In the case of Parkwood Leisure Ltd v Alemo-Herron and others, the Court of Appeal has examined the effect of regulations 5 and 6 of Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE 1981) in relation to collective agreements. The Court has held that in circumstances where a contractual right to a pay increase is dependent on collectively agreed terms, the transferee of an undertaking transferred will not be bound by terms collectively agreed by third parties after the transfer. In making this decision, the Court declined to follow established UK case law and preferred instead to follow a 2006 decision of the European Court of Justice (ECJ).

Although the case involved an issue relating to the 1981 Regulations, the law as stated in it will apply to the current Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE 2006).

What happened in this case?

The Claimants were all former employees of London Borough of Lewisham (the “Council”). In 2002, the part of the Council’s undertaking in which they worked was transferred to CCL, a private sector employer. In 2004 it was transferred again to Parkwood, another private sector employer. TUPE 1981 applied to each transfer. The Claimants’ employment contracts contained a clause which provided that their salary would be “in accordance with collective agreements negotiated from time to time by the National Joint Council for Local Government (the “NJC”)”. After the 2004 transfer to Parkwood, new rates of pay for the period 1 April 2004 to 31 March 2007 were negotiated and agreed by the Council and the relevant unions through the NJC. Other terms were also agreed relating to training, development and other aspects concerning working relationships. Parkwood was not party to the negotiations. Although Parkwood increased pay in 2005 in accordance with the NJC rates agreed after the 2004 transfer, it did so expressly without acknowledging any liability to do so. Parkwood subsequently refused to increase pay in later years in accordance with further revised rates agreed through the NJC. The Claimants brought claims in the Employment Tribunal for unlawful deduction from wages. They argued that their employment transferred to Parkwood under regulation 5 of TUPE 1981 and that any collective agreements would also transfer under regulation 6 TUPE 1981. The Tribunal rejected the claims and found that the renegotiated pay rise in 2004 amounted to a new collective agreement which did not bind Parkwood. On appeal, the Employment Appeal Tribunal (“EAT”) disagreed and found in favour of the Claimants.

Parkwood appealed to the Court of Appeal (“CA”). The CA held that it was bound by the European Court of Justice decision of Werhof v Freeway Traffic Systems GmbH & Co. KG [2006] IRLR 400 which decided that terms referred to in a collective agreement negotiated by a third party (here the Council, being the Claimants’ former employer) will only continue to apply to the transferred employees’ contracts until the relevant collective agreement expires, terminates or is replaced. The ECJ’s reasoning was based on Article 3 of the Acquired Rights Directive 77/187/EC (now Directive 2001/23/EC). Article 3(1) provides that rights and obligations under a contract of employment existing at the date of the transfer are transferred to the transferee. Article 3(2) provides that the transferee had to comply with any collective agreement applying to the transferor “until the date of termination or expiry of the collective agreement or the entry into force or application of another collective agreement”. The ECJ in Werhof said clauses in employment contracts which refer to third party agreements are “static” so that collective terms agreed after the transfer will not bind the transferor. They are not “dynamic” in the sense that collectively agreed terms after the transfer will continue to bind the transferor. The ECJ’s conclusion was based on the two important considerations. First, that the Directive did not intend a transferee to be bound by a collective agreement other than the one in force at the time of the transfer. Second, that the transferor has a fundamental right to join, or not to join an association and this fundamental right would be breached if the “dynamic” approach were to apply. 

The CA noted the earlier domestic decision of the EAT in Whent v Cartledge [1997] IRLR 153 which had approved the “dynamic” approach to employment contracts, whereby the transferee will be bound to terms collectively agreed by third parties after the transfer. However, this approach was incorrect in the light of the ECJ’s decision in Werhof in 2006. TUPE should be construed as far as possible in line with the directive and the ECJ in Werhof.

What this decision means to employers

As mentioned above, although the Court was required to consider the provisions of TUPE 1981, the same position will apply in the case of TUPE 2006 (regulations 4 and 5 of TUPE 2006 have a similar effect to regulations 5 and 6 of TUPE 1981). 

This case will be important for employees who have been transferred to the private sector from a function previously undertaken in the public sector. Private sector employers will welcome this decision as it means that they will no longer be bound by collective agreements which have transferred pursuant to TUPE where those agreements are re-negotiated and in circumstances where they are not a party to the negotiations. The decision sensibly recognises an employer’s fundamental right of freedom of association and gives transferee employers comfort that they will have control over future pay reviews where those reviews have yet to take place at the time of the transfer. 

In practice, where specific terms have been incorporated into an employee’s contract as a result of a collective agreement negotiated between the transferor and the transferor’s recognised union, those specific terms will continue to bind the transferee after the transfer. For example, where terms relating to agreed incremental pay increases over a period of time which includes the post transfer period, have been incorporated into the employment contract, the transferee will be bound by those incremental pay increases. However, the position is different when a general term referring to collective agreements negotiated from time to time has been incorporated into the transferring employees’ contracts (such as in this case). In these cases, any new rates of pay negotiated after the transfer by the transferor and the transferor’s recognised union in circumstances where the transferee is not party to the negotiations, will not bind the transferee where the renegotiated terms comprise a new collective agreement (such as in this case).