Alemo-Herron v Parkwood Leisure Ltd

The appellants are former employees of the London Borough of Lewisham ("the council"). They worked in the council's leisure department until 2002. Their part of the council's undertaking was then contracted out to a private sector employer named CCL Ltd and they were transferred into its employment. In May 2004 CCL's undertaking was taken over by another private sector employer named Parkwood Leisure Ltd ("Parkwood"), which is the respondent to this appeal. As a result of that transfer the appellants became employees of Parkwood. The Transfer of Undertakings (Protection of Employment) Regulations 1981 ( SI 1981/1794) ("TUPE") applied to each of these transfers.

TUPE safeguards the rights of employees when the business in which they worked changes hands between employers. It preserves their contractual rights so that they are enforceable against the transferee after the transfer. Regulations 5(1) and 5(2) of TUPE provided that their contracts of employment were to have effect after the transfer as if originally made between the persons so employed and the transferee. TUPE was replaced by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) which came into force on 5 April 2006. But the transfers with which this case is concerned took place before that date. So the position that applies to them is governed by the 1981 Regulations, which I shall continue to refer to as TUPE.

The council subscribed to the National Joint Council for Local Government Services ("the NJC"). The NJC comprises within its membership representatives of local authority employers and trades unions. As the appellants were employees of a local authority, their contracts of employment with the council included a term which entitled them to the benefit of the terms and conditions set by the NJC. They were in a standard form which, under the heading "Terms and Conditions of Employment", contained the following express term:

"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 National Joint Council for Local Government Services, set out in the scheme of conditions of service (commonly known as the Green Book) supplemented by agreements reached locally through the council's negotiating committees."

Among the terms and conditions collectively agreed by the NJC were rates of pay for employees of local authorities.

At the date of the appellants' transfer to CCL there were in place collectively agreed terms setting out the pay rates for the period from 1 April 2002 to 31 March 2004. Those terms were honoured by CCL throughout the period of the appellants' employment with that company. In March 2004 NJC negotiations began for the period from 1 April 2004 to 31 March 2007. There were twelve representations of the local government associations on the NJC and various unions, including UNISON of which the appellants were members. But Parkwood does not recognise UNISON and, as it is a private sector employer, it cannot belong to the NJC or be represented on it. So it was not a party to these negotiations. The negotiations concluded on 4 June 2004, after the date of Parkwood's takeover of CCL. On 14 July 2004 the NJC issued a circular summarising the three year settlement. It included pay increases for the periods from 1 April 2004 and 1 April 2005.

Parkwood initially refused to award the appellants pay increases in accordance with the collective agreement for the periods from 1 April 2004 and 1 April 2005. The appellants brought claims against it for unauthorised deductions from their wages contrary to section 13 of the Employment Rights Act 1996. These claims were settled without admission of liability and the increases for these years were paid. But Parkwood declined to award the appellants increased rates of pay in accordance with the collective agreements with effect from 1 April 2006 and 1 April 2007. So the appellants brought further claims against Parkwood for unauthorised deductions in the London (South) Employment Tribunal ("the ET"). The ET dismissed their claims, for reasons that were given in a judgment sent to the parties on 16 July 2008. On 12 January 2009 the Employment Appeal Tribunal ("the EAT"), allowed the appellants' appeal against that decision and remitted the claims to the ET for a hearing as to remedy: [2009] ICR 703. Parkwood was given permission to appeal. On 29 January 2010 the Court of Appeal (Ward, Smith and Rimer LJJ) allowed the appeal, set aside the order of the EAT and restored the decision of the ET to dismiss the appellants' claims: [2010] EWCA Civ 24, [2010] ICR 793.

The issues

The issue which lies at the heart of this appeal is whether the effect of regulations 5(1) and 5(2) of TUPE is that the appellants are entitled to the benefit of increases in pay negotiated by the NJC after they were transferred into the employment of Parkwood.

It is common ground that, had this issue been solely one of domestic law, the question would have been open only to one answer. In BET Catering Services Ltd v Ball ( unreported) 28 November 1996, Lindsay J, delivering the judgment of the appeal tribunal in Mrs Ball's favour, said that he could see no conceptual difficulty in a private sector employer binding itself to public sector pay rates. In Whent v T Cartledge Ltd [1997] IRLR 153, in a judgment delivered by Judge Hicks QC, the appeal tribunal said that, once it was accepted that regulation 5 of TUPE applied and that there had been no relevant subsequent variation in the contract of employment, the issue became simply one of the true meaning of the clause that provided that the employees' pay would be in accordance with the agreement made by the NJC as amended from time to time, and that there was no apparent reason why the transfer should cause any change in the meaning of these words: para 9. The employment tribunal's view that it could not be right that an employer is bound ad infinitum by the terms of a succession of collective agreements negotiated by bodies other than themselves was rejected. In para 16 Judge Hicks said:

"…there is simply no reason why parties should not, if they choose, agree that matters such as remuneration be fixed by processes in which they do not themselves participate."

In Glendale Grounds Management v Bradley, ( unreported) 19 February 1998, and Glendale Managed Services v Graham [2003] EWCA Civ 773, [2003] IRLR 465 issues were raised as to whether a different result followed because of particular words used in the employee's contract. In Bradley it was held that the particular terms of the contract required the approval of the employer for the time being to any new negotiated terms, whereas Glendale had given none. In Graham the clause provided that the rate of remuneration would "normally" be in accordance with the NJC. The Court of Appeal held that it was an implied term of that contract that the employer must inform the employee if and when there was to be a departure from the normal situation. BET Catering Services Ltd v Ball and Whent v T Cartledge Ltd were not referred to. But I agree with Rimer LJ's observation in the Court of Appeal in this case that the decision in Graham was impliedly consistent with the approach that was reflected in those cases: [2010] ICR 793, para 21.

The view that was taken in those decisions about the effect of conditions of the kind that the appellants rely on in this case was, in my opinion, entirely consistent with the common law principle of freedom of contract. There can be no objection in principle to parties including a term in their contract that the employee's pay is to be determined from time to time by a third party such as the NJC of which the employer is not a member or on which it is not represented. It all depends on what the parties have agreed to, as revealed by the words they have used in their contract. The fact that the employer has no part to play in the negotiations by which the rates of pay are determined makes no difference. Unless the contract itself provides otherwise, the employee is entitled to be paid according to the rates of pay as determined by the third party. This is simply what the parties have agreed to in their contract. The same is true of the transferee in the event of the transfer of an undertaking regulated by TUPE. Domestic law tells us that the term in the contract is enforceable against the transferee in just the same way as it was against the original employer. As Rimer LJ said in the Court of Appeal, decisions such as Whent amount to no more than a conventional application of ordinary principles of contract law to the statutory consequences apparently created by regulation 5 of TUPE: [2010] ICR 793, para 46.

But the issue is not solely one of domestic law. Regulation 5 of TUPE must be read together with article 3(1) of Council Directive 77/187/EEC of 14 February 1977 on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of businesses ( OJ 1977 L61, p 26) ("the Directive"), to which it gave effect. The question that has brought the appeal before this court is whether the approach that has hitherto been taken as to the effect of TUPE can still stand, in the light of the decision of the European Court of Justice in Werhof v Freeway Traffic Systems GmbH & Co KG ( Case C-499/04) [2006] ECR I-2397 ("Werhof"). The ECJ was...