Two months to equalise: The Czech Supreme Court's approach to wage harmonisation in TUPE transfers

Abstract

The article addresses a significant judgment by the Czech Supreme Court in the area of Transfer of Undertaking (TUPE). In this ruling, the Supreme Court rejected the Transfer of Undertaking as a justifiable reason for differential wage treatment. Based on the decision, transferees have a two-month period following the transfer to harmonise employment terms for all employees to prevent unequal treatment. The only exception applies to transfers of rights and obligations arising from collective bargaining agreements.

Case note:

Czech Supreme Court Case No. 21 Cdo 2559/2023 dated 29 August 2024

I. Introduction

In its judgment, the Supreme Court dealt with the intersection of the principles of equal treatment and the maintenance of employment terms under the Transfer of Undertaking Directive. ¹ Under Czech law, the employers are obliged to ensure equal treatment of all employees with respect to their working conditions, remunerations, benefits, training and the opportunity to achieve promotion or other advancement in employment (Section 16(1) of the Labour Code). ² It is important to note that under Czech law the equal treatment principle, including equal remuneration, is not limited to the prohibition of unequal treatment based on discriminatory reasons (such as gender, age, religion etc.) as recognised by European anti-discrimination Directives. It is a general principle obliging the employers to provide equal wages to all employees performing the same work or work of the same value.

At the same time, under Article 338 (2) of the Labour Code, which transposes Art. 3 of the Transfer of Undertaking Directive, the transferees are obliged to retain the employment rights and obligations of transferred employees. When it comes to rights and obligations arising from the collective bargaining agreements, these shall be retained by the transferee for the period of validity of the collective bargaining agreement, but no longer than until the end of the subsequent calendar year.

However, Czech law is silent when it comes to the rights arising from employment contracts or internal regulations issued by the employer. Article 339a of the Labour Code transposing Article 4(2) of the Transfer of Undertaking Directive only stipulates that the employees shall be entitled to severance pay if they terminate employment within two months post transfer due to a substantially detrimental change in employment conditions.

In the Czech Republic, the coverage by collective agreements is only around 35%, therefore the majority of employees have their terms agreed in their employment contracts or stipulated in internal regulations. Due to the fact that the Czech law transposing the Directive does not expressly mention the obligation on the part of the transferee to retain employment terms agreed in employment contracts or stipulated in an internal regulation, nor does it provide for the period during which such terms should be retained, the practical implementation is unclear. In particular, it is not clear if and when the transferees shall aim to harmonise employment terms post transfer in order to avoid breaching the equal treatment principle, but at the same time to adhere to the TUPE rules.

II. Facts of the case

A former employee working as a social services worker sought additional remuneration, claiming a violation of the equal treatment principle. Despite having the same job description, equivalent education, and even more professional experience, she was placed in a lower wage bracket than employees transferred from another employer under a TUPE scenario. The transferee argued that the differential treatment was justified by the fact that the employees were transferred under TUPE principles, with their previous wage classification applicable at the transferor, and as such the transferee was obliged to comply with the previous terms.

Both lower-instance courts ruled in favour of the employee and concluded that there was a breach of the equal treatment principle as laid down in Article 16 of the Czech Labour Code. The employer further appealed to the Supreme Court, contending that it maintained the transferred employees’ original classification to prevent worsening their salary situation, citing Section 338 of the Labour Code, which prohibits the deterioration of conditions of employment of transferred employees during TUPE.

The Supreme Court was thus compelled to determine whether TUPE constitutes a justifiable reason for differentiating between transferred and existing employees in terms of wage classification. It came to following conclusions:

The TUPE legislation does not provide for any exceptions to the obligation to ensure equal treatment of all employees of the transferee, and it does not allow for the possibility of treating the transferred employees differently from its other employees.

The only such specific situation shall be the period of time during which the transferee is bound by the rights and obligations provided for under the collective agreement.

Therefore, after the transfer, the transferee is obliged to take measures to eliminate unjustifiable inequalities in the areas defined in Section 16(1) of the Labour Code, including in the area of remuneration. It must do so within a reasonable timeframe.

Although the Labour Code does not regulate the length of such a period, it may be inferred from the provisions of Section 339a of the Labour Code, i.e., the two-month period during which the employees can terminate their employment on grounds of the deterioration of their employment conditions with entitlement to a severance payment.

After that period, the difference in treatment (with the exception of rights and obligations provided for under collective agreements) can no longer be justified.

The manner in which this is done (within the limits set by law and contractual arrangements) is entirely up to the transferee. In this respect, the TUPE legislation does not prohibit the deterioration in the working conditions of the transferred employees.

III. Commentary

The judgment is quite surprising. The Supreme Court clearly stated in this case that the transferee is free to change the employment conditions of transferred employees; it only has to wait for two months after the transfer. Such changes may even be unfavourable to the transferred employees.

This conclusion seems to contradict the case law of the Court of Justice of the European Union (CJEU), which allows for the alteration of terms of employment at the transferee insofar as national law permits altering employment relationships unfavourably in situations other than a transfer of undertaking. However, the CJEU emphasises that such alteration is possible only ‘provided that the transfer of the undertaking itself may never constitute the reason for that amendment.’ ³ In my view, a situation where the transferee harmonises salary levels two months after the transfer should essentially always qualify as a change justified by the transfer itself. In such a situation, the alteration of the terms is justified solely by the fact that the transferee intends to harmonise the terms of employment of the transferred employees with those of the other transferee employees. If there was no transfer, there would be no harmonisation. Therefore, it seems very difficult to argue that such amendments would not be justified by the transfer.

At the same time, in this ruling the Supreme Court obliged employers to harmonise the terms of employment within the two-month period. When salaries are contractually agreed and employees are unwilling to accept a salary reduction, employers are left with only one option: to offer higher salaries to employees in lower salary brackets (whether they are the transferee's original employees or the transferring employees). The ruling therefore has significant inherent costs and may materially impact the financial considerations of any TUPE transaction.

Before the adoption of the Supreme Court's judgment, transferees in practice considered it justifiable to keep the different terms of employment of the two groups of employees for a period of around one year and then slowly attempted to harmonise them. The logic of the one-year period was based on the express regulation of the collective agreements where the law clearly allows for maintenance of the different terms of the transferred employees even until the end of the next calendar year. Now the Supreme Court has made it clear that the one-year period applies only to entitlements arising from the collective bargaining agreements, but with respect to any other entitlements, it is not possible to wait so long, and it is mandatory to act after the two months.

Nevertheless, it appears that the Supreme Court has also given employers the green light to alter employment terms after the two-month post-transfer period. As such, employers may unilaterally reduce the salaries and benefits of transferred employees, as long as these revised entitlements are stipulated unilaterally by internal regulation or salary assessment. The transferring employees as well as original employees of the transferee, whose terms of employment are set unilaterally by the employer, will now be at higher risk of having their terms of employment altered after two months as the employer can always decline any TUPE protection and argue for the necessary harmonisation as required by the judgment.

On the other hand, employees whose employment terms are set contractually will benefit from the judgment as their terms of employment may not be worsened without their consent. As the employers will need to harmonise conditions quickly post transfer, the only way to do so will be to increase the contractual salaries.

In its judgment, the Supreme Court has thus prioritised the equal treatment principle over the principle of maintenance of rights of the transferred employees. The Court did not provide much reasoning regarding this approach; in fact, it did not elaborate in detail on the TUPE protection and why the two-month period should be binding. Nevertheless, the outcome of the judgment seems quite clear, and transferees shall take into account that they only have two months to equalise terms.