The ‘Swedish derogation’ is a fancy pretence about permanent contracts for UK agency workers

While the enthusiasm of British businesses for zero-hours contracts has been widely criticised, the ‘Swedish derogation’ gives a fancy name to a British system which enables one-hour-a-week contracts to legally masquerade as ‘permanent work’ and strips agency workers of entitlement to be paid the same as non-agency workers.

Ed Miliband has announced that, if elected, his government will remove the 'Swedish derogation’ from British employment law.  This is to be welcomed since Britain's so called ‘Swedish derogation’ makes a mockery of principles applied in Sweden to promote decent work and permanent employment with labour agencies.  There are significant benefits to workers of having a ‘proper job’ with an agency and being paid in-between assignments.   However, the idea of encouraging permanent employment with agencies has been picked up and seemingly plonked into a British context with none of the surrounding regulatory infrastructure or sectoral collective bargaining to make it advantageous for agency workers. 

Miliband's attention is also timely. Following a ruling of the EAT in December, the British courts risk getting into something of a pickle over interpreting what is meant by 'temporary' in the Temporary Agency Workers Regulations 2010.  The reasoning in Moran v Ideal Cleaning veers between eligibility based on a) working for a 'temporary' agency b) working under a temporary contract of employment c) working on a temporary assignment d) temporary as meaning 'that which is not permanent'.  More to follow in a case note on Moran, but suffice to point out here that the cleaners concerned had worked for an employment agency, on the same cleaning contract with a client organisation, for between 6 and 25 years.  They were paid less than they would have been if directly employed by the client organisation.  The judgment denied them access to rights under the Temporary Agency Workers Regulations to better pay, on grounds they had been 'permanently placed' by the agency. 

The Agency Workers Directive 2008/104/EU established that basic working conditions for temporary agency workers are to be at least those which would apply if the worker was directly recruited by the client organisation.  Its focus on temporary agency work supported the accommodation of responsible employment practice in member states where agency work was offered on the basis of permanent employment with the agency (such as Sweden).  Paragraph 15 provided:

‘In the case of workers who have a permanent contract with their temporary-work agency, and in view of the special protection such a contract offers, provision should be made to permit exemption from the rules’.

Accordingly, Regulation 5(2) concerns pay and provides that  'where temporary agency workers have a permanent contract of employment with a temporary-work agency [and] continue to be paid in the time between assignments' the agencies can be exempt from having to pay agency workers at least as much as would apply if the worker was directly recruited by the client.

At the time when the 2008 directive was introduced, Britain was one of only six EU member states that did not already provide equal pay protection to agency workers.  In addition, the number of agency workers in the UK was thriving.  The UK’s Agency Worker Regulations came into effect in October 2011, when there were estimated to be 1.5 million agency workers.

How the regulation of agencies works in Sweden

In Sweden, employment agencies adhere to minimum rates of pay which are reached, by sector, through negotiations between employers’ associations and trade unions. All employment with an agency is automatically assumed to be permanent unless otherwise specified.  If stipulated as a temporary contract, it is subject to strict time limits.  In advance of a client hiring a worker from an agency, the law requires the company to consult with the relevant employers’ association about which collective agreement should be observed.

Employment agencies are members of the Swedish Staffing Agencies Association, which signs negotiated agreements with the Swedish trade unions. Membership provides the agencies with authorised status and obliges them to follow a collective agreement.  In the event of a collective agreement being broken, the agency can lose its authorisation to operate.

Collective agreements for skilled agency workers guarantee pay based on a monthly minimum of 133 hours, rising to 150 hours of work after 18 months employment.   They also cover compensation for overtime, displaced working time, on-call duties, traveling time compensation, holiday and sick pay. The agreements for unskilled agency workers provide for a guaranteed wage for the times they are not hired out to a client based on 90% of their average income during the prior three months.  Terms set out in collective agreements include working time, traveling time compensation, leave of absence, sick pay, holiday, the working environment, and paid time to participate in vocational and educational training.

In Sweden, it is these sectoral collective agreements that regulate the employment contract, not a blanket minimum wage as in the UK.  Swedish agency workers with permanent employment are exempt from EU provisions offering pay which is the same as would apply if the worker was directly recruited by the client organisation.  However, Swedish agency workers have the opportunity to both participate and be represented in a strong, government supported system of joint negotiation between unions and employers in which their voices are heard. 

What the ‘Swedish derogation’ means in the UK

The Agency Workers Regulations 2010 provide that UK agency workers who have worked in the same role, with the same hirer for at least 12 weeks, are entitled to the same ‘basic working and employment conditions as [they] would be entitled to for doing the same job had [they] been recruited by the hirer.’  However, parity is limited to pay, working time and holiday entitlement.  Expressly excluded  is sick pay, maternity pay, redundancy pay, pension, payments for time off for trade union duties and any payment for expenses.

It has been estimated that UK agency workers earn 32% less than comparable employees who are directly hired.  Furthermore, UK agency workers do not generally have the legal status of an ‘employee’ and are therefore are not entitled to the full range of employment rights and receive wages only for the hours they are engaged in an assignment.

The UK Agency Workers Regulations (2010) provides in Regulation 10 that the right to the same pay as if directly hired by the client does not apply to agency workers engaged under a ‘permanent contract of employment providing for pay between assignments’.  On the face of it, the income stability offered by a permanent contract is highly beneficial to agency workers.  However, what passes for a ‘permanent contract’ under these regulations is miserly.  According to Regulation 10(1)(a)(v) an eligible ‘permanent contract’ may guarantee the worker just one hour of work each week during an assignment.  This one-hour-a-week contract counts as ‘permanent’.  The pay intended to sustain the worker between assignments is either the National Minimum Wage or at least 50% of the hourly rate earned in the highest earning week of the previous 3 months.  In return, the agency worker must be available to take work as an when it becomes available and sign away all legal rights to same pay. 

In short, under a ‘permanent’ contract, an agency worker can be paid for 1 hour a week, at the minimum wage, in exchange for giving up their right to decent pay.   The rationale for the UK’s use of this permanent employee status exemption appears motivated by concern for the cost to client companies of approx £3,722 per agency worker per year for ending pay discrimination against agency workers.  

In Conclusion

It would appear that the Swedish system is a genuine attempt to increase the level of employment security offered to agency workers.  It illustrates that insecurity, lack of rights and economic hardship associated with temporary work need not necessarily always be a feature of working for an agency.  However, the use which has been made of this exemption in the corresponding UK regulations appears to be driven by a more cynical rationale.  

Miliband’s commitment to get rid of the 'Swedish derogation’ is a small chink of light in a gloomy national political culture which is tolerant of poor working conditions, low wages and disrespect for workers rights.  It is perhaps more than a little ironic that zero-hours contracts have been widely condemned (and are currently the subject of a public consultation) while the ‘one hour a week contract’ is currently alive and well, with a fancy sounding name and the legal capacity to turn a casual agency worker into a permanent employee so they can sign away their entitlements to equal treatment.

see Ahlberg K (2011) Agency Workers should have Equal Rights, Nordic Labour Journal; Temporary Agency Work and Collective Bargaining in the EU, (European Foundation for the Improvement of Living and Working Conditions, 2009)

Digesting one hot EU potato: A comment on fresh proposals for the Posted Workers’ Directive.

In advance of EU elections in May 2014, the issue of 'social dumping' and wage competition between workers from different member states is under intense public scrutiny. In the UK, attention has focused on the extension of free movement rights to Bulgarian and Romanian nationals whereas elsewhere in the EU, the issue of posted workers stands out as a political hot potato. 

Ongoing economic hardship and rising unemployment has put public pressure on EU law-makers. Employment ministers from across the EU have agreed proposals on the implementation, application and enforcement of the existing rules on the posting of workers. Approval by Members of the European Parliament is far from certain, but with EU elections looming there is a sense of urgency about negotiations prior to the last plenary session of the current Parliament on 14-17^th April 2014. 

Posted Worker controversy

Most EU citizens working in an EU member state other than their home state do so by drawing on free movement rights available in EU law.  However, EU workers qualifying as ‘Posted workers’ rely on the cross-border service rights available to businesses established in the EU.   Companies established in one EU member state may win contracts to provide services in other member states and ‘post’ EU workers across member state borders to perform the work on a temporary basis.

The classification of ‘posted worker’ has proven controversial as a distinct category of worker in EU law.  It costs much less to engage a posted worker from a low-wage EU member state such as Lithuania, than to employ a worker directly in a high-wage EU member state such as Germany.  This is partly due to the way in which the rules of the Posted Workers Directive 96/71/EC have been interpreted.  It is also a consequence of political commitment to a dynamic EU employment environment based on the principles of free movement in goods, people and services.  An EU-wide labour market open to ‘posted workers’ creates commercial opportunities for cross-border service providers to lever strong competitive advantage by posting. 

In 2013, a complaint of ‘social dumping’ was lodged by Belgian Ministers before the EU Commission in response to bankruptcies amongst Belgian, French and Dutch meat processors.  In the absence of a national minimum wage in Germany and lack of a generally applicable collective agreement, German abattoirs were able to use workers posted from Poland and paid less than €4 an hour.  

Low wages are not the sole controversy associated with posting and the European Transport Federation has recently claimed that labour exploitation goes hand in hand with tax avoidance and the abuse of systems of social security.  In the transport sector, service providers reportedly establish themselves via letter box companies in tax havens such as Jersey; recruit workers in low wage Eastern EU member states and post them to work on transport contracts in higher-wage Northern EU member states.  An example of social dumping is that of an employment agency recruiting Romanian drivers on behalf of a lorry firm registered in Cyprus.  These workers are them posted to Belgium and France on 12 week temporary contracts, working 12 hours a day, for €300 per month.  This wage is comprised of a 30% basic element and 70%  bonus.  Since the employment contracts are subject to Cypriot law, the employer is required to pay social costs (i.e. forms of national insurance) on only the 30% basic element of the wage.  Unsurprisingly, the French and Belgian transfer sector claims to be unable to compete.

Trade unions have faced legal action when members tried to defend their terms and conditions from undercutting by service providers who post workers.  In the judgments of the European Court of Justice in Laval and Viking, economic freedoms prevailed over the social rights of workers to take collective action.  Collective actions were ruled as an unjustified interference with the freedom to provide services and free movement rights.  This raised the prospect of unions being exposed to uncapped damage claims because industrial action might be ruled unlawful at an EU level, even when it was lawful under national rules.  Public authorities in receiving states have likewise found themselves challenged in law.  Following the case of Luxembourg they have been prevented from imposing specific national regulatory requirements on service providers that post workers into their territory.  The case of Ruffert prohibited the imposition of collectively agreed terms of work as a conditional term in public sector building contracts.    

Critics regard the current posted workers regime as either poorly enforced or inadequate.   The Posted Worker proposals agreed by Employment ministers acting through the Employment Social Policy Health and Consumer Affairs Council in December 2013 do not assist posted workers to access the terms and conditions they would otherwise be entitled to if employed, and represented, like workers in receiving states.   Rather, these measures aim to formalise systems of inspection, co-operation, accountability and information exchange between the member states who receive posted workers, and the member states from which they are sent.  

Enforcing the Posted Workers Directive.

Article 3 of the Posted Workers Directive 96/71/EC is its regulatory backbone. Accordingly, member states must ensure that posted workers are guaranteed terms and conditions fitting a list of seven employment matters including hours of work, holidays, minimum wages, agency work, health & safety, pregnancy and equal treatment on grounds of sex, race etc.

Up until 2007 it was generally considered that this list laid down a bare minimum of entitlement.  However, following the cases of Laval, Viking and Ruffert, the European Court of Justice made clear that the list set the limit of employment matters on which posted workers could receive legal protection.  To qualify, terms and conditions falling under one of the list headings would have to be laid down by national law/administrative regulation.  Posted workers in construction and building work could also draw on terms and conditions laid down in collective agreements declared universally applicable.  However, there are stringent rules determining the eligibility of collective agreements.  Depending on the legal customs of the member state concerned, permissible collective agreements are those observed by, or generally applicable to, ALL employers in a geographical area and industry, or those concluded by the most representative employers’ and labour organisations and nationally applied.

Fresh proposals for posted workers.

The proposals establish a mechanism by which member states can be assured that service providers are genuinely eligible to post workers from a sending state and that postings to receiving states are genuinely temporary in nature.  Each member state is required to nominate a ‘competent authority’ with responsibility for performing the functions laid down.  To be deemed genuine, a service-provider should undertake ‘substantial activities’ in the member state in which it claims to be established, and perform more than just internal management or admin functions.  This measure appears designed to stamp out the practice of setting up convenience letter-box companies.  ‘Competent authorities’ are also permitted to assess whether a posting is genuinely temporary.  However, there are limitations on their powers of determination.   Article 3.3 of the Posted Worker proposals states that the factors permitted to be examined are merely to be taken as indicative, case specific and of merit only ‘in the case of doubt and may not therefore be considered in isolation’.  Hence it would be unwise to regard the factors discussed in the Posted Worker proposals as a shopping list for determining if a service-provider is ‘genuine’, or a posting ‘genuinely temporary’. 

Member states engaged in sending and receiving posted workers are expected to provide clear and accessible information about terms and conditions of employment.  Receiving states should use national websites to identify which terms and conditions have to be applied.  The breadth of information shared is strictly limited to legally supported minima corresponding to the list of employment matters laid out in Article 3 of the PWD.  It does not include reference to general principles, aspirations or good employment practice within an industry, region or member state.  Where relevant employment matters are set out in eligible collective agreements, member states may involve trade unions in the sharing of information to clearly set out which terms have to be applied and to whom.

Sending states will continue to be responsible, in accordance with national law, for monitoring and enforcing measures relating to workers posted to another state.  However, they will also ensure that service providers supply the necessary information for supervising their activity and provide receiving states with assurances about the legality of the business, its good conduct and lack of known infringement of relevant rules.

The ability of member states to impose administrative controls on service providers is restricted.  Formalities must be designed to enable service providers to satisfy them ‘easily’ and ‘at a distance’.  Any measure must be justified and proportionate and may only be extended on the limited grounds of enforcing the PWD.  The ETUC is particularly dissatisfied with this aspect of the proposals, because it does not support member states who may wish to implement specific national measures in order to protect workers’ rights to fair and equal conditions. 

Member states can require service providers to share information about the location and nature of the posting, the likely number of posted workers and the expected length of the posting.  In each receiving state, service providers will be expected to keep copies of employment contracts, payslips, timesheets and proof of wages.  However, the powers of inspection awarded to competent authorities are limited in scope of the list of employment matters set out in Article 3 PWD.  Furthermore, a decision to inspect should be based on a  risk-assessed approach and must not be discriminatory or disproportionate. 

The service provider must designate a specific person for liaison with the authorities and name a contact person with whom trade unions may ‘seek to induce the service provider to enter into collective bargaining within the host member state’.  This rather awkward wording at Article 9(1) of the proposals indicates that the promotion of collective bargaining in receiving states is not part of the regulatory design.

Although the PWD entitles posted workers to enforce their employment rights to the extent of the minimum guarantees, enforcement to date has been ineffectual.  The fresh proposals contain provisions at Article 11 which require member states to ensure ‘effective mechanisms for Posted Workers to lodge complaints against their employers directly, as well as the right to institute judicial or administrative proceedings’.  Posted workers will be able to do this in a receiving state so long as they are considered to have ‘sustained loss or damage as a result of a failure to apply applicable rules’.  With the approval on the individual concerned, a trade union may represent a posted worker in support of individual claims in any judicial or administrative proceedings.

If service providers are found liable for the underpayment of a posted worker, member states will ensure posted workers are able to receive ‘outstanding’ pay which, ‘under the applicable terms and conditions of employment covered by Article 3 96/71/EC would have been due’.  This suggests that posted workers may be unable to recover underpayments associated with the terms of collective agreements that may be incorporated into employment contracts but fall outside the criteria laid down in the PWD. 

The issue of liability within contracting chains would seem critically important for the effective regulation of posting because the status of posted workers depends upon the existence of a service delivery contract with a client organisation in the receiving state.  All posted workers are therefore in some way involved in a contracting chain.    Under Article 12 of the proposals, and following consultation with social partners, member states will be able to take additional measures on liability.  If a posted worker is due outstanding money, the contractor of the employing service provider may be held liable.  However, liability will only be for that ‘which corresponds to minimum rates of pay and/or contributions due to common funds or institutions of social partners in so far as covered by Article 3 Directive 97/81/EC’.  This extension of liability, from the direct employer of the posted worker to the contractor organisation, is a narrow one.  It does not to extend to all outstanding monies nor all seven categories of employment matters in the PWD, but only to the minimum rate of pay.  Further, member states are entitled to exempt contractors from any liability if they have taken due diligence obligations as defined by national law.

Some initial observations.

The fresh proposals on posted workers are weaker than MEPs had reportedly requested and make no mention of human rights or ILO standards.  Competent authorities may turn out to be little more than poorly equipped and under resourced policing units, with a limited remit, and an exclusive focus on enforcing the minimum standards set out on the PWD. 

Inspections relating to posted workers in receiving states must be neither discriminatory nor disproportionate. In the absence of risk-based evidence, member states with a poor track record of using inspection to enforce minimum labour standards (and one might include the UK) may be unable to justify more frequent inspections of posted worker arrangements.

On a more positive note Article 2 makes explicit reference to the right to strike, the right to negotiate, conclude and enforce collective agreements and the right to take collective action.  However, the full body of the proposals suggest this is little more than window dressing.

The proposals seem to further embed PWD provisions as a minimum suite of labour standards which also serve as the gold standard so far as posted workers are concerned.  This is implied at the outset of the document since Article 1 sets out a goal of an ‘appropriate level of minimum protection of the rights of posted workers’; suggesting that the minimum is indeed what is appropriate.  How threadbare this minimum can be, is well illustrated in provisions purporting to address the requirement of MEPs for liability to be carried through subcontracting chains.  On offer is a very limited extension of subcontractor liability which steps back even from the restricted list of seven employment matters, to include only minimum pay.

So far as the liability of the direct employers of posted workers is concerned, it appears a posted worker employed on better than minimum terms would have little ability to enforce those terms in the receiving state, and that pay over and above that minimum is non-recoverable if it does not fit the list of employment matters and eligibility requirements contained in the PWD.

The proposals arguably re-affirm the PWD as a mechanism for maintaining posted workers at the bottom of the labour market in receiving states.  Indeed, the application of posted workers status introduces a basement-level standard into the labour markets of member states.  The new regulatory approach is organised around an expectation that this basement-level of labour standards can be ‘policed’ by member states in the absence of trade union representation or effective collective bargaining.  It is hard to see how inferior labour rights can provide a sustainable basis for addressing exploitative pay, lack of regard for health and safety and the silencing of worker voice. 

New holes in the floor of labour rights? Alemo-Herron v Parkwood Leisure

The case of Alemo-Herron is a potential landmark in the post-crisis reconstruction of labour rights currently underway across the EU.  It presents a forthright assault on collective bargaining. Although focused on trade unions, the logic behind the judgment could be used to argue for the future reinterpretation or removal of other EU employment and labour law rights.  

The direct outcome of Alemo-Herron is, that despite statutory protection in EU and UK law, contractual terms which entitle workers to representation in public sector collective bargaining are unenforceable in the event of employment transfer to a private sector employer.  If applied more widely, it is possible that the jurisprudence emanating from Alemo-Herron will be used to restrict other labour rights.  Anti-trade union judgments have been particularly prominent in EU law since 2008 and stemmed from a suite of cases concerned with cross-border service provision, posted workers and the ability of trade union members to effectively protect terms and conditions (see cases of Viking, Laval, Ruffert).  However, Alemo-Herron gives a new footing to judicial hostility - undermining trade unions on the basis of protecting employer freedom to change employment contracts as the 'essence' of the right to conduct a business. The right of collective bargaining and the freedom to conduct a business are both laid down in EU law.  However, the failure of the Court of Justice of the European Union to pay regard to collective bargaining rights in Alemo-Herron suggests that provisions in EU law which have previously supported collective bargaining, or employment rights which have been made effective through collective bargaining, may not necessarily continue to be relied upon.  

Alemo-Herron originated in the UK and concerned the privatization of leisure services in a London borough. Even though the UK government claims to be very much against legal 'interference' from the EU, this is a case in which the UK government has been very keen for EU law to override the established protection of workers' rights otherwise available in British law.

The employment contracts of workers employed by the local authority stated:

'During your employment with the council your terms and conditions of employment will be in accordance with collective agreements negotiated from time to time by the NJC (National Joint Council for Local Government Services) supplemented by agreements reached locally through the council’s negotiating committee'.

As such, they were entitled, and received, annual pay increases negotiated through collective bargaining conducted at a national level, topped up by agreements reached between their employer and trade union representatives at a local level.

When the leisure service was privatized in 2002, the workers' jobs transferred to a private contractor, CCL.  The employment transfers were covered by legal provisions set out in the Transfer of Undertakings and Protection of Employment Regulations, commonly known as TUPE.  In line with its name, the purpose of TUPE is to protect employment in the event of a transfer of business undertakings.

CCL adhered to the requirements of TUPE.  It honored the contracts of the transferred workers by increasing their wages annually in line with ongoing improvements concluded in collective agreements negotiated by the National Joint Council for Local Government Services.  However, CCL later lost the contract and the workers' employment transferred again, to a new contractor - Parkwood Leisure.  All parties agreed that TUPE protections applied to the employment contracts with Parkwood, just as they had when CCL became the employer.  However, when it came to increases in annual pay, Parkwood did not follow the nationally negotiated pay increases set out in collective agreements.  Parkwood refused to honor the outcome of ongoing collective bargaining, despite the existence of the term which said otherwise in the contracts of the workforce it had acquired.

The law

Regulation 5(2)(a) TUPE states that all rights, powers, duties and liabilities connected with contracts of employment, transfer with the worker, from the transferor organisation (in this instance, the local authority) to the transferee (initially CCL, later Parkwood).  This protection is available in UK law as a result of the EU Acquired Rights Directive, a longstanding legal instrument which is most recently set out in Council Directive 2001/23/EC on the approximation of the law of the member states relating to the safeguarding of employee's rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses.

Article 3 of this Transfers Directive provides that the rights and obligations arising from a contract of employment shall transfer from the transferor organisation to the transferee.  In particular, subsection 3 states that, following an transfer, the transferee:

'shall continue to observe terms and conditions agreed in any collective agreement on the same terms applicable to the transferor under the agreement'.

There are provisions for member states to make this obligation a time limited one, but Article 8 asserts that the Directive:

'does not affect the right of Member States to apply or introduce laws, regulation or administrative provisions which are more favourable to employees or which promote or permit collective agreements'.

Prior to Alemo-Herron it seemed that EU law provided, in the event of a transfer, clear legislative protection of contractual rights, obligations to respect and adhere to collective agreements and the facility to encourage collective bargaining in order to safeguard the rights of employees.  Such protection would include the ability for national courts to come to conclusions which offered a superior outcome for workers.

The view of the UK Supreme Court

Mr Alemo-Herron, supported by his trade union UNISON, pursued a claim and the Supreme Court affirmed that under UK law he was entitled to draw on a contractual term which was 'dynamic'.  By 'dynamic', the Court referred to an ongoing entitlement to a benefit which would change over time, such as pay rises flowing from ongoing collective bargaining.  Contractual terms which set out such ‘dynamic rights’ are enforceable in UK law as a matter of common law and via established judicial interpretation of TUPE legislation.  The view of the Supreme Court was, that as long as the employment contracts were in place and unless the terms were lawfully amended, the leisure service workers were entitled to have their pay set by reference to ongoing collective bargaining.  However, some uncertainty stemmed from an earlier EU judgment.  In Werhof, the Court of Justice of the European Union (CJEU) had found that the relevant EU law did not require German courts to enforce a dynamic contractual term where that term was not otherwise enforceable under German law.  The Supreme Court of the UK therefore referred a question to the CJEU, it wished to know if the relevant EU provision in Article 3 of Transfers Directive 2001/23 permitted a national court to enforce a dynamic term in a contract, where that term was enforceable under national law.

The findings of the Court of Justice of the EU

The key finding in Alemo-Herron is that the Transfers Directive 2001/23 relating to the safeguarding of employee rights, does not actually safeguard employee rights.  Rather, the CJEU found that Directive 2001/23 seeks:

'to ensure a fair balance between the interests of those employees and those of the transferee'

The CJEU then explained how it would strike such a 'fair' balance. First, in the event of the transfer of a public service contract in the private sector, the CJEU finds private sector employers have interests which are distinguishable from public sector employers. These interests of private sector employers include having the ability to make:

'significant structural changes, given the inevitable differences in working conditions that exist between those two sectors' 

Accordingly, collective bargaining (or the dynamic clause in question) which is 'intended to regulate changes in working conditions in the public sector, is liable to limit considerably the room for manoeuvre necessary for a private transferee to make such adjustments and changes'.

It should come as little surprise to a Court well-versed in matters of social rights that collective bargaining challenges the interests of employers. Indeed, limiting room for manoeuvre by any employer to attack or reduce wages might be what many would see as the very purpose of trade unions and the point in protecting collective bargaining rights in this instance.

However, in the view of the Court, honouring the dynamic clause would be:

'liable to undermine the fair balance between the interests of the transferee in its capacity as employer on the one hand and those of employees on the other'

In the second part of the balance, the CJEU ascertained that the Transfers Directive 2001/23 must be interpreted in a way that is compatible with the Charter of Fundamental Rights of the European Union.  It did so by turning to well established jurisprudence, as set out in a recent case dealing with minimum standards applicable to asylum seekers who are transferred by one member state to another (CIMADE v Ministre de l'interieur [2013]). The Court could have found legal authority on this point from any number of its own judgments. It is perhaps revealing that it chose an asylum/migration case concerning the movement of people between member states as a relevant steer to inform the direction of Alemo-Herron, a case concerning the transfer of workers moving between public and private sector employers.  Anti-trade union ideology appears particularly prevalent when the Court upholds principles relating to free movement of labour - this has occurred post-2007 in the context of cross-border service provision between member states and now, it would appear, in the context of worker movement between public and private sectors.

The Courts' reference to the Charter of Fundamental Rights of the European Union (CFEU) is legally and politically significant in the context of the UK labour market. The UK is a signatory to Protocol 30 of the CFEU which states that the Charter does not 'extend the ability of the Court of Justice of the European Union' or UK courts, to find that UK laws are 'inconsistent' with the CFEU.  The UK government claims Protocol 30 gives it an opt out from the CFEU.  The legal standing of this claim however is dubious and its basis may prove more strongly grounded in inter-member state politics than law.  Nevertheless, despite vocal opposition by the UK government on other CFEU related matters, it has not complained about reference to CFEU in Alemo-Herron, even though the effect is to realise CFEU rights in the UK regardless of the Protocol.  Arguably, this because the rights in question are pro-business.

Article 16 of the CFEU states the freedom to conduct a business as a matter of EU law. Although the Court acknowledges in Alemo-Herron that this is not an absolute right, it finds that freedom to contract is an essential component, and any interpretation of Directive 2001/23 'must in any event comply with Article 16'.

According to the Court this means:

'the transferee must be able to assert its interests effectively in a contractual process [...] and to negotiate the aspects determining changes in the working conditions of its employees with a view to its future economic activity'

Since a private sector organisation is not able to participate in the Joint National Council for Local Goverment Services ...

'the transferee's contractual freedom is seriously reduced to the point that such a limitation is liable to adversely affect the very essence of its freedom to conduct a business.'

The verdict

Article 3 of the transfer Directive 2001/23 does not entitle member states 'to take measures, which while being more favourable to employees, are liable to adversely affect the very essence of a transferee's freedom to conduct a business'.  Therefore, the dynamic clause (the ongoing connection to national level collective bargaining) is precluded from being transferred as part of the contract.

New holes in the floor of labour rights?

The way in which the CJEU depicts the interplay between private sector contractors and public sector services is significant for workers employed in the UK's massive public services industry.  The approach of the CJEU suggests that issues of economic 'migration' are wider than matters of nationality and citizenship.  Public service workers who transfer between private contractor employers, appear judicially to be moving over economic frontiers, between the public and private sectors as distinctive regulatory arenas.  This is arguably an important tenet of the post-crisis EU, in which welfare states are dismantled and public services handed over to the private sector as a matter of fundamental economic and political principle.  Workers who are subsequently 'displaced' from public sector employment are analogous with workers who move across EU member state borders in search of work, because the Court defends the ability of employers to reduce wages in such circumstances and uses grounds of pro-business rights, worker mobility and freedom of contract to do so.

In reading the judgment, one could be forgiven for thinking that workers did not have the right to engage in collective bargaining laid down in EU law or freedom of association rights as a matter of European and International Human Rights law.  Collective bargaining rights are enshrined in Article 28 CFEU and technically have the same legal status as Article 16 rights to conduct a business.  Nevertheless, collective bargaining rights are not even mentioned by the Court in Alemo-Herron.  Although the Court acknowledges that the freedom to conduct a business is not absolute, there is no balance made between the right to run a business and the right to engage in collective bargaining.  This is made all the more shocking because of the emphasis on employers' contractual freedom.  Arguably, it is only through collective bargaining that workers have any effective freedom to influence the terms under which they are employed, because employers have much greater economic power than workers acting as individuals.  The lack of regard for collective bargaining rights might explain the UK government's quietism over judicial 'interference' from Europe or the creep of Charter rights in this particular instance.  UK ministers frequently complain about unwelcome legal precedents set by the Court of Justice of the EU.  The case of Alemo-Herron means its more important than ever to consider which rights, and whose freedoms, are so objectionable to the UK government as to be deemed unworthy of protection.

Perhaps the most ominous aspect of Alemo-Herron is the attitude of the Court of Justice of the EU to the safeguarding of longstanding statutory employment rights.  Previously, in the event of transfers of undertakings, the balance struck between the interests of employees and employers was thought to have been made in the conclusion of the EU Transfers Directive 2001/23 and its domestication into the legal frameworks of member states.  Now, the CJEU is prepared to set the Directive as a mere starting point from which new balances may be struck, and to use rights set out in the CFEU as a mechanism to assert their own judicial will.  Article 16 rights to conduct a business and freedom of contract for employers have been shown to be legally sufficient to prevent the terms of an employment contract being enforced to the benefit of employees. The contractual protections previously available to workers in the event of a transfer of undertakings have been weakened on the basis that EU law must rather protect employer contractual freedom. The need for contractual certainty on the part of workers and their freedom to engage in effective collective bargaining has been brushed aside.  The impact of Alemo-Herron makes a new hole in the floor of EU labour rights.  It remains to be seen in 2014 how much wider the hole might become, or how frequently the Courts will be prepared to replicate it.