In July the European Court of Justice (ECJ) passed an unexpected judgment on the enforceability of changes to employment contract terms made by collective bargaining concluded after a transfer of an undertaking. The judgment was in respect of a UK case but it will have applications in other EU Member States. It was surprising mainly because it favoured the employer. The ruling can be regarded as another small move in the direction of a more liberal EU labour market. 

Effect of the Judgment

Put simply, where Undertaking A’s employment contracts provide that terms can be amended from time to time (i.e. dynamically) by a collective bargaining agreement (CBA), and Undertaking A’s business is acquired by Undertaking B under a business transfer, Undertaking B may not be bound by any changes to the terms of the employment contract agreed under the CBA after the transfer if Undertaking B is unable to take part in the collective bargaining negotiating process.

Clearly, this judgment is helpful for employers. Prior to the judgment it had been unclear whether, in the case of “dynamic” contract terms, Undertaking B would be bound by new terms (such as wage increases) contained in CBAs concluded after the transfer. The case has now returned to the UK Supreme Court for a final ruling on the matter in hand.

How the judgment will effect Court rulings in Members States remains to be seen. In the case of the UK, the UK Government announced last week, in response to this ruling and following consultations, that it “intends to amend the Transfer of Undertakings Regulations so that one year after the transfer, the existing restriction on variations to employment contracts will no longer apply in respect of changes to terms derived from, or incorporating, CBAs, provided that any change (which is by reason of the transfer) is no less favourable overall. The UK Government will also amend the Regulations to expressly provide for a static approach to the transfer of terms derived from CBAs (i.e. only those in existence at the date of the transfer will be binding on the transferee and not subsequent ones where the transferee is neither a party to those subsequent CBAs nor to the bargaining process for them)”.

Facts of the English case

The case, Alemo-Herron v Parkwood, concerned the leisure services department of a local council which had been contracted out and then later transferred to Parkside, a private company. The employment contracts of the former local council staff contained a provision stating that the terms “..will be in accordance with collective agreements negotiated from time to time by the National Joint Council for Local Government Services…(NJC)”. After the transfer to Parkwood, the NJC agreed wage increases under the collective bargaining process. Parkwood refused to apply the wage increase to the transferred staff on the basis that Parkwood was not a party to the NJC and was not bound by its decisions. The staff thought otherwise and brought a claim.

Before reaching the European Court, the case had slowly worked its way up the English judicial system all the way to the Supreme Court. The Supreme Court, uncertain of the correct interpretation of the Acquired Rights Directive (ARD), from which UK transfer of undertakings legislation derives, asked the ECJ for clarification of the EU law.

Ruling

The core conclusion was that while undertakings acquiring a business via transfer are bound by those CBAs in place prior to the transfer date, they are not, under the ARD, bound by changes made under CBAs concluded after the transfer unless they are able to partake in the negotiations.

The ECJ based its judgment on a new interpretation of the ARD.  Previously, the ARD had been regarded primarily as a tool for the protection of employee rights; the ECJ has now clarified that “.. [the ARD] does not aim solely to safeguard the interests of employees in the event of transfer of an undertaking, but seeks to ensure a fair balance between the interests of employees, on the one hand, and those of the transferee, on the other. More particularly, it makes clear that the transferee must be in a position to make the adjustments and changes necessary to carry on its operations…” The ECJ went on to say that the ARD must be interpreted in the light of the freedom to conduct a business, under Article 16 of Charter of Fundamental Rights of the European Union. Where a transferee cannot assert its interest in the collective bargaining process its freedom to conduct business is adversely affected.

In these circumstances the ECJ said that the ARD “..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 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.”