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Businesses and undertakings are merged, transferred and taken over every day of the week. The Transfer of Undertakings (Protection of Employment) Regulations 1981  and their successors, the Transfer of Undertakings (Protection of Employment) Regulations 2006, play a vital role in safeguarding the rights of employees whenever the undertaking for which they work changes hands. One key way in which these regulations protect employees is by subjecting the transferee to the same contractual obligations towards the employees of the undertaking as were owed by the previous employer (reg 5 TUPE, and reg 4 of the 2006 Regulations). In the recent case of Parkwood Leisure Ltd v Alemo-Herron & Ors [2011] UKSC 26 the Supreme Court was asked to resolve an important issue concerning the exact scope of that protection.

Factual background

The facts of the case are straightforward. The appellants were all former employees of the leisure department of Lewisham Borough Council. They had worked in the department until 2002, when the undertaking was contracted out to a private sector employer. In 2004 the undertaking was then taken over by a second private sector employer, Parkwood Leisure Ltd, the respondent to the appeal.

The appellants’ employment contracts with the Council contained a particular contractual mechanism for determining the level of remuneration payable to employees. Unlike most employment contracts, which expressly stipulate the exact amount of an employee’s remuneration, the appellants’ contracts contained a term which provided that their salaries would be determined by collective agreements concluded from time to time by a third party, the National Joint Council for Local Government Services. The upshot of this arrangement was that the appellants’ salaries were not fixed by the contract itself, but instead fell to be determined by the collective agreements concluded and periodically renegotiated by the NJC.

When the appellants were transferred for the first time their new employer honoured the NJC’s collectively agreed terms. However in March 2004 the NJC then began negotiating new collective terms for a three-year period beginning on 1 April 2004. These negotiations were concluded in June 2004, after the second transfer to Parkwood had taken place. As a private sector employer, Parkwood had not been eligible to participate in the NJC negotiation process. Parkwood accordingly refused to award the appellants increased rates of pay in accordance with the most recent NJC collective agreements.

The appellants brought claims against Parkwood for unauthorised deductions of wages. Parkwood resisted these claims, arguing that it was not bound by the terms of any collective agreements concluded after the date on which it took over the undertaking. At first instance the employment tribunal dismissed the claims. The appellants then successfully appealed that decision before the Employment Appeal Tribunal; however the EAT’s decision was itself overturned by the Court of Appeal. The appellants therefore appealed to the Supreme Court.

The issue before the Supreme Court

The moment the appellants’ undertaking was transferred the protective effect of TUPE kicked in and the new employer was immediately bound by the terms of the existing employment contracts. The question for the Supreme Court, however, was whether TUPE required the new employer to pay remuneration in accordance with the terms of collective agreements that had been concluded by the NJC after the date when the new employer took over the undertaking. In other words, did the employees’ remuneration rights crystallise at a particular salary level on the date of the transfer? Or did TUPE enable the employees to benefit from a “dynamic” reading of their employment contracts, so as to benefit from subsequent increases in the remuneration terms collectively negotiated by the NJC?  The answer to this question would have important consequences for the hundreds of thousands of individuals in the UK with similar contracts of employment to the appellants.

The domestic regulations and the EU Directive

In order to decide the appeal, the Supreme Court had to consider the complex relationship between the TUPE regime and the European Union Directive that TUPE was enacted to give effect to. This meant examining general principles of statutory interpretation as well as grappling with the “troublesome” case law of the European Court of Justice in this area.

The correct interpretation of reg 5 TUPE lay at the heart of the appeal. Reg 5(1) provides that, save in certain circumstances defined by para (4A), a transfer covered by TUPE does not have the effect of terminating an employee’s contract of employment. Reg 5(2)(a) provides that on completion of a transfer “all the transferor’s rights, powers, duties and liabilities under or in connection with any such contract shall be transferred by virtue of this regulation to the transferee”.

The appellants argued in favour of a “dynamic interpretation” of the effect of their original contract on subsequent transferees. In short, they contended that the effect of reg 5 TUPE was that their contracts should be interpreted as binding Parkwood to all collective salary agreements negotiated by the NJC after the transfer of the undertaking. The respondent, on the other hand, argued in favour of a “static” interpretation. According to Parkwood, a transferee should not be bound by any collective agreements that were not already concluded and binding on the original employer at the date of the transfer.

If the issue had solely been one of domestic law then the answer would have been clear: under ordinary domestic law principles of construction, the relevant “dynamic” contractual term is preserved by reg 5, as various decisions of the Employment Appeal Tribunal and the Court of Appeal had recognised pre Werhof (referred to below). There is also no reason why a private sector employer should not be able to bind itself to pay employees at a rate to be determined by a third party. However the issue was complicated by the interface between reg 5 of TUPE and Council Directive 77/187/EEC on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings. The Directive was amended by Council Directive 98/50/EC and then replaced by Council Directive 2001/23/EC; however the material provisions remained the same throughout.

The Preamble to the Directive explains that it was intended “to promote the approximation of laws in this field” i.e. it was not intended to create absolute harmonisation of the laws of the Member States on business transfers. This is also apparent from Article 7, which states that the Directive shall not affect the right of member states “to apply or introduce laws, regulations or administrative provisions which are more favourable to employees.”

Regulation 5 of TUPE was enacted to give domestic law effect to Article 3(1) of the Directive. Article 3(1) provides that:

“The transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer within the meaning of article 1(1) shall, by reason of such transfer, be transferred to the transferee.”

The meaning and effect of Article 3(1) had been considered by the Court of Justice in Werhof v Freeway Traffic Systems GmbH & Co KG (Case C-499/04) [2006] ECR I-2397. The correct interpretation of that case was central to the issue that the Supreme Court had to determine in Parkwood Leisure. In Werhof, the national court had rejected a dynamic approach to the claimant’s contract of employment. On a reference from the national court, the Court of Justice held that the national court’s approach was compatible with Article 3(1) of the Directive.

In Parkwood Leisure the Court of Appeal concluded that Werhof meant that a transferee was not committed by Article 3(1) to any collective agreement entered after the date of the transfer of an undertaking. The Court of Appeal went on to hold that there was nothing in the language of reg 5 TUPE to indicate that it was intended to enlarge employees’ rights beyond those provided by Article 3(1) of the Directive. Accordingly, the court held that the appellants could not enforce a dynamic reading of their contracts against Parkwood.

In the light of this decision the Supreme Court therefore had to decide two questions. First, what is the effect of the Court of Justice’s judgment in Werhof on the interpretation of Article 3(1) of the Directive? Second, to what extent, if at all, is there room for giving a different meaning to reg. 5 TUPE from that indicated by Werhof as the correct meaning of Article 3(1)?

The interpretative obligation in domestic law

Lord Hope gave the only judgment in the Supreme Court. He began by examining the nature of the interpretative obligation in domestic law. It is well established that the courts are under a duty to construe domestic legislation which has been enacted to give effect to the UK’s obligations under the EU Treaty so as to give effect to those obligations (Pickstone v Freemans plc [1989] AC 66; Litster v Forth Dry Dock & Engineering Co Ltd [1990] 1 AC 546). But is a UK court prohibited from interpreting domestic legislation in a way that is more generous than the EU legislation that the domestic legislation was enacted to give effect to? Lord Hope concluded that it was not. In other words, there is nothing to stop a domestic court from applying its usual domestic law approach to interpretation, and thereby conferring more extensive protection than EU law requires, provided that the final outcome does not violate any provision of EU law.

Lord Hope based this conclusion upon two decisions of the Court of Justice: Katsikas v Konstantinidis [1992] ECR I-6577 and Criminal Proceedings against Lindqvist [2004] QB 1014. In the latter case the Court of Justice stated that, “nothing prevents a member state from extending the scope of the national legislation implementing the provisions of Directive 95/46 to areas not included within the scope thereof, provided that no other provision of Community law precludes it.” Lord Hope also referred to the speech of Lord Brown in R (Hurst) v London Northern District Coroner [2007] UKHL 13, who said:

“In cases where no European Community rights would be infringed, the domestic legislation is to be construed and applied in the ordinary way.”

In the light of these authorities it was therefore open to the Supreme Court to interpret reg. 5 TUPE more generously than the Directive, provided that such an interpretation was not actually precluded by EU law.

The ordinary and natural meaning of Regulations 5(1) and 5(2) TUPE

Lord Hope next examined reg 5 TUPE and concluded that Parliament had intended to do no more, when it was enacting that regulation, than implement Article 3(1) of the Directive. However this was not the end of the story since,

“It is open to the national court…to extend the scope of the national legislation implementing the provisions of the Directive to areas not included within its scope, provided that no other provisions of Community law preclude it. In the present context this means that it would be open to the national court to give regulations 5(1) and 5(2) their ordinary and natural meaning so long as there was nothing in Werhof that indicates that it is not open to it to do so.”

This gave rise to two questions. First, what is the ordinary and natural meaning of the language of regs 5(1) and 5(2)? Second, is that ordinary and natural meaning compatible with Article 3(1) of the Directive, as expounded in Werhof?

Lord Hope did not provide a conclusive answer to the first question. However it was clear from his judgment that he favoured an interpretation of reg. 5 that allowed the transfer of dynamic contractual rights. On this point, Lord Hope commented that there were various reasons for thinking that, when TUPE was originally being framed, it was believed that employment contracts such as the appellants’ which provided for a dynamic approach to collective agreements were permitted by the Directive.

The important question was whether Werhof prevented the UK courts from interpreting TUPE so as to protect dynamic contractual rights. Did Werhof mean that a static approach was actually required by the Directive, or did it simply mean that a static approach was permissible but not mandatory?

The effect of Werhof on the interpretation of Article 3(1) of the Directive

In Werhof the national court explicitly rejected a dynamic approach. The applicant’s terms of employment with his original employer had provided that his salary would be determined by the collective wages agreements negotiated from time to time between the relevant trade union and the employer’s federation (of which his original employer was a member). The applicant’s undertaking was subsequently transferred to a new employer, which was not a member of the employer’s federation. After the transfer had taken place, a new collective agreement was concluded between the trade union and the employer’s federation. Under German law, collective agreements were legally enforceable as between the parties and for the benefit of the members of the union parties; however in order to be enforceable the relevant statute required the employer to be a member of the employer’s federation that was a party to the collective agreement or there to be agreement between employer and employee that the agreement applied in the same way that it applied to members of the union parties. The applicant argued that he was entitled to benefit from the terms of the new agreement, notwithstanding that it was concluded after the transfer to his new employer and notwithstanding that his new employer was not a member of the employer’s federation that had negotiated it.

The German court examined the domestic law on the transfer of undertakings and held that the applicant was not entitled to take advantage of the new collective agreement. In other words, the national court rejected a dynamic approach and held that the applicant was only entitled to a static reading of his contract. The Court of Justice was then asked to decide whether this interpretation was compatible with Article 3(1) of the Directive.

The Court of Justice held that the national court’s interpretation was permissible under the Directive. It gave two reasons for this conclusion. First, Article 3(2) of the Directive showed that the object of the Directive was merely to safeguard the rights and obligations of employees in force at the date of the transfer, and was not intended to protect hypothetical advantages flowing from future changes to collective agreements. Secondly, although the interests of the employees must be protected, the interests of the transferee could not be disregarded. Under the German law relating to collective agreements, a dynamic interpretation would potentially have infringed the transferee’s fundamental right not to join an association, whereas a static interpretation fully respected that right. Accordingly, the Court of Justice concluded that:

“ . . . Article 3(1) of the Directive must be interpreted as not precluding, in a situation where the contract of employment refers to a collective agreement binding the transferor, that the transferee, who is not a party to such an agreement, is not bound by collective agreements subsequent to the one which was in force at the time of the transfer of the business.” [Emphasis added]

So where did all this leave the appellants in Parkwood Leisure? Lord Hope agreed that there was “something to be said” for the appellants’ argument that Werhof was distinguishable on its facts. However more importantly, the issue addressed in Werhof was not the same as the question before the Supreme Court in Parkwood Leisure. In Werhof the Court of Justice had simply ruled that the static interpretation applied by the domestic courts was “not precluded” by the Directive. In Parkwood Leisure, the question had to be looked at the other way round: did the Directive actually require the national courts to adopt a static interpretation? If the Directive required a static approach then reg. 5 TUPE would have to be construed accordingly and the appellants’ claim would fail. However if the Directive did not demand a static approach then it was open to the national court to interpret national law so as to allow the transfer of dynamic contractual rights.

Overall it was not clear from Werhof whether or not Article 3(1) actually prohibited the transfer of dynamic contractual rights. There appeared to be signs in the Court of Justice’s judgment that it did not. Lord Hope said that the first of the two reasons given by the Court of Justice – that the object of the Directive was merely to safeguard the rights and obligations of employees in force at the date of the transfer – did not seem to preclude a more generous interpretation if the national court felt that this was more appropriate in order to give effect to the ordinary meaning of TUPE. As for the second reason given by the Court of Justice – the need to protect the transferee’s right not to join an association – this consideration did not arise under TUPE. The TUPE regime is “entirely different” to the German regime and there is “no equivalent statutory framework” in the UK. Unlike in Werhof, there was simply no danger that a dynamic interpretation would infringe Parkwood’s right not to join an association (indeed Parkwood did not even advance such an argument).

In the end, however, since the answer was not “acte claire” the Supreme Court decided to refer the issue as to the Court of Justice for a preliminary ruling under Article 267 TFEU. The Court of Justice will therefore be asked to decide whether Article 3(1) of the Directive precludes the transfer of dynamic contractual rights whenever an undertaking is transferred. The matter will then return to the Supreme Court, which will decide the appeal in the light of the answer provided by the Court of Justice.

Comment

The judgment in Parkwood Leisure is important for two reasons. First, it confirms that the UK courts may in appropriate cases be  free to interpret national legislation more generously than the EU legislation that it was enacted to implement, provided that the more generous domestic interpretation is not incompatible with any rules of EU law and subject to the question of vires under Section 2(2) European Communities Act 1972. This is a perfectly sensible approach and is entirely consistent with the previous jurisprudence of the Court of Justice and the UK courts.

Secondly, the judgment is of “fundamental importance” to the thousands of employees who work in sectors where the terms and conditions of employment are commonly determined through collective bargaining. As far as those individuals are concerned, the protection afforded by TUPE will be significantly diluted if reg. 5 is restricted to protecting static rights.

If the Court of Justice decides that the transfer of dynamic contractual rights is permitted under the Directive, it appears very likely that the Supreme Court would construe reg 5 TUPE as having exactly this effect. The fact that Germany and the UK might end up with different degrees of employee protection is not inherently problematic. The Directive is intended to “promote the approximation” of laws among the Member States in this field. It therefore contemplates a situation where differences in the level of employee protection remain across the Member States. Moreover, Article 7 expressly preserves the power of Member States to introduce regulations which are “more favourable” to employees. The Directive therefore sets a floor, not a ceiling, and tacitly invites Member States to confer greater protection on employees if they see fit.

EDWARD CRAVEN