England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOYMENT APPEAL TRIBUNAL
His Honour Judge McMullen QC, Mrs A Gallico and Mr R Lyons
UKEAT/0456/08/ZT

		Royal Courts of Justice Strand, London, WC2A 2LL
		29/01/2010

Lord Justice Rimer :

Introduction

1. The appellant is Parkwood Leisure Limited. Parkwood is the respondent in the proceedings and the employer of the claimants (respondents to its appeal). The claimants are Mark Alemo-Herron and 23 others. They brought claims against Parkwood in the London South Employment tribunal complaining of unauthorised deductions from their wages. The tribunal (Employment Judge Taylor, Mrs R.C. Macer and Mr R. Masini) dismissed the claims for reasons given in their judgment sent to the parties on 16 July 2008.
2. By an order of 12 January 2009 the Employment Appeal Tribunal (His Honour Judge McMullen QC, Mrs A. Gallico and Mr R Lyons) allowed the claimants' appeal and remitted the claims to the tribunal for a remedy hearing. The appeal tribunal recognised the point at issue as important and gave Parkwood permission to appeal. On 19 February 2009 Maurice Kay LJ stayed the tribunal proceedings until after our judgment. Mr Adrian Lynch QC and Mr Richard Hignett represented Parkwood, and Mr Thomas Linden QC and Ms Laura Prince the claimants, as they also all did before the appeal tribunal.
3. The appeal raises an issue under the Transfer of Undertakings (Protection of Employment) Regulations 1981 ('TUPE').

The facts

4. The claimants are former employees of the London Borough of Lewisham ('the Council'), who worked in its leisure services department until 2002. Their part of the Council's undertaking (and with it the claimants) was then transferred to CCL Limited, a private sector employer. In May 2004 that part of CCL's undertaking (and with it the claimants) was further transferred to Parkwood, also a private sector employer.
5. TUPE applied to each transfer. TUPE preserves the employment contracts of transferred employees so that they are enforceable against the transferee as if the latter were the original party to the contracts. One of the terms in the claimants' contracts with the Council provided:

'Terms and Conditions of Employment

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. These documents are available for reference at your Personnel Section. However, in the case of doubt, inconsistency or ambiguity the terms of this Contract shall prevail.' (Emphasis supplied).

6. The National Joint Council for Local Government Services ('NJC') comprises many members, including representatives of local authority employers and trades unions. At the date of the transfer to CCL, there were already in place collectively agreed NJC terms setting out the claimants' pay rates for the period 1 April 2002 to 31 March 2004. Those terms were honoured by CCL. Following the claimants' transfer into Parkwood's employment, Parkwood also awarded them pay increases in line with those NJC pay settlements, but did so expressly without acknowledging any liability on its part to make wage payments by reference to such settlements.
7. In June 2004 (after the transfer to Parkwood), fresh NJC negotiations commenced in relation to the rates of pay applicable for the three-year period 1 April 2004 to 31 March 2007. The negotiations involved (inter alios) the Council (which had representatives in the NJC, but was no longer the claimants' employer) and various unions, including UNISON of which the claimants are members. They were concluded on 14 July 2004, when the agreed terms were announced. The employment tribunal described the new terms as 'a comprehensive revision of terms relating to pay, training and development and other aspects concerning working relationships'.
8. Parkwood does not recognise UNISON and was not a party to the negotiations. As a private sector employer, it cannot belong to the NJC or be represented in it. The issue between Parkwood and the claimants is the latters' claim to payment by Parkwood for the period 1 April 2006 to 31 March 2008 of the increased rates of pay so negotiated at the NJC. I shall explain the nature of the issue more fully below, but it turns ultimately on the interpretation of regulation 5 of TUPE.

The legislation

9. The relevant legislation is the Business Transfers Directive and TUPE, which date from 1977 and 1981 respectively. Before their enactment, it was the law in the United Kingdom that if an employer transferred his business to another, the employees' contracts of employment were terminated. That was reversed by Council Directive 77/187/EEC (the Acquired Rights Directive), which provided that on such a transfer the employees' employment and their contracts of employment were deemed to continue with the transferee employer. In 1981 the 1977 Directive was implemented domestically in the United Kingdom by TUPE. In 1998 the 1977 Directive was amended by Council Directive 98/50/EC and then, in 2001, it was replaced in (so far as material) essentially the same terms by Council Directive 2001/23/EC ('the Directive'). The arguments before us were addressed to the Directive, although its material provisions were in their essentials the same as those in the 1977 Directive. TUPE was itself replaced by the Transfer of Undertakings (Protection of Employment) Regulations 2006, which came into force on 5 April 2006, but the proceedings are governed by TUPE, to which the arguments before us were also addressed.
10. The Directive is described as '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 undertakings or businesses'. Its recitals include that:

'(3) It is necessary to provide for the protection of employees in the event of a change of employer, in particular to ensure that their rights are safeguarded.

(4) Differences still remain in the Member States as regards the extent of the protection of employees in this respect and these differences should be reduced.'

11. Article 1(a) (in essentially the same terms as article 1 of the 1977 Directive) provides for the Directive to apply to any transfer of an undertaking, business etc to another employer as a result of a legal transfer or merger. Article 3 (in Chapter II, headed 'Safeguarding of employees' rights') includes the following provisions:

'1. The transferor's rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer shall, by reason of such transfer, be transferred to the transferee. …

3. Following the transfer, the transferor shall continue to observe the terms and conditions agreed in any collective agreement on the same terms applicable to the transferor under that agreement, until the date of termination or expiry of the collective agreement or the entry into force or application of another collective agreement.

Member States may limit the period for observing such terms and conditions with the proviso that it shall not be less than one year.'

Article 8 (in Chapter IV, headed 'Final Provisions') provides:

'8. This Directive shall not affect the right of Member States to apply or introduce laws, regulations or administrative provisions which are more favourable to employees or to promote or permit collective agreements or agreements between social partners more favourable to employees.

Articles 3(1) and (3) above were in essentially the same terms as articles 3(1) and (2) of the 1977 Directive. Article 8 was in essentially the same terms as its article 7

12. Turning now to TUPE, I will quote regulations 5 and 6:

'5. Effect of relevant transfer on contracts of employment, etc

(1) Except where objection is made under paragraph (4A) below, a relevant transfer shall not operate so as to determine the contract of employment of any person employed by the transferor in the undertaking or part transferred but any such contract which would otherwise have been terminated by the transfer shall have effect after the transfer as if originally made between the persons so employed and the transferee

(2) Without prejudice to the paragraph (1) above, but subject to paragraph (4A) below, on the completion of a relevant transfer –

(a) 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; and

(b) anything done before the transfer is completed by or in relation to the transferor in respect of that contract or a person employed in that undertaking or part shall be deemed to have been done by or in relation to the transferee.

(3) Any reference in paragraph (1) or (2) above to a person employed in an undertaking or part of one transferred by a relevant transfer is a reference to a person so employed immediately before the transfer, including, where the transfer is effected by a series of two or more transactions, a person so employed immediately before any of those transactions.

(4) Paragraph (2) above shall not transfer or otherwise affect the liability of any person to be prosecuted for, convicted of and sentenced for any offence.

(4A) Paragraphs (1) and (2) above shall not operate to transfer his contract of employment and the rights, powers, duties and liabilities under or in connection with it if the employee informs the transferor or the transferee that he objects to becoming employed by the transferee.

(4B) Where an employee so objects the transfer of the undertaking or part in which he is employed shall operate so as to terminate his contract of employment with the transferor but he shall not be treated, for any purpose, as having been dismissed by the transferor.

(5) Paragraphs (1) and (4A) above are without prejudice to any right of an employee arising apart from these Regulations to terminate his contract of employment without notice if a substantial change is made in his working conditions to his detriment; but no such right shall arise by reason only that, under that paragraph, the identity of his employer changes unless the employee shows that, in all the circumstances, the change is a significant change and is to his detriment.

6. Effect of relevant transfer on collective agreements

Where at the time of a relevant transfer there exists a collective agreement made by or on behalf of the transferor with a trade union recognised by the transferor in respect of any employee whose contract of employment is preserved by Regulation 5(1) above, then, -

(a) without prejudice to section 18 of the 1974 Act or Article 63 of the 1976 Order (collective agreements presumed to be unenforceable in specified circumstances) that agreement, in its application in relation to the employee, shall after the transfer, have effect as if made by or on behalf of the transferee with that trade union, and accordingly anything done under or in connection with it, in its application as aforesaid, by or in relation to the transferor before the transfer, shall, after the transfer, be deemed to have been done by or in relation to the transferee; and

(b) any order made in respect of that agreement, in its application in relation to the employee, shall, after the transfer, have effect as if the transferee were a party to the agreement.'

The issue

13. The claimants' case is in principle simple. Their contracts with the Council included a provision entitling them to pay increases negotiated 'from time to time' under the collective agreements to which it referred (paragraph [5] above). The pay settlement agreed in July 2004 was so negotiated. The pay increases thus became their entitlement under their contracts. Regulation 5 of TUPE made Parkwood liable for them, just as the Council would be were it still the claimants' employer. The claimants rely on domestic decisions in which similar claims succeeded, for example that of the Employment Appeal Tribunal in Whent and others v. T. Cartledge Ltd [1997] IRLR 153.
14. Parkwood's response is that that case has been fatally undermined by the decision of the Court of Justice of the European Communities ('the ECJ') in Werhof v. Freeway Traffic Systems GmbH & Co KG [2006] IRLR 400, which postdates the domestic decisions upon which they rely. Parkwood claims that Werhof has explained that article 3(1) has a meaning of more limited breadth than had perhaps previously been assumed and that regulation 5 of TUPE must now be interpreted in a similarly limited way.
15. Parkwood recognises that it is contractually bound to honour the terms and conditions of the claimants' contracts so far as they incorporated terms that had already been collectively agreed at the NJC at the time of the transfer to it. It recognises also that if, for example, at that time the terms and conditions so agreed included pre-determined pay increases spread over a future period, it would be bound to honour those increases when they fell due for payment. What it disputes is that it is bound to honour new terms and conditions that are only agreed afresh in a collective bargaining process conducted after the transfer. In the language of Werhof, the difference between what Parkwood does and does not accept as binding upon it is that between a static and dynamic approach to the interpretation of the Directive and TUPE. Its position is that Werhof shows that its obligations to the claimants are only of a static nature, whereas the claimants claim to make it answerable on a dynamic basis.
16. More specifically, Parkwood's point is that Werhof shows that it cannot be made liable for pay or other employment obligations to its employees that have resulted from post-transfer collective bargaining processes to which it was not, could not be and did not wish to be a party. Its case is that regulation 5 of TUPE implemented article 3(1) of the Directive. It asserts that Werhof shows that the effect of article 3(1) is to transfer to the transferee only those obligations already agreed at the date of the transfer (static obligations); it does not also transfer any dynamic obligation in respect of changed terms and conditions that are only agreed by a third party after the date of the transfer. There is, Parkwood says, no basis for a conclusion that regulation 5 gives the transferred employees any greater right than article 3(1).
17. The heart of the claimants' responsive case is that whatever Werhof decided, it did not preclude the United Kingdom Government, when implementing it by TUPE, from giving employees wider rights; and the correct interpretation of TUPE requires the conclusion that it did just that, in particular by enabling the enforcement by transferred employees against transferees of the full extent of their contractual rights in accordance with conventional principles of domestic contract and employment law.

The domestic case law

18. BET Catering Services Ltd v. Mrs J Ball and Others EAT/637/96, 28 November 1996, unreported, is a decision of the Employment Appeal Tribunal, Lindsay J presiding. Mrs Ball was an employee of a London Borough whose contract incorporated the NJC conditions. Following her TUPE transfer to BET, a private sector employer, the NJC promulgated terms that included pay increases. The issue was whether BET was obliged to pay the increases. Lindsay J, delivering the judgment of the appeal tribunal, upheld Mrs Ball's claim to the increases. He could see no conceptual difficulty in a private sector employer binding itself to public sector pay rates, 'nor any reason why Regulation 5(1) [of TUPE] should not operate so as to have the effect that he had so bound himself'. Lindsay J thus favoured the dynamic approach to regulation 5(1) for which the present claimants contend.
19. Whent and others v. T. Cartledge Ltd [1997] IRLR 153 was another decision of the Employment Appeal Tribunal. The appellants had been employees of the London Borough of Brent, their contracts providing that their pay would be in accordance with NJC agreements as amended from time to time. Their employment transferred under TUPE to a private sector employer, who wrote to the employees and their union stating that any collective agreements affecting former Brent employees would no longer have effect. The employees claimed that, despite this, their pay entitlement remained at levels determined by the NJC from time to time. The industrial tribunal dismissed the employees' claims that the employer had made unauthorised deductions from their wages. The appeal tribunal, by a judgment delivered by His Honour Judge J. Hicks QC, allowed the appeal, regarding the issue as clear. The terms of the contract incorporated the results of the annual round of NJC negotiations and '[t]here is no apparent reason why the transfer should cause any change in the meaning of the words' (paragraph [9]). Judge Hicks referred to, and rejected, the tribunal's view that it 'cannot be right that an employer is bound ad infinitum by the terms of a collective agreement negotiated by bodies other than themselves' (paragraph [16]). The employer, he said, was not so bound: it could negotiate new terms or terminate the employees' contracts and offer new ones, although the risk of unfair dismissal claims would no doubt require it to weigh that course commercially. He also said that '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' (also paragraph [16]). Judge Hicks's reasoning was thus essentially the same as Lindsay J's in BET Catering Services Ltd, which does not, however, appear to have been cited to him (it had been decided only 18 days before and the inference is that counsel were unaware of it).
20. A similar point came before the Employment Appeal Tribunal in Glendale Grounds Management v. Mr J. Bradley EAT/484/97, 19 February 1998. The industrial tribunal had upheld the employee's claim, regarding the matter as resolved in his favour by BET Catering Services Ltd and pointing out that the effect of regulation 5 was that the successor employer took the applicant on 'warts and all'. The appeal tribunal (His Honour Judge Peter Clark and members) allowed the appeal on the ground that, upon the true construction of the employment contract, any new negotiated terms required the approval of the employer for the time being, whereas Glendale had given none. That decision therefore went the way it did because of the particular terms of the employment contract: it did not undermine the approach in BET Catering Services Ltd and Whent.
21. A similar point came before this court in Glendale Managed Services v. Graham and others [2003] IRLR 465. The applicable contractual term was slightly different from that in Bradley's case, the argument turned on its true effect and the outcome was that the employment tribunal, the appeal tribunal and this court all upheld the employees' claims that they were entitled to the pay increases agreed by the NJC subsequent to the TUPE transfer. The decision was implicitly consistent with the approach reflected in BET Catering Services Ltd and Whent, although this court's judgments referred to neither.

The ECJ's decision in Werhof v. Freeway Traffic Systems GmbH & Co KG

22. Those domestic cases arrived at decisions which, I suggest, would cause no surprise to a lawyer familiar with basic principles of English contract law. The proposition that a contracting party can agree to be bound by terms fixed by a third party is not novel; if that is what the contract provides, that will ordinarily be its effect; and regulation 5 might be thought to speak for itself. Werhof, which postdates the domestic cases (and does not refer to them) is said to require a different approach to cases involving facts such as those in BET Catering Services Ltd and Whent – and of course in the present case.
23. Mr Werhof was employed in 1985 by D under a contract whose terms were governed by the collective agreement in force at the material time negotiated between two bodies: a trade union (of which he was not a member) and the employers' federation (of which D was a member). In 1999 the part of the undertaking in which he was employed transferred to Freeway, which was not a member of the employers' federation. In 2002 the union and the federation negotiated a new collective agreement providing for additional wage payments from 1 June 2003. Mr Werhof claimed payment of the increases from Freeway. The report of the decision at [2006] IRLR 400 to which we were referred includes no verbatim quotation of the terms of Mr Werhof's contract with D, but I infer that they purported to entitle him to be remunerated by D of (inter alia) wage increases negotiated from time to time (or words to that effect) by collective agreement by the two negotiating bodies. Were this not so, it is difficult to see what claim he could have had against Freeway for the claimed payments; and his case would simply have been dismissed on the basis that he had no 'from time to time' contractual entitlement.
24. The Labour Court at Wuppertal did dismiss his claim but, I infer, not on this basis. The Higher Labour Court at Dusseldorf decided that under paragraph 613a(1) of the German Civil Code, which implemented article 3 of the 1977 Directive domestically, Mr Werhof was not entitled to the claimed remuneration because that paragraph provided only for a static interpretation of the obligations imposed on transferees. Its terms were as follows:

'Where a business or part of a business is transferred to another owner by a legal transaction, the rights and obligations arising from the employment relationships existing on the date of the transfer shall pass to the owner. Where those rights and obligations are governed by the provisions of a collective agreement or works agreement, they shall be incorporated into the employment relationship between the new owner and the employee and may not be amended to the employee's disadvantage for at least one year following the date of the transfer'.

25. The Higher Labour Court was concerned, however, as to whether that paragraph was compatible with article 3. It accordingly referred the following questions to the ECJ:

'(1) Is it compatible with Article 3(1) of … Directive 98/50/EC … amending Directive 77/187/EEC … if a transferee of a business – who is not subject to a collective agreement – is bound by an agreement between the transferor of the business – who is subject to a collective agreement – and the employee, under which the collective wage agreements in force binding the transferor of the business are to apply, in such a way that the collective wage agreement in force at the time of the transfer applies but collective wage agreements entering into force subsequently do not?

(2) If that is to be answered in the negative: Is it compatible with Article 3(1) of Directive 98/50/EC if the transferee of the business – who is not subject to a collective agreement – is bound by collective wage agreements which have entered into force after the transfer of the business only so long as the transferor of the business is so bound?'

26. Mr Werhof argued before the ECJ for a 'dynamic' interpretation of article 3(1). I will set out his argument as summarised in paragraph [18] of the court's judgment, since that paragraph is later referred to in the court's reasoning for its conclusion:

'18. The claimant submits that it follows from the case law of the Court that, when an individual contract of employment includes a clause referring to collective agreements concluded in a particular sector, that clause must necessarily be "dynamic" and, in accordance with Article 3(1) of the Directive, refers to collective agreements concluded after the date of transfer of the undertaking (see, inter alia, case C-343/98 Collins and Chiappero [2000] IRLR 788, paragraph 53, and case C-4/01 Martin and others [2004] IRLR 74, paragraphs 29, 48 and 54). Furthermore, such an interpretation of the Directive follows from its spirit and purpose, namely, the protection of employees in the event of a change of owner of the undertaking and in particular, the safeguarding of their rights.'

27. Freeway and the German Government argued for a 'static' interpretation. I will also set out the court's summary of their argument, since it was the one that the court ultimately accepted:

'19. The defendant and the German Government take the view, on the other hand, that only the collective agreement in force at the time of the transfer is applicable. Otherwise, that is to say if collective agreements which came into force after the date of the transfer were to apply to employers who did not take part in the negotiations, employers' freedom to contract would be hindered, which would equate to expropriation. Moreover, it is important to take account of freedom of association which includes an employer's right not to join an association or trade federation. Finally, it may be inferred from the objective of the Directive and the wording of Article 3(1) thereof that only the transferor's rights and obligations arising from a contract of employment existing on the date of a transfer are transferred to the transferee.'

28. The court preferred that argument and answered 'yes' to the first question, so that the second question did not arise. The court's reasoning for its conclusion is in paragraphs [23] to [37] of its judgment. It is not in all respects easy to summarise and so, despite its length, I will quote it in full:

'23. The Court's answer

First, the general point should be made that a contract is characterised by the principle of freedom of the parties to arrange their own affairs, according to which, in particular, parties are free to enter into obligations with each other. Under that principle, and in a situation such as the one in the main proceedings where the defendant is not a member of any employers' association and is not bound by any collective agreement, the rights and obligations arising from such an agreement do not therefore apply to it, as a rule. Otherwise, as the Advocate General noted in point 52 of his Opinion, the principle that contracts cannot impose obligations on third parties would be infringed.

24. However, in respect of the transfer of an undertaking and its consequences on employment relationships, unconditional application of the abovementioned principle could result in erosion of the rights which the employee has under his contract of employment and the collective agreement to which the employer transferring the undertaking was party, but not the transferee. That is why the Community legislature sought to ensure that, on transfer of an undertaking, employees enjoy special protection designed to prevent the erosion which could result from application of that principle.

25. Furthermore, according to the case law of the Court, the Directive is intended to safeguard the rights of employees in the event of a change of employer by allowing them to continue to work for the new employer on the same conditions as those agreed with the transferor (see, inter alia, case 324/86 Daddy's Dance Hall [1988] IRLR 315, paragraph 9, case C-362/89 D'Urso and others [1992] IRLR 136, paragraph 9, and case C-399/96 Europieces [1998] ECR 1-6965, paragraph 37).

26. It is also settled case law that the rules of the Directive must be considered to be mandatory, so that it is not possible to derogate from them in a manner unfavourable to employees (see Martin, paragraph 39). It follows that the contracts of employment and employment relationships existing, on the date of the transfer of an undertaking, between the transferor and the workers employed in the undertaking transferred are automatically transferred to the transferee by the mere fact of the transfer of the undertaking (see, to that effect, D'Urso and others, paragraph 20, and case C-305/94 Rotsart de Hertaing [1997] IRLR 127, paragraph 18).

27. Here the contract of employment of the claimant in the main proceedings refers, as regards wages, to a collective agreement. That clause in the contract of employment is governed by Article 3(1) of the Directive. By virtue of the Directive, the rights and obligations arising from a collective agreement to which the contract of employment refers are automatically transferred to the new owner, even if, as in the main proceedings, the latter is not a party to any collective agreement. Accordingly, the rights and obligations arising out of a collective agreement continue to bind the new owner after the transfer of the business.

28. In respect of the interpretation of Article 3(1) of the Directive, a clause referring to a collective agreement cannot have a wider scope than the agreement to which it refers. Consequently, account must be taken of Article 3(2) of the Directive [this is reference to the 1977 Directive, but Article 3(3) of the 2001 Directive, quoted by me above, is in essentially the same terms], which contains limitations to the principle that the collective agreement to which the contract of employment refers is applicable.

29. First, the terms and conditions under that collective agreement are to continue to be observed only until the date of its termination or expiry, or the entry into force or application of another collective agreement. Thus the wording of the Directive does not in any way indicate that the Community legislature intended that the transferee be bound by collective agreements other than the one in force at the time of the transfer and, consequently, that the terms and conditions be subsequently amended through the application of a new collective agreement concluded after the transfer. Such an assessment is, moreover, consistent with the objective of the Directive, which is merely to safeguard the rights and obligations of employees in force on the day of the transfer. On the other hand, the Directive was not intended to protect mere expectations to rights and, therefore, hypothetical advantages flowing from future changes to collective agreements.

30. Secondly, the Member States may limit the period for observing the terms and conditions arising from a collective agreement, provided that that period is not less than one year. In a way, this limitation is subsidiary, since it is applicable if none of the abovementioned situations, that is, termination or expiry of the existing collective agreement, or entry into force or application of a new collective agreement, arises within a period of one year after the transfer.

31. In addition, although in accordance with the objective of the Directive the interests of the employees concerned by the transfer must be protected, those of the transferee, who must be in a position to make the adjustments and changes necessary to carry on his operations, cannot be disregarded.

32. In this connection, in accordance with the Court's settled case law, when interpreting the provisions of a Directive account must be taken of the principle of the coherence of the Community legal order which requires secondary Community legislation to be interpreted in accordance with the general principles of Community law (see, to that effect, case C-1/02 Borgmann [2004] ECR I-3219, paragraph 30).

33. Freedom of association, which also includes the right not to join an association or union (see, to that effect, European Court of HR, Sigurjonsson v. Ireland, (1993) 16 EHRR 462, and Gustafsson v. Sweden (1996) 22 EHRR 409, para 45) is enshrined in Article 11 of the European Convention for the Protection of Human Rights and Fundamental Freedoms signed in Rome on 4 November 1950 and is one of the fundamental rights which, in accordance with the Court's settled case law, are protected in the Community legal order (case C-415/93 Bosman [1995] ECR I-4921, paragraph 79), as is restated in Article 6(2) EU (see case C-274/99 Connolly v. Commission [2001] ECR I-1611).

34. If the "dynamic" interpretation, supported by the claimant, of the contractual reference clause mentioned in paragraph 18 of this judgment were applied, that would mean that future collective agreements apply to a transferee who is not a party to a collective agreement and that his fundamental right not to join an association could be affected.

35. On the other hand, the "static" interpretation, supported by the defendant in the main proceedings and the German Government, makes it possible to avoid a situation in which the transferee of a business who is not a party to a collective agreement is bound by future changes to that agreement. His right not to join an association is thus fully safeguarded.

36. In those circumstances, the claimant cannot maintain that a clause contained in an individual contract of employment and referring to collective agreements concluded in a particular sector must necessarily be "dynamic" and refers, by application of Article 3(1) of the Directive, to collective agreements concluded after the date of transfer of the undertaking.

37. It follows from the foregoing that the answer to the first question must be 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 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.'

29. Before coming to the submissions on the appeal, I add the following observations. There is nothing difficult about the first sentence of paragraph [23]. But the rest of that paragraph is perhaps more difficult. No doubt an employer such as Freeway (or Parkwood) is not bound by a collective agreement to which it is not a party. It is not, however, obvious that it follows that such employers cannot or should not be bound by the incorporation into their employees' employment contracts of terms negotiated by such a collective agreement.
30. In paragraph [24] the court appeared to recognise that the unqualified application of what it was saying in paragraph [23] could lead to an erosion of employees' rights on the transfer of an undertaking, a consequence that the Directive was intended to prevent; and in paragraph [25] it underlined that the Community case law had made it clear that the Directive was intended to safeguard employees' rights. Paragraph [26] then pointed out that the rules of the Directive are mandatory and that contracts of employment are automatically transferred to the transferee by the mere fact of the transfer of the undertaking. It might be thought to be implicit in paragraph [26] that the court was saying that the contracts so transferred were transferred with all their terms, since otherwise there would be the very erosion of employees' rights that the Directive was intended to avoid. Paragraph [27] then said that the term of Mr Werhof's employment contract referring to the collective agreement term relating to wages was covered by article 3(1).
31. A reading of the judgment to the end of the second sentence of paragraph [27] might perhaps justify the innocent reader in believing that Mr Werhof was probably going to win the day. But the rest of the paragraph reflects the start of the implied 'however' that commonly marks the judicial prelude to the dashing of a litigant's hopes. The court there explained that the reason why Freeway was prima facie bound by that particular term of the employment contract was because the effect of a transfer is to make the transferee bound by the rights and obligations arising from any relevant collective agreement even though it was not a party to it; and in paragraph [28] the court embarked upon its reasoning for its conclusion that the correct interpretation of article 3(1) is the static rather than the dynamic one.
32. It first invoked article 3(2) of the 1977 Directive (article 3(3) of the Directive to which we were referred) and explained in paragraph [29] that the sense of article 3(2) is that the employer is only intended to be bound by the collective agreement in force at the time of the transfer; and, more importantly, that it is not intended to be bound by new collective agreements concluded subsequently. I refer to, but do not repeat, the last two, important, sentences of paragraph [29], which reflect the court's explanation of what the Directive was - and was not - intended to achieve.
33. In paragraph [31], the court then moved to a separate, but related, reason why the static interpretation was to be preferred, namely that the Directive's intentions as to the manner of the transferee's operations could not be disregarded. That took the court to article 11 of the European Convention for the Protection of Human Rights and Fundamental Freedoms ('the Convention'), which protects the right to freedom of association, including the right not to join an association. The court's conclusion, in paragraph [34], was that a dynamic interpretation of article 3(1) could affect a transferee employer's fundamental right not to join an association. More generally, it then concluded in paragraph [36] that Mr Werhof could not claim that a clause such as that in issue must necessarily be dynamic or, in consequence, refer by the application of article 3(1) to collective agreements concluded after the transfer.

Parkwood's submissions

34. Mr Lynch's submission was that Werhof provides conclusive guidance for the disposition of the claimants' claims. His general thesis was that the ECJ's decisions on the interpretation of EU principles of law are binding on the courts of Member States. Werhof was a decision on the interpretation of the Directive; and TUPE, which implemented it, should be interpreted in a manner consistent with the interpretation and scope of the Directive.
35. More particularly, he submitted that the facts in Werhof were virtually indistinguishable from those of this case; and the court's decision was that Freeway was not bound to pay Mr Werhof the wage increases the subject of the collective bargaining process conducted after the transfer. This was despite the provision in his contract incorporating terms from time to time agreed in the collective bargaining process. The reasoning was that a 'dynamic' interpretation would entitle employees to assert a right to mere expectations flowing from future changes to collective agreements (paragraph [29]), whereas that would be to extend the Directive beyond its legitimate ambit, which was to ensure that employees transferred on their existing terms, that is those already agreed and in place at the time of the transfer. The ECJ was influenced by the provisions of article 3(2) of the 1977 Directive, which was premised on the fact that collectively agreed terms are not necessarily deemed to continue to bind after the transfer if the transferee does not wish to be associated with that process of collective bargaining. In addition, the adoption of the 'dynamic' interpretation could risk a violation of the article 11 of the Convention, which guarantees a right of freedom of association, including a right not to join an association.
36. Mr Lynch recognised that Whent and other domestic authorities answered the point differently, but they were decided before Werhof and he said it was inconceivable that they would have been decided the same way if Werhof had been decided before them. He also recognised that it was in theory open to the United Kingdom Government, when enacting TUPE, to provide employees with wider rights than Werhof shows were required by the Directive; and thus to provide that obligations transferred to the transferee were of a dynamic nature. His submission, however, was that there is no basis for a conclusion that TUPE did purport to confer any such wider rights. It did no more than purport to implement the 1977 Directive, with regulation 5(1) essentially mirroring the language of article 3(1). He also said that regulation 5(2)(a) clearly limited the rights and obligations transferred to those existing at the time of the transfer – by which he meant rights and obligations of a static nature - although I confess to an inability to detect anything in its language that supports that submission.
37. By way of support for the proposition that TUPE did no more than implement the Directive, Mr Lynch referred us to the decision of the House of Lords in Litster and Others v. Forth Dry Dock & Engineering Co. Ltd (in receivership) and Another [1989] ICR 341. The facts there were very different, but Mr Lynch drew attention to the observations of Lord Keith of Kinkel, who at 349D pointed out that TUPE had been laid before both Houses of Parliament and was 'so laid as designed to give effect to' the 1977 Directive, a point also made by Lord Templeman at 350G. As for the approach that the court should adopt in interpreting TUPE, Mr Lynch referred us to what Lord Keith said at 349H, namely that:

'… it is the duty of the court to give to regulation 5 a construction which accords with the decisions of the European Court upon the corresponding provisions of the Directive to which the regulation was intended to give effect.'

Mr Lynch also referred to the similar observations of Lord Oliver of Aylmerton, at 354D:

'The approach to the construction of primary and subordinate legislation enacted to give effect to the United Kingdom's obligations under the EEC Treaty have been the subject of recent authority in this House (see Pickstone v. Freemans Plc. [1988] ICR 697) and is not in doubt. If the legislation can reasonably be construed so as to conform with those obligations – obligations which are to be ascertained not only from the wording of the relevant Directive but from the interpretation placed upon it by the European Court of Justice in Luxembourg – such a purposive construction will be applied even though, perhaps, it may involve some departure from the strict and literal application of the words which the legislature has elected to use.'

38. Mr Lynch submitted that the same approach is required here. The provisions of regulation 5 should be interpreted so as to be in line with the limits of article 3(1) of the Directive. There is a particular reason for doing so, namely that a critical element of the ECJ's reasoning for interpreting article 3(1) as it did was to safeguard the fundamental right of freedom of association, which was an important policy consideration.

The submissions for the claimants

39. Mr Linden pointed out that it was common ground that the claimants' contracts of employment entitled them to the benefit of the terms agreed 'from time to time' by the NJC. There was nothing unusual or problematic about that. Such arrangements are common in sectors where there is collective bargaining between unions and employers or employers' associations and it will not necessarily be the case that all employers covered by the collective bargaining body will be represented at the negotiating table.
40. It was also common ground that regulation 5 of TUPE applied to the transfer of the claimants' into Parkwood's employment in 2004. Regulation 5 required that all the claimants' contractual rights (save in respect of occupational pensions: see regulation 7) were preserved and enforceable against Parkwood: and Mr Linden emphasised the closing words of regulation 5(1) and the language of regulation 5(2)(a). Regulation 5 did not differentiate between contractual terms incorporating the terms of collective agreements and other contractual terms. The domestic law decisions, of which Whent is a prime example, point to the correctness of the claimants' case.
41. In his challenge to the claim that Werhof had imported a sea change in relation to the interpretation of regulation 5 of TUPE, Mr Linden emphasised the limited nature of what the ECJ had decided in Werhof. It did no more than rule that the Directive did not require Member States to introduce laws under which the transferee is bound by subsequent collective agreements to which it is not a party. It did not rule that a Member State was prohibited from doing so. Article 8 of the Directive (article 7 of the 1977 Directive) expressly reserved the right of Member States 'to apply or introduce laws, regulations or administrative provisions which are more favourable to employees …'. Paragraphs [27] to [30] of the judgment based the decision materially on the provisions of article 3(2) of the 1977 Directive. Those provisions do not find an equivalent in TUPE; and there is nothing in its regulations 5 and 6 to preclude the continuing enforceability against transferee employers of contractual terms incorporating pay rates negotiated by collective bargaining, which is the position under the law of England and Wales even though collective agreements ordinarily create no legally enforceable obligations between a union and the employers (see Robertson v. British Gas Corporation [1983] ICR 351). This is not a case about the enforcement of a collective agreement, it is simply one in which the claimants are seeking to enforce their employment contracts. Regulation 6 has, therefore, no significance. Exactly the same point would arise, said Mr Linden, if, for example, the claim were one by a trainee solicitor against a transferee firm for payment of a salary by reference to the minimum rates fixed from time to time by the Law Society.
42. Mr Linden acknowledged that at paragraphs [32] to [37] of the judgment, the ECJ was influenced by the policy considerations there mentioned, focused on article 11 of the Convention, but it was doing so in the context of a consideration of whether it was desirable that all Member States should be required to make the provision for which Mr Werhof was contending. The question in the present case was the different one of whether our national law required the upholding of the contractual term relied upon by the claimants.
43. Mr Linden submitted that the real question raised by the appeal is whether, if Werhof is to be regarded as governing the present type of case, Parliament is to be regarded, in enacting TUPE, as having gone beyond the requirements of the Directive as interpreted in Werhof. He pointed to the wide language of regulations 5(1) and 5(2)(a) (as between which he was unable to identify any difference of substance), which he said was wider than the language of article 3(1); the irrelevance of regulation 6; the express inclusion of the pensions exception in regulation 7 (which pointed to there being no implied exception to the apparent width of regulation 5); the clarity of the domestic law (Whent); and the fact of the replacement of TUPE with the 2006 Regulations (regulations 4 and 5 of which substantially repeat regulations 5 and 6 of TUPE), which he said justified the conclusion that Parliament had thereby confirmed the domestic case law. Mr Linden referred us to the decision of the Employment Appeal Tribunal in Transport and General Workers Union v. Swissport (UK) Ltd (in administration) and another [2007] ICR 1593 as an illustration of how regulation 4 of TUPE enacted wider rights in certain insolvency situations than was required by the Directive. The critical question, he said, was whether regulation 5 conferred wider rights than, according to Werhof, were the minimum requirements of the Directive; and, if it did, whether such wider rights preserved the full measure of employees' rights on a transfer so as to enable them, in circumstances such as the present, to enforce 'dynamic' obligations against the transferee. Mr Linden urged that we should give regulation 5 such a wider interpretation.

The reasoning of the tribunals below

44. The employment tribunal, in a short judgment, decided the case on the basis that, having found that the terms negotiated in July 2004 amounted to a fresh collective agreement, the decision in Werhof required a decision in Parkwood's favour. They accordingly dismissed the claims.
45. Judge McMullen, in delivering the appeal tribunal's judgment allowing the claimants' appeal, recorded it as common ground that until Werhof, no-one had questioned the correctness of decisions such as Whent. He accepted the claimants' submission that a judgment of the ECJ on a preliminary reference as to the scope of a Directive 'is not capable of changing the established position under domestic law which … provides for protection of a dynamic wage-fixing clause.' In his view, the employment tribunal was wrong not to follow the domestic cases rather than Werhof. I derive from paragraphs 25, 29 and 33 of his judgment that he accepted Mr Linden's submission that the effect of the domestic decisions was to show that TUPE had provided transferring employees with larger rights than were recognised in Werhof but that it was open to the United Kingdom Government to do this when implementing the Directive (I hope this is a fair interpretation: Judge McMullen does not deal with the point as explicitly as I have suggested). As for the reliance placed by the ECJ on article 11 of the Convention, Judge McMullen observed that no direct breach of that article had been asserted by Parkwood. His conclusion was that in any event this was not a case in which its article 11 rights could be affected: Parkwood could join an employers' association if it chose to do so, or it could terminate the claimants' contracts or negotiate their variation. He recorded Mr Lynch's acceptance that in principle a 'dynamic' term in a contract is or may be enforceable against a transferee, for example a term linking wage increases to inflationary increases. Parkwood's particular objection in the present case, however, was their linkage to collective agreements, for which Mr Lynch had drawn on paragraph [28] of the judgment in Werhof. Judge McMullen pointed out, however, that there was no provision in TUPE corresponding to the second part of article 3(2) of the 1977 Directive, so that the ECJ's reasoning in reliance on that provision provides no help in the interpretation of TUPE. He concluded his judgment by observing that:

'39 Finally, we bear in mind that TUPE and the Directive are both measures aimed at protection, or safeguarding, of employees' rights, and it would be odd if those rights which are accepted to be part of the canon in domestic labour law could be taken away by a subsequent interpretation of the Directive, as to which Member States have a margin of appreciation. …'

Discussion

46. But for the decision in Werhof, I would regard the claimants' case as unanswerable. The inclusion in their contracts of a term providing (inter alia) for their pay from time to time to be fixed by a third party body was a conventional contractual provision. The effect of regulation 5 of TUPE is, on a transfer of an undertaking, to preserve employees' contracts and make them enforceable against the transferee as if the transferee were a party to the contracts. Thus the term in question would in principle be enforceable against the transferee just as it would have been against the original employer. The fact that the transferee may have no voice in the negotiation from time to time of the terms provided for by such provision is, from a legal point of view, neither here nor there. It may be commercially unfortunate from the transferee's perspective, but it is one that appears to be visited upon it by regulation 5, one implemented for the purpose of achieving the great objective of the Directive, namely the safeguarding employees' rights on the transfer of an undertaking. Decisions such as that in Whent appear to me to have been a conventional application of ordinary principles of contract law to the statutory consequences apparently created by regulation 5.
47. Werhof appears, however, now to have put all that in question. Whilst Mr Linden questioned quite how close its facts were to those of the present case, I am satisfied that the ECJ was focusing on a case which was for all relevant purposes indistinguishable. Its decision was that the German Civil Code's domestic implementation of the Directive, under which the static interpretation applied, was not incompatible with the requirements of the Directive.
48. The ECJ's decision was therefore formally expressed in negative terms, but that should not be allowed to conceal the positive nature of what it was deciding. What it decided was that the true interpretation of the Directive did not require Member States, when implementing it at national level, to do more than the German Civil Code had done. More generally, it decided that article 3(1) of the Directive does not bear a dynamic interpretation in relation to the circumstances of cases like Mr Werhof's, namely those in which there is a contractual term providing for employment terms to be fixed by reference to the terms of collective agreements negotiated from time to time.
49. In arriving at that conclusion, the court drew on two main considerations. The first was that it inferred from article 3(2) that the Directive did not intend a transferee to be bound by any collective agreement other than one in force at the time of the transfer; and it bolstered that conclusion by saying what it did in the last two sentences of paragraph [29] as to the objective of the Directive. Secondly, and related to that point, it considered that the interpretation favoured by Mr Werhof could create the consequential risk that the transferee's fundamental right to join, or not to join, an association (article 11 of the Convention) could be affected. The result was that article 3(1) of the Directive must be interpreted as the court explained in paragraph [37].
50. To the extent that the decision was conditioned by a consideration of article 3(2) of the 1977 Directive, I have a personal concern as to whether that provision, any more than regulation 6 of TUPE, was intended to have anything to do with the enforceability of contractual terms such as that which Mr Werhof was enforcing rather than with the strictly different question of the extent to which collective agreements made with the transferor continued to bind the transferee. That concern may, however, reflect no more than an over narrow perspective of what the ECJ was considering. It can, I consider, readily be regarded as unsatisfactory, at any rate from the employer's viewpoint, that an employer should find itself committed to employment terms negotiated from time to time by bodies in whose collective bargaining negotiations it is entitled to no voice or representation, perhaps bodies in which it wishes to have no voice or representation. Article 3(2) of the 1977 Directive showed that, upon a relevant transfer, an employer was only committed to the terms of any collective agreement until such agreement terminated, expired or was replaced. It can, I consider, readily be seen how that provision was regarded by the ECJ as justifying its conclusion that an employer should similarly not be committed to contractual terms purportedly incorporated into its employees' contracts by any collective agreement made after such termination, expiration or replacement. The court's article 11 point appears to me to have been an essentially consequential reason for its conclusion based on article 3(2), but one which was plainly an important policy consideration that steered the court to its overall conclusion. That conclusion was that, whatever might be the limits of the other boundaries of article 3(1), one limit of its reach was that it required a static interpretation of the burden upon transferees of employment contracts incorporating terms fixed from time to time by collective agreements.
51. The outcome of Werhof is, therefore, that the ECJ has interpreted article 3(1) of the Directive in the limited sense just described. It follows that article 3(1) must always have borne that meaning, even though it was not until 2006 that it came to be explained. It follows that the United Kingdom had no obligation when enacting TUPE to do more than incorporate a burden upon transferees that was co-extensive with that meaning.
52. The United Kingdom could of course, if it had so chosen, have so implemented the Directive as to give employees wider rights than those required by the Directive, and so imposed greater burdens on transferees. Mr Linden said that, in implementing TUPE, the United Kingdom Government had done just that. He said that, whatever the minimum requirements of article 3(1) of the Directive, regulation 5 of TUPE imposed dynamic obligations upon transferees. Mr Lynch submitted that it did not.
53. I am unable to detect anything in the language of regulation 5, read in the context of TUPE as a whole, supporting Mr Linden's submission. I have already indicated that, without the benefit of Werhof, I would have interpreted regulations 5(1) and 5(2)(a) as meaning what the claimants say they mean and thus as bearing a dynamic interpretation. Equally, without the benefit of Werhof, I would probably have interpreted the rather more economical language of article 3(1) of the Directive in the same way. I would, in particular, not regard the words 'existing on the date of a transfer' as implying a purely static interpretation: whether those words refer to the transferor's obligations or to the employment contract/relationship under which they arise, they prima facie refer also to 'dynamic' obligations. I would have interpreted both regulation 5 and article 3(1) in this way because, so it seems to me, that is the more natural interpretation of their language.
54. I consider that the language of regulation 5 translates the apparent sense of article 3(1) with greater comprehensive clarity. But I can detect nothing in it that might be said to enlarge employees' article 3(1) rights. The inference that I would draw is that, whatever article 3(1) required, regulation 5 implemented. Mr Lynch submitted that the House of Lords had held in Litster that TUPE gave effect to article 3 of the Directive, so providing a conclusive answer to the 'enlargement' argument. I would not, however, regard that as such an answer, since the House was not there focusing on the point now before us and did not have it in mind. There is anyway no dispute that TUPE did give effect to article 3: the question is whether it did anything more. Nothing that we were referred to in argument provided, in my view, support for the proposition that the enactment of TUPE was intended to give employees greater rights on a transfer than those prescribed by article 3.
55. Of course the decisions in Whent and the other domestic cases are consistent with the conclusion that regulation 5 did achieve more than Werhof has since told us was meant by article 3(1). But that does not help the claimants. We now know what article 3(1) means and, in particular, that it does not mean what the domestic courts have interpreted regulation 5 as meaning. If, as I consider, regulation 5 was intended to do no more than give effect to article 3(1), the ordinary rule is that regulation 5 must, if it can, be construed so as to conform with the requirements of the Directive that it is intended to implement, an exercise that requires regard to be had to the interpretations put upon the Directive by the ECJ (see Litster, per Lord Keith and Lord Oliver).
56. As it seems to me, the language of regulations 5(1) and (2) sits harmoniously with that of article 3(1) and gives effect to it. The duty of the domestic courts is to interpret it consistently with article 3(1), the meaning of which is, in the present context, to be found in Werhof. Judge McMullen made the point that TUPE does not include a provision that mirrors article 3(2), which played a material part in the ECJ's interpretation of the limits of article 3(1). That is literally correct, although TUPE does contain regulation 6, which reflects that (save in the prescribed circumstances referred to) collective agreements are conclusively presumed to be unenforceable, as they were in the present case and probably will be in most cases. Mr Linden did not place any emphasis in his argument on regulation 6 and I would not regard it as providing any basis for a conclusion that, in enacting regulation 5, Parliament intended to do more than implement article 3(1) of the Directive, whose limits Werhof has since explained. Nor would I regard the express exception in regulation 7 relating to occupational pension schemes as meaning that there are no other limitations on the apparent width of regulation 5. That exception implemented the exception permitted by article 3(3) of the 1977 Directive (article 4 of the Directive) but there was no need also to carve out a 'dynamic' exception to regulation 5 because it was merely implementing article 3(1) in which such exception was implicit. Nor would I regard the enactment of TUPE 2006 as implicitly affirming the correctness of the earlier domestic decisions. The Advocate General's Opinion in Werhof (proposing the answer that the court later gave) was delivered on 15 November 2005, TUPE 2006 was laid before Parliament on 7 February 2006, the ECJ's judgment was promulgated on 9 March 2006 and TUPE came into force on 6 April 2006. The least that can be said is that Parliament can be taken to have been aware that Werhof was before the ECJ, and that no inference can safely be drawn that the enactment of TUPE 2006 was intended to provide an implicit affirmation of the prior domestic authorities. The interpretation of regulation 5 that, in light of Werhof, I would favour, shows in my view that the domestic decisions in cases such as Whent were wrong and should not be followed.
57. I would allow the appeal, set aside the order of the appeal tribunal and restore the decision of the employment tribunal to dismiss the claimants' claims.

Lady Justice Smith :

58. I agree.

Lord Justice Ward :

59. I also agree.