ECJ ruling on early retirement benefits

In November 2003, the European Court of Justice (ECJ) ruled that early retirement benefits must be honoured by a new employer in the event of a transfer of undertakings.

On 6 November 2003, the European Court of Justice (ECJ) issued a ruling, in case C-4/01 Serene Martin and others and South Bank University on the interpretation of Directive 77/187/EEC on the transfer of undertakings (now amended by and consolidated in Directive 2001/23/EC). It found that early retirement benefits should be paid for by a new employer after a transfer of undertakings.

Prior to 1 November 1994, Serene Martin, Rohit Daby and Brian Willis were employed as nursing lecturers at a college which formed part of the UK National Health Service (NHS). However, this college subsequently became part of South Bank University (SBU). Shortly before this transfer, the college staff were informed by SBU that they would be offered a new employment contract and, although they were not obliged to accept the new terms and conditions, they would in any case not be able to continue their membership of the NHS retirement scheme. They could either: leave the NHS scheme as it was and join a new scheme; transfer pension rights from the NHS scheme to one of the SBU’s retirement schemes; or leave the NHS pension scheme as it was and not join a new scheme. The applicants did not accept the new SBU terms and conditions, but joined the teachers’ superannuation scheme and applied to transfer their existing NHS pension rights into that scheme. However, only Mr Daby and Mr Willis were able to do so - Ms Martin could not as she was over 60 at the time of the transfer.

In January 1997, SBU wrote to all university staff aged over 50 stating that it would not be able to offer early retirement after 31 March 1997 and offered them a last change of taking early retirement before that date. Ms Martin and Mr Daby accepted the offer. Mr Willis remained in SBUs’ employment. At this point, a dispute arose, as the applicants claimed to be entitled to the NHS terms of early retirement instead of SBU’s terms, which were less favourable.

The Employment Tribunal in Croydon, UK, decided to refer a total of nine questions to the ECJ relating to the application of the Directive on the transfer of undertakings with regard to early retirement benefits. In essence, the rule contained in the Directive protecting employees’ terms of employment in the event of a transfer of undertakings does not apply to old-age, invalidity or survivors’ benefits. The ECJ therefore had to decide whether conditional benefits paid before normal retirement age at the discretion of an employer would fall within this exclusion. If they did, then the protection offered by the Directive could not be applied.

Following the reasoning of an ECJ decision reached on 4 June 2002 in case C-164/00, Katia Beckmann and Dynamco Whicheloe Macfarlane Ltd, the ECJ held that only benefits paid for the time when employees reach the end of their normal working life, under the rules of the pension scheme in question, and not benefits paid in other circumstances, could be classified as old-age benefits, even if calculated by reference to the rules for calculating normal pension benefits. The ECJ therefore ruled that there was no reason to treat the early retirement benefits in question any differently from benefits payable on redundancy and that therefore they came within the scope of the Directive’s protection.

The ECJ also looked at the issue of whether, if rights were transferred, they could be waived or varied by the employee’s acceptance of new terms of employment offered by the new employer. It held that legislation on this issue is in place in order to safeguard employees’ rights and it should therefore not be possible to derogate from those rights in a manner unfavourable to employees, unless altering the rights was unconnected with a transfer of undertaking. However, in this case, the new terms were designed to bring the applicants’ early retirement benefits into line with those offered to existing SBU employees and were therefore connected with the transfer.

Commentators note that this decision may result in employers having to factor the cost of early retirement benefits into transfers of undertakings. Further, there is no specific time limit for bringing claims relating to the transfer of rights and therefore there is a possibility that claims could be backdated to 1977, when the Directive came into force.