TUPE transfers and collective agreements

PPMA WEBSITE EMPLOYMENT LAW UPDATE February 2010 (3)

TUPE transfers and collective agreements

The Transfer of Undertakings (Protection of Employment) Regulations 2006 provide a number of protections for employees who are transferred to a new employer, primarily through the transfer of the relevant contracts of employment. This will include any collectively agreed terms and conditions which are incorporated into individual contracts of employment at the time of the transfer.

But what is the position where agreement on any collectively negotiated term(s) is reached after the transfer, for example, in respect of any subsequent pay increase? Will that particular agreement be binding on the transferee? This issue has been examined over the years in a number of cases, both by domestic courts and by the European Court of Justice (ECJ), and has recently been considered once again by the Court of Appeal in the case of Parkwood Leisure Ltd v Alemo-Herron & ors.

The employees in this case were employed by the London Borough of Lewisham. Their contracts specified that their terms and conditions of employment would be in accordance with collective agreements negotiated from time to time by the NJC for Local Government Services. In 2002 the employees transferred to CCL Ltd, a private sector employer, and then again in 2004 to Parkwood Leisure. At the date of the transfer to CCL there was already in place a national collective agreement relating to the pay rates for the period 1 April 2002 to 31 March 2004. The relevant pay increases under this agreement were honoured by CCL and subsequently by Parkwood who did so expressly without acknowledging any liability on its part to make wage payments by reference to such national settlements.

After the employees transferred to Parkwood a fresh agreement was reached through the NJC concerning the rates of pay for the period 1 April 2004 to 31 March 2007. Parkwood subsequently refused to apply these new rates of pay and the employees made a complaint of unlawful deduction from wages, arguing that the employer was bound by the clause in their contracts relating to pay which had been continuously in force since the original transfer.

This claim was rejected by the Employment Tribunal holding that the 2004 NJC agreement amounted to a new agreement and thus Parkwood were not obliged to implement the new pay rates. In the case of Werhof v Freeway Traffic Systems GmbH & Co KG, the ECJ had held that Article 3(1) of the Acquired Rights Directive, which transfers contractual obligations existing on the date of a transfer, does not bear a “dynamic interpretation”, i.e. terms and conditions under a collective agreement negotiated by a third party only operate until that agreement terminates or expires or is replaced by another agreement.

However, the Tribunal’s decision was overturned by the Employment Appeal Tribunal (EAT). Domestic case law had previously approved a “dynamic” approach to employment contracts, which meant that pay could be set in accordance with a third party decision. For example, in the case of Whent & ors v T Cartledge Ltd, the EAT had held that the transferee was bound by the NJC agreement which was incorporated into the relevant employees contracts of employment. As such the transferred employees had the right to the benefits negotiated under that agreement. This included the rates of pay which were subsequently agreed by the NJC. Although this provided transferring employees with greater rights than had been recognised in Werhof, it was open to the UK Government to grant greater protection when implementing the Directive. In the instant case, Parkwood was liable to pay the increased rates agreed by the NJC, despite the fact that they were negotiated after the date of the transfer. It was a contractual term that successive collective agreements would increase pay and there was no basis for discontinuing this practice.

The decision of the EAT has now been overruled by the Court of Appeal, finding that a “static” interpretation, rather than a “dynamic” one, was appropriate. Although domestic cases, such as Whent, which allowed for pay to be set in line with third parties post-transfer decisions, were consistent with a dynamic interpretation of the relevant TUPE provision, they were wrong in the light of the ECJ decision in Werhof and should not be followed. This meant that the transferee employer did not need to give effect to a pay increase agreed under the relevant collective agreement if that was agreed after the transfer had taken place. The transferee employer will only be bound by existing rights under collective agreements in force at the date of the transfer.

This decision overturns the previously held understanding, derived from Whent, regarding the obligations of the transferee under a collective agreement to which it is not a party and the rights of the relevant employees which flow from it. It would appear to provide greater flexibility in terms of potential future contractual and financial obligations and, as such, will no doubt be welcomed by private sector providers. For public sector organisations it may be a two-edged sword – on the one hand, the reduction in the extent of TUPE protection for employees may make outsourcing decisions more controversial and thus difficult to “sell” to the relevant workforce, but, on the other, it may mean that the costs of providing the service via an external contractor is lower than would otherwise have been the case.

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