Can you control pay rises after a TUPE transfer?

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06 July 2011

A recent decision of the Supreme Court on the interpretation of the TUPE regulations may lead to important implications for any employer involved in outsourcing, particularly from the public sector. 

When there is a TUPE transfer, the relevant employees are transferred automatically from the transferor to the transferee, together with all rights and liabilities in connection with their employment, including any collective agreements.

Of particular importance to employers is the bargaining machinery set out in any collective agreements dealing with pay reviews. A private sector employer taking on a contract from the public sector does not want to be bound by future pay rises agreed in the public sector over which it has no control.

In Parkwood Leisure Limited v Alemo-Herron & Others (2011), the question before the court was whether TUPE could and should be interpreted generously in favour of employees, requiring transferees to honour terms negotiated after the transfer under collective agreements.

For many years UK case law supported a "dynamic" interpretation of the TUPE regulations, under which a transferee could be bound to give effect to pay reviews negotiated after the transfer by a central bargaining body - if contracts of employment provide for this.  

However, following the ECJ decision in Werhof v Freeway Traffic Systems GmbH & Co KG (2006), the Court of Appeal in Parkwood held that a transferee was not bound by a collective agreement made after the expiry of an agreement that was in force at the point of transfer, if the employer was not party to the collective bargaining machinery concerned. This is the so called "static" interpretation.

Employers are very much in favour of this "static" interpretation as it leaves them free not to offer national collective bargaining pay rates and increases agreed after a transfer. It also makes it much easier to price a contract and achieve more consistency in employee terms and conditions.

Parkwood  was appealed to the Supreme Court, which has now decided to refer this to the European Court of Justice (ECJ) to establish whether the Acquired Rights Directive (from which the TUPE regulations derive) precludes a national court from giving a "dynamic" as opposed to a "static" interpretation to TUPE.

It could be a couple of years before the ECJ makes its decision and in the meantime  the Court of Appeal's "static" interpretation has not been overruled and continues to apply. This leaves contractors theoretically free not to honour pay increases agreed after the transfer of employees, but if the ECJ rules that the "dynamic" approach is not precluded, the Court of Appeal's decision may be reversed.   

Given the uncertainty and the fact that a contractor may in future be bound by a pay rise negotiated under a collective agreement after the transfer, those involved in outsourcing contracts with the public sector should review their pricing models. Warranties or indemnities against future claims, or price adjustment mechanisms, may be ways to manage the risk.

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