United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR I GATT (One of Her Majesty's Counsel) Instructed by: Messrs Lovells Solicitors Atlantic House Holborn Viaduct London EC1A 2FG
For the Respondent	MR D BASU (of Counsel) Instructed by: Messrs Rowley Ashworth Solicitors No. 1 Snow Plaza St Chad's Queensway Birmingham B4 6JG

SUMMARY

Unlawful Deduction From Wages

Terms of a collective agreement were incorporated into employee's contracts of employment. Employees contended that the working of the ordinary defined shift pattern under the contract involved working more than the contractual hours and hence they were entitled to overtime rates for working the ordinary roster. Employment Tribunal accepted employee's interpretation of collective agreement and terms of employment and held that the failure to pay overtime rates for these hours amounted to an unlawful deduction from wages. EAT held employees interpretation was incorrect and that no term to bring about that result could be implied into the contract. Appeal allowed.


 


THE HONOURABLE MR JUSTICE NELSON

1. The Respondents are employed as technicians by the Appellant at their printing works in Oldham where national and regional newspapers are printed for distribution in the Midlands, North England and Scotland. There are some 480 permanent employees at the site, with some 75 technicians, including the Respondents. Mr Kershaw commenced employment with the Appellant in June 1989 and Mr Whitmore in March 1990. They are both members of the Trade Union now known as Amicus, which was formerly the Amalgamated Engineering Union.
2. In January 1989 a Collective Agreement was made between the Appellant and the Respondents' Trade Union, then the AEU. This agreement governed the Respondents' terms of employment. It required the Respondents to work on a shift rota system under which they worked 4 days on and 4 days off. Because of the nature of the calendar, this resulted in them working four shifts on certain weeks and three shifts on other weeks. From 1 January 2000 to December 2001 a four-shift week involved 4 shifts of 11.5 hours each, making a total of 46 hours, and a three-shift week involved 3 separate shifts of 11.5 hours each, making a total of 34.5 hours. From December 2001 to the date of the decision the total number of hours to be worked on a four shift week was reduced to 45.5 hours and the total number of hours to be worked on a three shift week fluctuated between 34 hours and 34.5 hours per week. Any new cycle was, in practical terms, completed every 8 weeks.
3. Each technician was contractually entitled to 7 weeks paid annual leave and each such week of holiday was paid as a week during which the technicians would have worked a four-shift week. If a simple mathematical calculation was made, without any adjustment for weeks of paid holiday, the shift rota system involved on average 40.25 hours work per week over an 8 week cycle in the first period, from 1 January 2000 to December 2001 and on average, 39.8 hours per week during the second period, December 2001 to the date of the decision. During the first period the Respondents' normal attendance hours were defined in the contract as 39.8 average hours per week and during the second period reduced to 39 hours average.
4. The technicians were entitled under the agreement to overtime payment where they worked hours in addition to the hours specified in a particular shift rota. Such overtime sums were claimed by the Respondents when they worked overtime in that sense, and were paid to them.
5. By proceedings commenced on 22 April 2003 in the Employment Tribunal each Respondent claimed that he should have been paid overtime for working the normal shift rota system as this in itself involved working longer hours than those which he was contractually obliged to perform (0.45 hours in the first period and 0.8 hours in the second period, each rounded up to one hour). Such overtime had not been paid, and the failure to pay this contractual entitlement amounted to an unauthorised deduction under section 13 (3) of the Employment Rights Act 1996. The Employment Tribunal accepted the Respondents' contentions and found that the Appellant had made unlawful deductions from their remuneration from 1 January 2000 up to the date of the decision. The Appellant now appeals against that decision and requests the Employment Appeal Tribunal to allow the appeal without remitting the matter either to the original or a fresh Employment Tribunal.

The Terms of Employment under the Collective Agreement and letters offering employment

6. Clause 9.1 of the Agreement states:

"The hours of the basic contractual week are detailed in the appendices to this agreement."

Clause 9.3 states that the current shift patterns and start and finishing times are set out in Appendix B and must be strictly adhered to. The duration of shifts, shift patterns and shift start and finish may have to be amended by management to accommodate customers production requirements, and subject to consultation in respect of long-term changes, the determination of shift patterns and start and finishing times are matters within the absolute discretion of the management. Clause 11 states that all employees will be available as required by management to undertake all prescribed shifts and that shifts will be staffed to suit schedule requirements. Under Clause 12 rotas listing names are produced by management at least fortnightly in advance.

7. Clause 13 deals with overtime and rota day working. Clause 13.1 states:

"The company will if practicable regulate the amount of overtime to minimum levels consistent with the overriding requirement to meet production needs...each employee will agree to work such overtime as and when deemed necessary by management. Overtime will not be withheld by the Union, its Chapel or any employee."

Clause 13.4 states that overtime rates, including the working of an additional shift, are as detailed in Appendix C, and "Where the amount of overtime worked either at the beginning or at the end of any shift is or includes a fraction of an hour it will rounded up to the nearest whole number."

8. Clause 24.1 states that annual entitlement of payment of holidays is in accordance with Appendix E which states the entitlement to five weeks annual holidays plus two weeks in lieu of all Bank Holidays. Clause 24.3 states that no extra payments will be made to employees in the event of them not taking their entitlements in any twelve month holiday year period and any holiday not taken will be lost. There will be no carry over period unless agreed. Holidays are stated to be paid under Appendix C at the inclusive rate of pay per week in respect of each week of holiday. Holiday weeks were always treated as four week shifts and paid accordingly. Appendix C of the Agreement sets out the General Terms and Conditions. Normal attendance hours are stated to be 39.8 average and overtime rate per hour per shift is stated to be £7.41 per hour. The parties put Appendix C and Appendix E before us, as the only relevant appendices.
9. The Respondents' terms of employment were also governed by their letters of appointment, both of which were in similar terms. They stated that:

"The arrangement of your attendance hours will be scheduled by the Company to meet production requirements. The Company will require production on all seven days of each week, including Bank and other Public Holidays which will be considered as normal working days to which shift arrangements may be applied."

10. The letters also stated:-

"Because the Company will operate over seven days per week, normal attendance hours will vary but can be expected to average no more than 40 hours per week over the rota cycle...Overtime will not normally be required but it is a condition of employment that you will work overtime when required by the Company."

11. Each letter stated that the Respondents' salary would be an inclusive annual sum payable by equal monthly instalments. The hours rostered to be worked under the shift pattern altered from month to month, but the Respondents' pay did not and was divided into and paid in twelve equal monthly instalments irrespective of the number of hours which each technician worked during each month.

The Tribunal's findings

12. The issue which the Employment Tribunal had to determine was whether the rota shift system itself required the Respondents to work more hours than they were obliged to work for a basic contractual week under their contract of employment. This was not a claim, the Respondents made clear in their final submissions, for overtime in the ordinary sense, that is, for work performed significantly beyond the end of a rostered shift.
13. The submission made on behalf of the Respondents to the Employment Tribunal was that it was necessary to imply into each of the Respondents' contracts of employment a term defining a "basic contractual week" for the purposes of establishing the correct amount of remuneration due to each Respondent. The Appellant's case was that no such implied term was necessary as the contract was clear on its face.
14. The Respondents submitted that the formula necessary to calculate the Respondents' entitlement to remuneration would be to identify the number of hours which each of them worked in aggregate over an 8 week cycle as this is the measure taken in the letter offering them employment. The passage relied upon both before the Employment Tribunal and us is:

"Because the Company will operate over 7 days per week, normal attendance hours will vary but can be expected to average no more than 40 hours per week over the rota cycle."

15. The 8-week cycle was, the Respondents submitted, the shortest and most convenient period applicable and it was not necessary to make any adjustment in respect of paid annual leave taken by either applicant during any 8-week cycle.
16. The Appellant submitted to the Employment Tribunal that an 8-week cycle was too short. The shift system had to be considered over a year, and for the purpose of calculating the number of hours worked by each technician it was necessary to exclude from the computation the weeks of paid annual leave. If that were not done the picture would be distorted, as to include them would be to take into account hours which were not worked, when the whole exercise was to determine the average hours worked. The Respondents' calculation assumed that the employee had in fact worked all of the seven 8 day periods and taken no holiday and completely ignored the fact that seven 4 day shift weeks were taken as a holiday at some point during the year and consequently not worked.
17. When holidays were ignored and the remaining 45 weeks of each year considered it could be seen that neither Respondent would have worked more than the number of hours which he was contractually obliged to work. The computation varied from year to year as it would depend upon the starting point at the beginning of each year but if an 8-year cycle was considered the position would remain substantially the same throughout that period. There would be 'over' hours worked in some periods and 'under' hours worked in others. Overtime could not be claimed other than in respect of additional hours actually (as opposed to notionally) worked.
18. The Employment Tribunal accepted the Respondents' submission that the term which had to be implied was that an 8-week cycle was the appropriate formula, and that such an implied term passed both the "officious bystander" test and the "business efficacy" test. The Respondents' formula was simple and necessary for the purpose of carrying out the relevant computation. The Employment Tribunal concluded that it was not necessary to exclude weeks of paid annual leave from the calculation because paid annual leave does not attract overtime. The Employment Tribunal dealt with annual leave by determining that any weeks of paid annual leave actually taken within the 8-week cycle had to be treated as a week in which the technician had worked precisely the number of hours he was contracted to work. That would, they concluded, avoid the possibility of either Respondent receiving an overtime repayment in respect of paid annual leave actually taken in calculating hours actually (or treated as) worked.
19. The Employment Tribunal therefore concluded that both Respondents were entitled to receive overtime payments based on an 8 week cycle commencing from 1 January 2000 to the extent to which each of them actually worked, or was entitled to be treated as having worked, in accordance with the shift pattern for that cycle more than the number of hours which each Respondent was contractually obliged to work during the first and second periods respectively. The Appellant's submission produced unnecessarily complex calculations and did not cater for situations where individual employees chose to take less than 7 weeks paid annual leave.
20. The Employment Tribunal's view of the correct term to be implied into the contracts of employment did not offend against the decision in Bamsey v Albion Engineering Ltd [2003] ICR 1224, [2004] ICR 1083 which meant that neither Respondent could sustain a claim for overtime in respect of weeks of paid annual leave actually taken as, the Employment Tribunal concluded, the implied term preferred by them took this into account. The choice of the 8 week cycle was consistent with section 222 (2) of the Employment Rights Act 1996 and paragraph 4 of the Working Time Regulations 1998 both of which envisage a relatively short period of calculating average hours over uneven weeks of employment.

The Submissions before the Employment Appeal Tribunal

21. Whilst the main thrust of the submissions made by each party was the same before us as it had been before the Employment Tribunal, there was one important difference. Whereas before the Employment Tribunal the Appellant had submitted that no implied term was necessary, as the contract was perfectly comprehensible on its face, it was accepted before us that it was necessary to imply a term to calculate the average number of hours worked. The Appellant accepted that the appropriate unit of calculation for the average number of hours worked was the 8-week cycle as a starting point, but stated, as it had before the Employment Tribunal, that in order to calculate whether any overtime was properly payable, it was necessary to calculate on an annual basis whether their contractual hours had been exceeded, by aggregating the number of hours over worked, or under worked for each of the 8-week cycles in any calendar year. The rota shift system, as the Appellant's calculations before us and before the Employment Tribunal demonstrated, resulted in hours over worked and hours under worked during a calendar year. Unless these were taken into account and balanced out against each other a distorted picture of the number of hours to be worked under the system would be gained. That would be a wholly false basis upon which to claim overtime payments.
22. Mr Ian Gatt QC on behalf of the Appellant submitted that the letters offering employment showed that the normal operation of the shift system was not intended to create overtime. The sentence "overtime would not normally be required but it is a condition of employment that you will work overtime when required by the Company" demonstrates this, he submitted.
23. There was no dispute between the parties that the reference period for calculating the "basic contractual week" could not be a week as there was no such thing as an average week under the shift system. Mr Gatt submitted that the system had to be considered over a year as the technicians' salaries were calculated on an annual basis, paid in twelve equal monthly instalments, and their holiday entitlement was awarded on an annual basis. This fact, together with the distortion which would follow if the picture over a whole year was not considered, meant that the Appellant's formulation of the term to be implied was appropriate.
24. The Respondents' formulation, Mr Gatt QC submitted, was on the contrary unfair. It resulted in them being paid overtime in respect of an 8-week period during which they worked in excess of their total contractual hours but ignored the effect of other 8-week periods in the year when they worked less than their total contractual hours. The Employment Tribunal's formulation, based upon the Respondents' submissions, gives no credit for those cycles where fewer than the contractual hours are worked. This produces the inherent unfairness which will prevent the implication of such an implied term. It is well established that no term will be implied unless it is reasonable. (Liverpool City Council v Irwin [1977] AC 239 at 262 and Lewison, The Interpretation of Contracts 3^rd Edition 2004 at para 6.0.4.)
25. Before the Employment Tribunal Mr Richard Gray, Director and General Manager of the Company's Oldham site, produced a table showing the shift pattern and hours worked over a year demonstrating that in some instances more hours were worked and in others fewer hours worked. These were general tables and did not refer to the Respondents in particular. The Appellant sought to introduce before us, a further set of tables relating to each of the Respondents showing the shifts that they worked, and the number of hours that they had worked either under or over the normal attendance hours. Mr Dijen Basu on behalf of the Respondents did not accept that the calculations in the new tables were all correct and pointed out that they did show some years where even on the Appellant's argument the hours went over the total. He did however accept that the figures would vary as the first tables before the Employment Tribunal had demonstrated, though not to the extent shown in the new set of tables placed before us.
26. We have considered the shift pattern tables, together with the exhibits to Mr Gray's evidence and have looked at the attendance records for the Respondents in the new schedules only produced before us. We are satisfied that the significance of the documents, leaving aside the new tables, is that they demonstrate that, taken over a year, a technician will have worked in some instances more hours than his contractual hours and in other instances fewer hours than his contractual hours. This situation will however vary from employee-to-employee depending on what point of the year his shifts start, holidays taken by him, and whether he swaps shifts.
27. The Appellant accepts that whilst the rota cycle is the starting point of the calculation, that cannot simply be the 8-week cycle by itself, as an 8-week cycle is simply a one week cycle writ large. In other words it has the same problems as a one week cycle which both parties accept cannot be the appropriate measure.
28. Holiday periods cannot be taken into account as inevitably the technicians are not working during such period of time and hence cannot claim overtime in respect of those days. To include them in the calculation for the purposes of overtime would be illogical. No officious bystander would say that a term could be implied in which the number of hours worked 'over' would be taken into account but the number of hours worked 'under' contractual hours would be ignored. That would be taking all the plums and no duff. The inherent unfairness of the term chosen by the Employment Tribunal plainly renders it unreasonable and one which, Mr Gatt QC submits, cannot properly be implied into the contract.
29. The Respondents submit that the question to be determined is whether the employees have exceeded their basic contractual week. The fact that in some 8-week cycles an employee may not exceed the maximum hours, because of the effect of holidays, does mean that he is not entitled to overtime payments for those cycles in which he does exceed the maximum hours. If he works more than the contractual maximum the company has to pay overtime, if he works less than the contractual maximum he doesn't have to pay back the 'under' period. The new table does not clearly demonstrate the under payments.
30. The Respondents further contend that the Appellant's approach in seeking to use a year measure is misconceived. Whilst the salary may be paid annually this is not an annualised hours contract. There has to be a definition of "basic contractual week" and the only appropriate measure is the 8-week cycle which is the rota cycle referred to in the letters offering employment. On a proper construction of the contract the basic contractual week is the same as the rota cycle.
31. The Respondents also suggested that the Appellant's claim to claw back those periods where the hours worked is under the contractual maximum, requires another implied term which would be inappropriate. The Appellant is in effect forced to accept the 8-week cycle but is nevertheless seeking to use a year cycle.
32. Furthermore, the Respondents say, the Appellant's approach is not merely wrong in principle but so complex so as to be unworkable. The implied term found by the Tribunal however was necessary to give business efficacy to the employee's contracts of employment or it represents the obvious, but unexpressed, intentions of the parties. The term is reasonable both in its calculation and in the fact that it avoids weeks of holiday attracting overtime.

Conclusions

33. It is agreed between the parties that the term "basic contractual week" in 9.1 of the Collective Agreement, is not expressly defined in the contract. It is therefore necessary to look at the contract as a whole and any other contractual documents in order to see whether a meaning can be ascribed to it or if not, to determine whether a term should be implied into the contract to achieve such a meaning.
34. The Collective Agreement is clearly incorporated into the contracts of employment of the Respondents. The letters offering employment to them also contain terms applicable to their particular contract and also form part of the contract of employment. Clause 13.1 of the agreement relating to overtime states that the company will, if practicable, regulate the amount of overtime to minimal levels consistent with the overriding requirement to meet production needs. Each employee will agree to work such overtime as and when deemed necessary by management. These passages are on their face inconsistent with the shift pattern itself including overtime as a standard shift system is normal work as opposed to work which is "deemed necessary". The letters offering employment also state that "overtime will not normally be required but it is a condition of employment that you will work overtime when required by the Company." This also suggests, as the Appellant submits, that the normal operation of the shift was not intended to create overtime. These passages, one from Clause 13.1 of the agreement and the other from the letter offering employment, suggest strongly that it was not the intention of any party to the agreement that the normal operation of the shift should create overtime. It is against that background that the Employment Tribunal decision and the submissions of the parties should be considered.
35. The work pattern of the shift system is complicated. It will vary according to the starting point in each year of the technician concerned. It will vary according to holidays taken and whether any shifts are swapped or varied. There is clearly no such thing as an average week so that cannot, as the parties agree, form the basis for an explanation of the term "basic contractual week". We accept, as did the Employment Tribunal and the Appellant does, that the 8-week shift is an appropriate starting point because a new cycle is completed every 8 weeks. In our view, however, it is not clear that a rota cycle can only be 8 weeks or that the passage in the letter offering employment necessarily means that a rota cycle can only be 8 weeks. There is nothing in the contract or the letter to indicate that this is so, or over what period, for example, the 40 hours per week was calculated. Furthermore, as the Appellant submits, the contract, albeit not an annualised hour contract, provides an annual salary payable monthly in arrears so that even if the hours rostered to be worked under the shift pattern alter from month to month, the monthly pay does not, and is divided into and paid in twelve equal amounts over the year. The holidays are also taken as standard hours over the year.
36. It is not therefore, in our view, clear from either the contract or the letter offering employment, that the 8-week cycle is in itself the appropriate or complete definition of the basic contractual week.
37. We accept the Appellant's submission that paid holiday weeks must in any event be excluded from any formulation. It is illogical to include a period which is notionally worked as opposed to actually worked in order to assess an entitlement to overtime.
38. Furthermore we accept the Appellant's submission that an 8-week cycle will not give a representative picture of the shift pattern. This is because over some 8-week cycles the technician may work more than his contractual hours and in others he may work less. In so far as the Employment Tribunal rejected these submissions by the Appellant we are unanimously of the view that they fell into error.
39. What is the implication of these findings for the implied term found by the Employment Tribunal? A term can only be implied into a contract if, firstly, the courts are spelling out what both parties know and would, if asked, unhesitatingly agree to be part of the bargain. As Mr Basu submits, if an officious bystander had suggested the term to the parties, would they have said "of course" Shirlaw v Southern Founderies 1926 Limited [1939] 2 KB 206, [1940] AC 701. Secondly, a term will be implied if it is necessary, in the business sense, to give efficacy to the contract. The Moorcock [1889] 14 PD 64, 68. Neither of the other possible routes for implication for terms i.e. custom and practice or implication by operation of law apply to the facts of this case.
40. We cannot accept that the implied term set out by the Employment Tribunal passes the officious bystander test. Such an implied term cannot have been the unexpressed intention of the parties when, as we have set out above, both the agreement itself and the letters offering employment suggest that none of the parties intended the normal operation of the shift system to create overtime. Indeed the response to the officious bystander would more likely have been one of puzzlement followed by "certainly not".
41. Nor is this a case where the business efficacy test applies. As can be seen from the judgment of Bowen LJ in The Moorcock terms are implied under this test where the law draws "from what must have obviously have been the intention of the parties". That cannot be the case here as such an implied term cannot be described as being obviously the intention of the parties for the reasons set out above. Furthermore any term to be implied has itself to be reasonable. Liverpool City Council v Irwin [1977] AC 239. We are satisfied that the term implied by the Employment Tribunal would create unfairness. It does not fully take into account the fact that in some 8-week cycles a technician will carry out more hours than his contractual obligation and in another 8-week cycle he will carry out fewer hours. Any system which only takes account of the 'overs' and not the 'unders' is inherently unfair. This is particularly so where the apparent intention of the parties to the agreement was to make overtime something which was outside the normal shift pattern. The implication of the term formulated by the Employment Tribunal on the basis of the Respondents' submissions was therefore an unreasonable term and one which it would be in the circumstances inappropriate to imply.
42. We conclude therefore, upon an unanimous basis, that the Employment Tribunal erred in law when it accepted the Respondents' submissions and formulated the implied term based upon the 8-week cycle, treating paid annual leave actually taken within that cycle to be a week in which the applicant worked precisely the number of hours he was contracted to work. Such a term could not, for the reasons set out above, be implied.
43. The Employment Tribunal's decision was therefore wrong in law and must be set aside. The question which remains is whether this Employment Appeal Tribunal should declare that the implied term sought by the Appellant and set out in paragraph 31 of its skeleton argument and paragraph 6 (d) of its Grounds of Appeal, should be incorporated in the contract. We find some difficulty in saying that this should occur. It is clear in our minds that the contract, and letters offering employment show that the parties to the agreement did not intend that the normal operation of the shift pattern should create overtime.
44. Furthermore we are satisfied that the basic contractual week should be calculated over a period such as a year, that is a period long enough to enable the true pattern of the shift rota system to be ascertained. We are also clear that the 7 weeks paid holiday should be excluded from the calculations. It remains the case however that the shift patterns are complicated and it is difficult on the material before us to extract a clear term to be implied from the Appellant's submissions. One of the problems facing the Employment Tribunal of which both they and the parties are apparently unaware is the need to draft a proposed implied term with precision. In this particular case we feel we are in a similar position to Viscount Simonds who said in Lister v Romford Ice and Cold Storage Company Limited [1957] AC 555 that if he were to try to apply the familiar tests for implication into a particular contract in order to give it what was called business efficacy "I should lose myself in the attempt to formulate it with the necessary precision." The parties must therefore seek to agree a formulation of an implied term, or otherwise agree how the "basic contractual week" is to be interpreted, based upon the findings we have made and set out above. Beyond this we are not able to go.
45. It nevertheless follows from the main conclusion of this appeal that the Employment Tribunal erred in law, that the decision must be set aside and to this extent the appeal succeeds. If there are any applications for consequential orders they should be made to us in writing within 14 days of the delivery of this decision.