European Court of Justice U-turn on transfers brings uncertainty for employees

A March 1997 ruling by the European Court of Justice (ECJ), changing the interpretation of the EU Directive on transfers of undertakings, left UK trade unions and employers speculating as to what the change would mean for the rights of the employees of contractors, and who would bear the brunt of the costs in the event of loss of contract. Their worst fears were confirmed when weeks later the UK Court of Appeal interpreted the Directive in the same way as the ECJ.

The ECJ's ruling on 11 March 1997 in the case of Süzen v Zehnacher Gebäudereinigung GmbH Krankenhausservice and another (Case C-13/95) made a potential "U-turn" in the interpretation of the EU Directive on transfers of undertakings, that has left a question mark over the way that the employment rights of the employees of contractors are decided. The ruling stems from a court case in Germany in which a school cleaner, Ayse Süzen, lost her job when her employer failed to keep the cleaning contract at the school where she worked. Ms Süzen challenged the decision of the new contractor not to re-employ the cleaning workers dismissed by their original employer.

In the UK, the outcome has potentially far-reaching consequences for many employees in those sectors where contracting-out arrangements have become the norm. According to a report in The Times, in the public sector alone there are about 250 contract companies working for local authorities, 150 attached to the National Health Service and 60 more on the payroll of central government departments.

The transfer of undertakings Directive

The ECJ's ruling in the Süzen case related to the interpretation of the Directive on the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of businesses (77/187/EEC) - sometimes known in the UK as the "acquired rights Directive". The Directive was incorporated into UK law through the Transfer of Undertaking s (Protection of Employment) Regulation, 1981, commonly known as TUPE. The Regulation, which has had a chequered history, had experienced three years of stability before this latest change in approach by the ECJ as to how the Directive should be interpreted.

In 1994, the Court ruled in the Schmidt case that the Directive applied to the contracting-out of cleaning services by a German bank, even though the services had previously been performed by one employee. But the ECJ has now ruled in Süzen that the fact that the service carried out by the old and new contractors is similar does not necessarily mean that there as been a transfer of an economic activity. Instead, unless it can be shown that significant tangible or intangible assets have been transferred from one contractor to another, or that the new employer has taken on a significant part of the workforce, the Directive will now not apply. The Court made it clear that no single factor will lead to a conclusive decision as to whether a relevant transfer is involved.

The decision led to immediate calls in the UK for theDepartment of Trade and Industry to clarify exactly what the ruling would mean under the TUPE arrangements. It had become widely accepted that TUPE applied very widely to transfers of undertakings, and even those businesses opposed to the broad interpretation have become used to tendering for contracts on that basis. Interested parties did not have to wait long for clarification, as on 26 March the UK Court of Appeal, in the case of Betts and others v Brintel Helicopters Ltd, followed the ruling of the ECJ.

Effects on employers

Employers' reactions have been mixed. The director general of the Business Service Association said that the news may be beneficial in the long run if TUPE goes back to its original purpose of applying to undertakings and not individual contracts. But even then, he was careful to stress that the Government must be prepared to ensure that industry is not left to bear the transitional costs of the arrangements if "second-generation" contracts are deemed not to have fallen within the scope of the Directive.

Currently, when companies winning contracts fall under the scope of the TUPE arrangements they have to take on responsibility for the employment rights of the existing contractor's staff. Now, winners may not be obliged to take on staff from those who have lost the contract and the loser may be the one left with the costs of severance payments and other liabilities, including those they may have inherited from past employers. Employers' associations seem particularly worried that the decision may force many companies into liquidation.

The Financial Times argues that the ECJ's decision to emphasise the importance of the transfer of tangible or intangible assets means that clients may have some choice over whether to invite TUPE or non-TUPE bids for contracts.

Effects on employees

The trade unions also had mixed reactions to the decision. Until the Betts ruling the Trades Union Congress (TUC) was keen to point out that the ruling applied only to a single case at the moment and that it did not appear to alter the rights of larger groups of workers. TUC general secretary John Monks said that "we are advising unions that any future cases should be judged on their merit."

The TUC, while taking comfort from the fact that TUPE will still apply where there is a significant transfer of tangible/intangible assets, still fears that it could encourage unscrupulous employers to deny employees of contractors their legal rights.

Both the General, Municipal and Boilermakers (GMB) union and the Unison health workers' union, which represent a significant number of employees of contractors, believe that fundamental rights under the Directive will remain intact, but that the ruling would make an already complex legal situation even more difficult.Mick Graham, GMB national secretary, said that the "Süzen judgment is unhelpful in that it will cause concern among contract workers but its very specific circumstances are unlikely to be repeated. Any employee transferring from one contractor to another will still retain the right to the same terms and conditions of service" (quoted in the Financial Times).

EU level

European Commission officials also thought that it was likely that the Süzen decision would not have a huge impact, although the precise circumstances under which the law applies remain uncertain. EU social affairs ministers are expected to leave further clarification of the Directive to the courts when they discuss the Commission's proposed revisions to the legislation in June 1997. The draft revision (EU9703115N) is the first time that an update has been considered in the last 20 years. The Directive is now considered to be old and business practices have changed, but instead of adopting a definition of exactly what constitutes a transfer of undertakings, ministers are thought likely to leave it to the courts to decide, as in the 1977 Directive. They are also thought to be considering expanding rights under the Directive to other groups, such as charities and part-time workers.

Commentary

The Süzen decision means that the Directive does not automatically apply when a contracted-out service transfers from one provider to another. But while it is thought that some employers are likely to make the best of the ruling, competing fiercely for contracts in the service sector because winning them would enable them to keep costs down by not having to honour existing employee rights, both unions and employers feel that in the majority of cases it will make little difference.

Another factor is that the Labour Government is opposed to the compulsory element of the existing rules on Compulsory Competitive Tendering (CCT) for services in the public sector, believing that contracts for services should only go out for tender if it can be proved that purchasers have not obtained the best value available. If the new Government is to abolish compulsion, the impact of the recent rulings may prove to be even less than it would have been under the previous Conservative Government. (Mark Gilman, IRRU)