The Court of Justice of the European Union (CJEU) has issued its ruling in an import-ant case concerning the effect of industry or sector-wide negotiated terms of collective agreements after the transfer of an undertaking.

Collective agreements regulate terms and conditions of employees at their workplace, their duties and the duties of the employer.

At issue was the interpretation of the Acquired Rights Directive 77/187/EEC, implemented into Maltese law through specific regulations, which aims to protect employees’ rights in the event of a transfer.

In terms of that Directive, where there is a transfer of employees in a transfer of business or undertaking, the new employer is bound by the existing terms of employees’ contracts of employment. Effectively the transferee steps into the shoes of the transferor in relation to the employees.

In the case of “Alemo-Herron and others v Parkwood Leisure Ltd”, the main question that the CJEU was requested to answer was whether the terms of a collect-ive agreement negotiated through a central bargaining forum bound the new employer even if it did not have the opportunity to be a party to the negotiations of the terms of the collective agreement.

The claimants in this case worked for the London Borough of Lewisham in its leisure service department.

Under their contracts of employment, their salaries were set by reference to collective agreements which established the applicable pay scales.

Following an outsourcing exercise, the claimants transferred to a private company in 2002 and two years later to the defendant company. Subsequently, a new collective agreement awarded a pay increase to relevant employees for the following three years.

Parkwood, the claimants’ new employer, had played no part in the negotiations for the new agreement and declined to comply with the new terms, arguing that it was not bound by amendments to the collective agreement made subsequent to the transfer.

The affected employees brought claims against their new employer for breach of contractual terms incorporated in the new collective agreement.

Their claim was dismissed by the Employment Tribunal and confirmed by the Court of Appeal. An appeal was made to the Supreme Court.

The latter made a reference to the CJEU for a preliminary ruling to determine what the correct interpretation of the Directive should be.

In February this year, the Europ-ean Advocate General delivered an opinion that endorsed the claimants’ interpretation, stating that the transferee employer is bound by changes made to collect-ive agreements after the transfer, such as new wage rates, whether the negotiations occurred prior to or after the transfer, and even if the transferee had no opportunity to negotiate the terms of the agreement.

In an unprecedented decision, the court disagreed with the Advocate-General’s opinion. It favoured the interpretation given by the defendant company, ruling that the new employer should not have to abide by the collective agreement it had no part in negotiating.

In reaching its decision, the court emphasised the importance of striking the right balance between the interests of the employees and those of the new employer, which is at the heart of the Directive.

In binding the transferee to terms it had had no opportunity to negotiate, the court noted that this would significantly impair the transferee’s freedom to conduct business, which presupposes the transferee’s ability to assert its interests in a contractual negotiating process.

Upholding the employer’s right to conduct a business under Article 16 of the Charter of Fundamental Rights of the European Union, the court concluded that where the transferee did not have the opportunity to participate in the negotiations for a collective agreement that are concluded after the date of the transfer, the outcome of those negotiations did not bind the transferee.

The court therefore ruled that employees who transfer to a new organisation are not entitled to the benefit of collectively-agreed terms where those terms are agreed to after the date of the transfer and the new organisation was not a party to the negotiation of those terms.

Consequently, the defendant company was not bound by any pay increase set out in the new collective agreement that was agreed to after the transfer.

New employers following a transfer do not face the prospect of being bound by any terms subsequently agreed by unrelated parties and having had no influence over negotiations.

New employers in a transfer will still, however, be bound by collect-ive agreements in place between the old employer and the trade union at the date of the transfer.

From a wider perspective, the court’s strong emphasis on freedom to contract is worth noting as it signifies the court’s desire to balance the interests of both employees and employers, rather than purely protecting workers’ rights.

Josette Grech is an associate with Guido de Marco & Associates and heads its European Law division.