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.