Could the ECJ change its stance on harmonising terms and conditions following a TUPE transfer?

Consultant editor Darren Newman asks if a recent European Court of Justice (ECJ) ruling on TUPE could herald a less rigid approach to the issue of harmonising terms and conditions following a TUPE transfer.

One of the big employment law questions this autumn is whether or not the Government will follow through on its earlier consultation regarding the reform of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246). TUPE is a subject that fascinates some and repels others. One reason for this is that, over the years, it has been the subject of confusing and sometimes contradictory case law from the ECJ interpreting the European Directive with which TUPE must be interpreted to comply.

One issue that employers find particularly difficult is whether or not terms and conditions can be changed post-transfer. In Foreningen af Arbejdsledere i Danmark v Daddy's Dance Hall A/S [1988] IRLR 315 ECJ, the ECJ held that the terms and conditions of transferred employees could be changed in the same way as those of other employees save that "the transfer of the undertaking itself may never constitute the reason [for the change]". In Martin and others v South Bank University [2004] IRLR 74 ECJ, the ECJ made it clear that if the reason for the change in terms was a reason connected with the transfer then it could not be made, even with the consent of the employee. That struck many as unfair. If both employer and employee agree to the change, why should the law interfere?

When the last Government rewrote the original TUPE Regulations in 2006 it carved an evolving principle into stone. The 2006 Regulations included a provision (reg.4(4)) making it clear that any purported variation of a contract of employment is void if the reason for it is either the transfer itself or a reason connected with it. The only exception is where the reason is "an economic, technical or organisational reason entailing changes in the workforce" (an ETO reason).

Case law has since clearly established that harmonising terms and conditions does not fall within this ETO reason exception, which really applies only when the change is inherently bound up with a restructuring exercise involving job losses or a change in the kind of work being done by employees.

In its recent consultation, the Government was wary about changing the wording of reg.4(4) too much on the basis that it simply reflected the requirements of the Directive as interpreted by the ECJ. However, it tentatively proposed removing references to a change "connected with" a transfer and excluding only those changes where the transfer itself is the reason for the variation, in line with the words used in Daddy's Dance Hall and skating over the way that this was interpreted in Martin. My initial reaction was that such a change would simply lull employers into a false sense of security. The Regulations would have to be interpreted to comply with the Directive and the ECJ had clearly said that a reason "connected with" the transfer is out of bounds.

However, a recent ECJ decision suggests that the ECJ's approach to business transfers may be changing. Alemo-Herron and others v Parkwood Leisure Ltd Case C-426/11 ECJ was, on the face of it, a case about collective agreements. The ECJ held that employees' rights under a collective agreement froze at the point of the transfer so that they were not entitled to the benefit of future changes to the agreement (to which the new employer was not a party). But what is particularly interesting about the case is the way in which the ECJ reached its conclusion.

In the past, the ECJ has emphasised that the purpose of the Directive is to protect the rights of workers. In Alemo-Herron, however, the Court said that the Directive does not just protect workers, but also "seeks to ensure a fair balance" between the interests of the employees on the one hand and the employer on the other. The Court went on to say that the new employer "must be in a position to make the adjustments and changes necessary to carry on its operations". Reference was even made to the Charter of Fundamental Rights of the European Union. Since the Lisbon Treaty of 2009, that Charter has been legally binding on all EU institutions, and Directives must be interpreted in line with it. Most of the rights set out in the Charter are those enjoyed by individual EU citizens, but art.16 expressly recognises "the freedom to conduct a business". In Alemo-Herron, the ECJ held that that right included the freedom of contract and that the employer "must be able to assert its interests effectively in a contractual process to which it is a party".

The context of that case was of course very different from a situation where an employer is seeking to harmonise terms and conditions, but the case law on changing contracts was decided before the Charter became part of EU law. It is surely arguable that, were the ECJ to be given a fresh look at the issue, the outcome would be different. Certainly the language used by the Court in Alemo-Herron is new. For the past 20 years, all of the emphasis in ECJ decisions on employment law has been on the rights of workers - with scant regard paid to the economic impact that the law may have on European businesses. But the enlargement of the Community has significantly altered the composition of the ECJ. Perhaps the old assumptions about how the Court approaches employment rights no longer apply.

Suppose the new TUPE Regulations allowed new terms and conditions to be agreed if the employer could show that the change was a proportionate means of achieving a legitimate business aim (to borrow a familiar term from discrimination law). There would surely be a strong argument that this provided the balance between the rights of employees and the rights of employers that the ECJ has held to be necessary. It would certainly make more sense to most people than trying to twist a situation to fit the concept of an ETO reason.

Whatever the Government does with TUPE there will still be uncertainty, and the timescales involved in referring questions to the ECJ will mean that the uncertainty will last for years. But, for business at least, the fact that the ECJ's approach is uncertain, rather than predictably one-sided, feels like an improvement.

perspective@xperthr.co.uk