TUPE Regulations officially 'static'

As we reported in our recent Alert, the European Court of Justice has published its long awaited decision on whether the TUPE Regulations are 'static' or 'dynamic' in relation to the enforceability of collective agreements on public to private sector TUPE transfers.  As Sarah Lamont (a nationally recognised authority in this area) explains, this decision is highly relevant to private to public sector outsourcing exercises.

The background

The origin of our domestic Transfer of Undertakings (Protection of Employment) Regulations (TUPE) is in the Acquired Rights Directive ('the Directive').  The Directive aims to protect employees' rights on a transfer of an undertaking.  The following provisions are relevant to this case:

"On a relevant transfer, the transferor employer's rights and obligations arising from transferring employees' contracts of employment transfer to the transferee employer"   (Article 3(1)).

On the face of it, this seems simple enough; but it becomes complicated when public sector employees transfer to the private sector on employment contracts that incorporate union-negotiated collective agreements.  Are collective agreements 'frozen' at the point of transfer, so that, post-transfer, employees can only rely on the terms of collective agreements as they stood when the transfer took place?  Or do post-transfer employees continue to benefit from changes negotiated to collective agreements, to which their employer is no longer a party? 

Divergent positions on this point were created by the EAT cases of Whent and Others v Cartledge and the European Court’s decision in Werhof v Freeway Traffic Systems Gmbh & Co KG.

In Whent, the EAT held that where a collective agreement was incorporated into the employees' contract, the employees were entitled to the benefit of later pay rises set by the collective agreement, even though the new employer was not a party to it (known as the 'dynamic' approach).

However, in Werhof, the ECJ (interpreting the Directive) held that, in similar circumstances, the employees benefit from the collectively agreed terms in force at the date of transfer; but not by subsequent changes to collective agreements (known as the 'static' approach).

The facts

In Alemo-Herron v Parkwood Leisure Ltd, a group of employees originally employed at a Council owned leisure centre were TUPE transferred to a private company, Parkwood.  Their contracts provided that their

"terms and conditions of employment will be in accordance with collective agreements negotiated from time to time by the National Joint Council for Local Government" (the NJC).

The NJC negotiated a new collective agreement relating to rates of pay.  Parkwood was not a party to the negotiations and declined to abide by the NJC terms.  The employees brought claims for unlawful deductions from wages, arguing that, under TUPE, Parkwood was obliged to increase their pay in line with the new collective agreement, agreed post-transfer.

An employment tribunal dismissed the claims but a series of appeals followed, with the Court of Appeal endorsing the static approach in Werhof (please see our February 2010 Update for a summary of the Court of Appeal's decision).  The Court of Appeal's 'static' interpretation of TUPE was appealed to the Supreme Court who, in turn, made a Reference to the European Court of Justice.  The Supreme Court asked whether the Directive (and EU law generally)

• prohibits,
• permits or
• requires the transfer of ‘dynamic’ contractual clauses, under which transferees can be bound by terms agreed in future collective agreements without being a party to the relevant negotiations.

In February 2013, the Advocate General said that EU law does not prohibit a 'dynamic' interpretation of TUPE concerning collective agreements, but the Advocate General's Opinion is not binding on the European Court of Justice (ECJ).

The decision 

Unusually, the ECJ disagreed with the Advocate General. It held that the Directive precludes a member state from adopting the ‘dynamic’ approach to TUPE, where the incoming employer cannot participate in the negotiation of the collective agreements.

In other words, the ECJ said that the 'static' approach must be followed – i.e. that collective agreements are 'frozen' at the point of transfer, so that employees can only benefit from the terms of collective agreements as they stand when the TUPE transfer takes place.  They cannot benefit from future changes to the agreements negotiated without the incoming employer taking part in the negotiations.

In reaching its conclusion, the ECJ noted that the Directive does not aim solely to safeguard the interests of employees.  Rather, it seeks to ensure a fair balance between the interests of employees and the new incoming employer. 

The ECJ's reasoning emphasised transferees' 'freedom of contract' and the need for them to be able to make changes that are necessary for it to carry on its operations. To this end, the transferee would need to make adjustments and changes taking into account the "inevitable differences" in working conditions that exist between the public and private sector.  Since the transferee in this case was unable to participate in the collective bargaining process, it was unable to assert its interests in this way.  A "dynamic" approach to the Directive would seriously reduce the transferee's contractual freedom, and adversely affect the very essence of its freedom to conduct a business.

By contrast, a 'dynamic' contractual clause, referring to collective agreements negotiated after the transfer, would limit the incoming private sector employer's "room for manoeuvre" and undermine the fair balance between the interests of the transferee and the employees.

What does this mean for me?

This case is very important for public to private sector outsourcing exercise. In essence, the ECJ's decision means that a 'static' approach to the TUPE Regulations will stand, as decided by the Court of Appeal in February 2010.

In practice, this means that private sector contractors are not obliged to honour national collective bargaining pay rates and increases agreed after the TUPE transfer of employees from the public sector.

Note, however, that arguments may be run that a different approach should be taken in private sector to private sector transfers, or where the incoming employer has had input into any post-transfer negotiations.  

We feel that this may mark an interesting change of course in the courts' approach to the TUPE Regulations, with a new emphasis on contractual freedom for incoming employers, possibly taking into account the challenging economic circumstances with which employers are currently faced.