how long collective agreements will continue to bind transferees.