United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR CLIVE SHELDON (of Counsel) Instructed by: Engineering Employers Federation Broadway House Tothill Street London SW1H 9NQ
For the Respondent	MR NICHOLAS SIDDALL (of Counsel) Instructed by: Messrs Southerns Solicitors Mackenzie House 68 Bank Parade Burnley Lancashire BB11 1UB


 


MR RECORDER LANGSTAFF QC

1. This appeal, against a decision of an Employment Tribunal sitting at Leeds, raises the question whether arrangements between an employer and some of his employees become of contractual effect between that employer and another employee despite the protestations of the employer throughout that his benevolence towards one group of employees should set no precedent for his treatment of others.
2. By their Extended Reasons, promulgated on 14 September 2000, the Tribunal found that Warman International ("Warman") were in breach of contract in that they had failed to pay the Respondent ("Mr Wilson") an enhancement of redundancy pay amounting to half a week's pay for each complete year of service, and that they had failed to compensate him fully for his notice period, for loss of use of the company car, for accrued holiday pay, and for loss of medical insurance.
3. Those conclusions begged the question what the contract was. The Tribunal found that Mr Wilson had become an employee of a predecessor company to Warman. His contract with that company, as with Warman, contained nothing in terms as to his entitlement to any enhancement of statutory redundancy pay. Nor did any written document Mr Wilson ever received. Nor did he claim that any oral agreement had been made with him to that effect. The term of the contract which the Tribunal found broken by Warman was that an arrangement which they adopted in the case of other employees amounted to custom and practice, and was incorporated in Mr Wilson's contract on that basis. In other words, it held that what had happened in the case of others was such that the employers were obliged to do the same in his case.
4. What had happened in the case of others was this. In 1983, Warman needed to effect redundancies compulsorily. The union wished selection for redundancy to be based on "last in first out". Warman wished instead to apply selection criteria to retain what it considered to be better employees, in the interests of the business. Those criteria were accepted by the unions representing the workforce, in return for redundancy payments enhanced by half a week's pay for each completed year of service.
5. In 1987, further redundancies were made. A similar enhancement in respect of redundancy pay was made. This time, no bargaining pressure was exerted by the unions to achieve this result.
6. Between 1991 and 1993 there was a rolling programme of dismissals by reason of redundancy. Again, the same enhancement of redundancy pay was made. In 1999, again, the same happened. However, in February 2000 Mr Wilson alone was dismissed by reason on redundancy: it appeared that due to the downturn of enquiries for major projects, Warman could no longer sustain his position. He was offered no redundancy enhancement.
7. Before the Tribunal, it was argued that because enhanced redundancy payments had been made on each of the four occasions (one spread between 1991 and 1993) that there had been redundancies, so should they be on the fifth occasion, as a matter of contract.
8. No argument appears to have been addressed to the impact, if any, which the implied term of trust and confidence identified in Mahmud -v- Bank of Credit and Commerce International SA [1998] AC 20 might have had in the circumstances. We have therefore not considered it. The argument was one of incorporation by long standing custom and practice.
9. However, the facts that we have cited above show only part of the picture. The Tribunal found in relation to the 1983 redundancies that the enhanced payments would apply only to that particular redundancy exercise, and were not to be taken as representing future company policy That was made clear to a meeting of shop stewards on 9 September 1983, a copy of the minutes of which was before the Tribunal.
10. The Tribunal went on to describe the enhancement made in 1987 as "discretionary", and found as a fact that in 1983 Warman was not prepared to consider enhancement of severance payments as of course. It did so only because it was threatened with industrial action.
11. As to 1999, Warmans' opening position in consultation had been that it was willing only to pay statutory redundancy pay, without enhancement. The position was, again, conceded following negotiations.
12. The Tribunal Decision

Against this factual background, the Tribunal record that they were addressed by Counsel for Warman by reference to Quinn -v- Calder [1999] IRLR 126. The headnote reads that:

"In determining whether a policy adopted by management unilaterally has become a term of the employee's contract on the grounds that it is an established custom and practice, the factors referred to by Brown-Wilkinson J in Duke v Reliance Systems [1982] IRLR 347 EAT, whether the policy has been drawn to the attention of the employees by the management or had been followed without exception for a substantial period, are likely to be among the most important circumstances to be taken into account, but they have to be taken into account along with all the other circumstances of the case. The question is not whether the period for which a policy has been followed is "substantial" in the abstract sense but whether, in relation to other circumstances, it is sufficient to support the inference that the policy has achieved the status of a contractual term. With regard to communication, the question is not so much whether the policy was made known directly to the employees or became known through intermediaries, but whether the circumstances in which it was made or has become known support the inference that the employers intended to become contractually bound by it."

That headnote faithfully records what is said by Lord Coulsfield in the decision of the Employment Appeal Tribunal in Scotland. In the body of his judgment, Lord Coulsfield continues, importantly:-

"…..it is, in our view, important that, while the Cookson terms had been applied on every occasion on which redundancy arose between 1987 and 1994, they had not been incorporated in any agreement, or communicated to the employees by the management. That is important because the positive act of communication of the terms to the employees might well suggest an intention to be bound by them, which does not arise, or not with the same force, merely from the repeated acting upon those terms. The period over which the enhanced terms were acted on was seven years, but, on the other hand, there were only four occasions during the seven years when redundancies arose. The enhanced terms had been paid on each occasion when there was a redundancy from 1987 onwards; but, on the other hand, there was evidence that payment of the enhanced terms was not, from the employers' point of view, automatic, but required a decision on each occasion. The fact that the employees' knowledge came from fellow-employees would not preclude the possibility of treating the enhanced terms as established, by custom and practice, as part of the contract; but it is necessary to take that knowledge along with the other circumstances, including the fact that there does not appear to have been any evidence that any employee actually entered into the employment on the faith of an expectation that those terms would be applied."

Pellowe -v- Pendragon plc, a decision of this Tribunal with H H J Clark presiding (EAT/804/98) was cited to the same effect.

13. In the light of those authorities, the Tribunal reached its Decision in these terms:

"22 For his part, the chairman had difficulty in reconciling the authorities with the applicant's case on the enhanced redundancy pay. For their part, the lay members, applying their industrial experience, had no difficulty whatsoever in seeing that this was a case in which not only was there a policy to make an enhanced redundancy payment in every case, but the policy bound the respondent as a matter of contractual obligation. They based their judgment on the period time over which, and the frequency with which, the enhancement had been paid. The fact that it had been conceded every time gave rise to the inference that, in reality, the respondent recognised that it had an obligation to make the enhanced payment. What changed in the applicant's case was the take-over by Weir plc and the instruction to Mrs Pilkington not to pay in his case."

14. This appears to be a Decision by a majority, with the Chairman dissenting, to the effect that a concession, though made after initial protest, amounted to a recognition of an obligation to make the enhanced payment, and (presumably) that the employees all knew that was the obligation. However, it is not entirely clear that the Employment Tribunal intended to reach a decision by a majority on this ground, because of the paragraph which follows in these terms:-

"23. We all agreed that there was another route to the same result. For we have found that in 1983 there was an agreement to pay the enhancement in consideration for the union dropping its insistence on LIFO. That agreement appears to have been honoured in 1987. The respondent sought to resile from it in 1991, whilst at the same time asserting the agreement in respect of selection criteria. In the event, it did not resile from it but gave effect to it. We find that it did so because, having asserted the 1983 agreement, it felt obliged to pay. The threat of industrial action was a further inducement. Likewise, in 1999, whilst it may be that the respondent hoped to get away with the statutory amount, it was reminded of its obligation by the members of the Works Council and helped to concede the point by the suggestion that it would induce more volunteers to come forward."

15. As to the second part of the Decision (dealing with the alleged failure to compensate Mr Wilson fully in respect of the notice period, car, and insurance) the Tribunal expressed its conclusion in these words at paragraph 24:-

"……we note that payments in lieu of notice have been based on gross pay since at least 1991. In the cases of Messrs Hadfield and Shaw, the only benefit embraced by such payment was a very notional one relating to the respondent's contribution to their share of the pension fund. There is nothing in the evidence before us to indicate that it was ever the intention of the respondent to compensate for loss of benefits by calculating payments in lieu of notice on a gross basis. We find instead, that having regard to the Inland Revenue concession on the tax status of such payments, the respondent simply assumed an obligation in these circumstances to pay gross."

They went on to say:-

"By failing to give the applicant three months' notice of termination, the applicant suffered losses in respect of the use of his company car, the provision of petrol and medical insurance."

(It went on to evaluate those).

16. We were invited to look at the notes of the shop stewards' meeting of 9 September 1983, which was before the Tribunal, the findings of which are amply justified by the contents of those minutes. We were also invited to look at the note of the conference in respect of the 1991 to 1993 redundancy exercise. That shows, to us, that the unions entered discussions with the employers rejecting the company's method of selection which had been imposed in 1983, and "hoped" that the company would provide some enhancement of redundancy. The second part of the note gives the employer's reply to those contentions. The company emphasised that the selection criteria had been agreed in 1983 "as a local agreement", and had been used in all subsequent occasions of redundancy. It seems plain to us that Warman was here answering the complaint that the redundancy criteria were inappropriate. As to enhancement, the second last paragraph of the note recorded that Warman were not prepared to consider an additional package of severance payments, particularly because the redundancies were necessary to cut costs.
17. Submissions

Mr Sheldon, for Warman, argued that it was perverse to find that there was a policy of making enhanced redundancy payments, or that Warman recognised that it was obliged to make them. The evidence was rather that the payment was not the result of an accepted obligation, as a matter of course, but was responsive to the particular circumstances of each occasion that redundancies had to be made. It was expressly to be traced back to a decision in 1983 which was clearly stated to have applicability to that redundancy round only, and was an "entitlement" which had always been denied on each occasion it was sought, save for the redundancy exercise in 1987 about which there was little or no evidence save those bare facts. The Tribunal, he argued, had assumed that the policy or practice of the employer gave rise to a contractual obligation. He argued that the alternative approach of the Employment Tribunal was predicated on two matters, both of which were erroneous: first there was an agreement made in 1983 by which Warman were still bound in 1991 (so that they "sought to resile" from it on that occasion) and that, secondly, the two matters (selection criteria on the one hand, and enhanced redundancy payment on the other) were so linked that the use of the one (the criteria) required the payment of the other (the enhancement).

18. As to the finding in respect of benefits, the employee, Mr Wilson, was entitled to be compensated by way of damages for what he had lost. What he had lost was the net value to him, after accounting for tax. As to other benefits, when the car was allocated to Mr Wilson, it was on terms that Warman reserved the right to withhold permission to use it for private purposes at any time. The only loss that Mr Wilson could claim was in respect of his private use during what would otherwise have been his notice period. There would, of course, be no business use during that time. An employer is entitled to perform its obligations under a contract in the way most beneficial to it, within the terms of the contract: Lavarack -v- Woods of Colchester [1966] 1 All ER 683.
19. For the Respondent, Mr Siddall argued that the decision as to incorporation of the enhanced redundancy terms was a matter of fact, which was a permissible option for the Tribunal and not therefore one with which we could interfere.
20. Mr Siddall felt driven to argue that the reasoning of the Tribunal could have been better expressed, but that if we were not satisfied that the decision was plainly and unarguably right it would be appropriate to remit on the issue.
21. He accepted that the Employment Tribunal had discerned a term of the contract as to the payment of pay during the notice period, and sought to sustain the finding in respect of the loss relating to the use of the car as only being permissible if the Tribunal had found as a matter of custom and practice that the use of the car would not be withdrawn, although the employer had expressly reserved the right to do so when the car was first allocated. He acknowledged the absence of reasoning to that effect in the Decision.
22. The Law

Both Counsel accepted that in attempting to determine whether there is a term incorporated by custom and practice, the relevant test is whether or not the custom and practice is notorious, certain and reasonable. That test emerges from cases such as Sagar -v Ridehalgh & Sons Ltd [1931] 1 Ch 310, CA and Liverpool City Council -v- Irwin [1977] AC 235.

23. One approach might be to ask whether, if the employee had been invited to say whether or not a particular term was part of his contract, he would suppress the enquiry with a testy "of course", just as would the employer, by analogy with the approach that might be taken to the implication of terms in a contract.
24. To be binding, the provision of enhanced redundancy would have to have become, by repeated operation, or by recognition, an obligation upon the employer which the employee was entitled to expect. If, on each and every occasion that the payment had been made it was expressed to be for that occasion only, the effect of that qualification would be to deny the practice as setting any precedent. It would be to deny the very existence of the "custom and practice" upon which the claim for incorporation depended. Similarly, the trade unions recorded expression of "hope" for enhanced redundancy payments, coupled with their denial of any continuing agreement as to the criteria for selection, in 1991 are inconsistent with both those matters already being concluded by agreement. One would be entitlement, and the other the quid pro quo.
25. Accordingly, we think that the Chairman was right to express the view that he did that authority precluded him from finding in favour of Mr Wilson upon the basis set out in paragraph 22. We think that Lord Coulsfield's comment in Quinn -v- Calder, at paragraph 8, to the effect that where payment of enhanced terms required a decision on each occasion of payment and was not automatic it would tell against such a payment being custom and practice, is entirely right. But we would add to it. Where entitlement to payment is denied, even repeatedly, though the payment itself is ultimately conceded (for a variety of different reasons on different occasions) it does not, by payment under protest, become an entitlement for future occasions. From the payer's point of view, the fact of payment, if made under protest, does not create an obligation to pay on a future occasion.
26. As to the Decision at paragraph 23 we conclude that either the Tribunal unanimously were expressing exactly the same reasoning as that which the Chairman had rejected in paragraph 22, or this was in effect a form of argument that, in colloquial terms, the employers could not "have their cake and eat it". Unfortunately, for this approach, there is no necessary link between redundancy criteria and enhanced payment such as is essential to the argument. If any dismissal is to be effected by reason of redundancy, it may or may not be unfair once the factors referred to in section 98 of the Employment Rights Act 1996 are considered. An employee may only be dismissed without that dismissal being liable to be declared unfair if he has been fairly selected for dismissal. Selection criteria are thus almost always necessary. A disagreement as to whether they should be of one sort or another does not have to be resolved by agreement. It can simply be a question of imposition by the employer, whose decision may then be reviewed (if it is still challenged) by an Employment Tribunal. If the criteria fall foul of the well known provisions of section 98(4) of the 1996 Act, the dismissal will be unfair.
27. In other words, for the employer to assert a particular set of selection criteria does not necessarily imply that the employer will add to the amount of money which his redundant employees would otherwise receive by virtue of statute. The critical part of paragraph 23 of this judgment is that:

"……having asserted the 1983 agreement, it [i.e Warman] felt obliged to pay. The threat of industrial action was a further inducement."

But this finding appears contradicted by paragraph 13:-

"…The threat of industrial action persisted, so that the respondent felt obliged to concede the ex-gratia discretionary enhancement of redundancy pay."

adding in a Delphic phrase:-

"Having said that, it was only honouring its side of the bargain concerning selection criteria, which it asserted had been agreed in 1983. For our part, we find that there was such an agreement."

It is difficult to describe pay as "ex-gratia" and "discretionary" whilst at the same time holding that there is an obligation to pay it: and reference to the bargain in 1983 cannot assist when the finding of fact in respect of it involved recording that the company at the time expressly limited it to the circumstances in 1983, and not thereafter. In short, we do not think that this part of the reasoning of the Employment Tribunal can be sustained.

28. So far as the additional sum in respect of payment in lieu of notice, the use of company car and medical insurance is concerned, we again have to reason from first principles. An employee who is dismissed summarily in breach of contract is entitled to be put into the position in which he would have been had the contract been fully and properly performed. The sum to be paid to him is damages, except in those rare cases in which the contract itself makes provision for what will happen. This was not such a case. Accordingly, the measure of damage is that which Mr Wilson would have had had he remained in employment, less any sums which Warman might prove that he could have obtained in order to mitigate his loss. No argument in mitigation is recorded: and accordingly that might be assessed as nil, the burden of proof of failure to mitigate being upon the employer.
29. What Mr Wilson lost was the amount of his net salary during the three month period. Ordinarily, an employee receiving damages in respect of his claim for lost earnings would be liable to taxation on any sum received, such that his employer would have to pay him such a sum by way of damages as would leave him with exactly his net loss after he had accounted to the Inland Revenue for tax due. In other words, any payment would be "grossed up". This, however, is not the case where the sum is as low as that to which Mr Wilson was entitled: section 148 of the Income and Corporation Taxes Act 1988, as substituted by the Finance Act 1998, section 58(1)(4) provides that payments and other benefits not otherwise chargeable to tax which are received in connection with the termination of a person's employment are chargeable to tax if and to the extent that their amount exceeds £30,000. That was not the case here. There was no charge to tax. Accordingly, it was the net loss only to which Mr Wilson was entitled.
30. So far as the car is concerned, Warman reserved the right to withhold permission to use it for private purposes at any time As it happens, Mr Wilson did have use of the car for a period within what would otherwise have been his term of notice. An agreement that the car should be retained until the end of March 2000, following dismissal on 29 February 2000, was recorded in the letter of dismissal. There being no contractual entitlement to retain the car after that date, no loss can ensue.
31. As to company car and medical insurance, in any event, Warman said in its letter of 29 February 2000 to Mr Wilson that it was in fact paying not simply net pay, but a sum equal to gross pay, in order to take into account the loss of benefits such as the company car and medical insurance. No suggestion has been made to us, nor was it to the Employment Tribunal, that the additional element constituted by the difference between net and gross pay was insufficient to compensate for these benefits even if properly recoverable. Accordingly, we can see no proper foundation in law for the conclusion to which the Employment Tribunal came.
32. We accept Mr Sheldon's argument that it would not be right to remit the case to the Employment Tribunal for reconsideration. The appeal must be allowed, for the reasons given in this judgment, with the result that the claim by Mr Wilson must be dismissed.