United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellants	MR PAUL DRAYCOTT (of Counsel) Instructed by: Messrs Thompsons Solicitors Arundel House 1 Furnival Square Sheffield South Yorkshire S1 4QL
For the Respondent	MR COLIN BOURNE (of Counsel) Instructed by: Messrs Addleshaw Goddard Solicitors Sovereign House P O Box 8 Sovereign Street Leeds LS1 1HQ


 


SUMMARY

Unfair Dismissal: Compensation

Reversing the Employment Tribunal, in the assessment of compensation for unfair dismissal under Employment Rights Act 1996 s123, an employee who took early receipt of his occupational pension (to which he to a small degree contributed), from a pension pot whose value was unaffected by early payment, was not required to bring it into account, the pension being deferred wages for work done before the dismissal and its payment was analogous to a collateral arrangement. The rules in contract and tort were of no practical difference to the rules for assessing the loss which it was just and equitable to recover under s123.

Upholding the Employment Tribunal, compensation was not recoverable for loss of life assurance when at the time of the hearing the employee had not taken out a replacement policy and the risk covered (death) had not occurred. The Employment Tribunal correctly awarded compensation only for future loss of this benefit.

The rules in contract and tort are well established on HL and CA authority, although there is no direct authority on early pension payments. They are not analogous to incapacity benefit or Job Seeker's Allowance which are to be brought into account.


 


HIS HONOUR JUDGE McMULLEN QC

1. This case is about two aspects of compensation for unfair dismissal: the early receipt of pension and the loss of life assurance. The judgment represents the views of all three members. We will refer to the parties as Claimants and Respondent unless more detail is required.

Introduction

2. It is an appeal by the Claimants in those proceedings against a judgment of an Employment Tribunal sitting over four days at Leeds (Chairman: Mr J Whittaker), registered with reasons on 16 September 2005. The Claimants and the Respondent were represented, as here, by Mr Paul Draycott and Mr Colin Bourne respectively of Counsel. The Claimants claimed compensation for what was found to be an unfair dismissal.
3. The Respondent contended certain aspects of the claims for compensation should fail.
4. The essential issues, as defined by the Employment Tribunal, and as now relevant on appeal, were to determine whether and, if so, what, credit should be given for early pension payments to two of the Claimants, Mr Knapton and Mr Daniel and for the loss of life assurance to all three. We will confine our consideration of the law and our account of the facts to the two issues.
5. The Employment Tribunal decided that early pension payments should be set off from compensation and that the Claimants should not receive compensation for life assurance before the date of the hearing, but it was to be recovered for the future. The Claimants appealed against those two aspects of the judgment. I gave directions sending this appeal to a full hearing.

The legislation

6. The relevant provisions of the legislation are found in the Employment Rights Act 1996 s123 which provides, so far as is relevant:

"(1) Subject to the provisions of this section and sections 124, 124A and 126, the amount of the compensatory award shall be such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer.

(2) The loss referred to in subsection (1) shall be taken to include

(a) any expenses reasonably incurred by the complainant in consequence of the dismissal, and

(b) subject to subsection (3), loss of any benefit which he might reasonably be expected to have had but for the dismissal.

(3) ….

(4) In ascertaining the loss referred to in subsection (1) the tribunal shall apply the same rule concerning the duty of a person to mitigate his loss as applies to damages recoverable under the common law of England and Wales or (as the case may be) Scotland".

The Tribunal directed itself by reference to s123 and what we hold to be the relevant authorities which are cited in the reasons to which we will turn.

The facts

7. The Respondent ran a final salary pension scheme and it included life cover. The employees were all long-serving. Mr Knapton had 28 years and Mr Daniel, 33 years in the pension scheme. On dismissal on 28 April 2004, Mr Daniel was taking home £408 a week. He mitigated his loss to the extent of earnings of £115 and took early pension payment of £123. Mr Knapton's figures were similar in principle.
8. They were entitled to draw on the provision for early payment of pension, and did so. It is agreed between the parties that the pot of money which represented their respective pensions was, in real terms, not affected by the date upon which each started to be paid their pension i.e. whether it was taken early or at normal retirement date. Life assurance cover was provided. In calculating the forward loss from the date of the dismissal, the Employment Tribunal reduced the liability of the Respondent by £123 a week in Mr Daniel's case and in Mr Knapton's case on the same principle. It refused to award any sum for loss of life cover up to the date of the hearing. Forward loss of this was calculated on market rates for buying cover. A figure was agreed. But what was not agreed was the period of 70 weeks between dismissal and the remedy hearing as there was no financial loss and no insured risk had occurred. Happily, the three Claimants have survived.

The Claimants' case

9. The Claimants submitted that the Tribunal had erred in law in that no benefit had been obtained in taking their pension early. Since the sum was the same whether it was taken early or late, no benefit occurred and no set-off should be made from the Respondent's liability.
10. The submission of Mr Draycott was that such payments as are made for pension, by analogy with the authorities which deal with payments of recoupable and non-recoupable State benefits, indicated that these early payments of pension should not be set off. It was genuinely a collateral benefit, and if such collateral benefits escape the attraction of credit during the course of employment, so they should thereafter.
11. It was contended, whether on the basis of the simple application of just and equitable principles under s123 or of common law rules pursuant to the judgment in Parry v Cleaver [1969] 1 All ER 555H-L that the result is the same – there should be no deduction.
12. In respect of the life assurance, the application of simple principles of damages would ensure that the Claimants were put in the same position as if they had not been dismissed. At the time of their dismissal, they were covered by life assurance; there had been no payment to cover the 70 weeks when they were without such cover.

The Respondent's case

13. On behalf of the Respondent, it was contended that, by their service, each had accrued benefits and had options to take either early pension or to leave the pension untouched until retirement age. The Employment Tribunal had correctly applied the authorities to which its attention was drawn. These authorities do not expressly cover pension payments but by analogy, the answer is clear. Also albeit the authorities deal with insurance schemes, they constitute benefits as is an apt description of pensions here.
14. While payments into the pension scheme were predominantly made by the employer, it was accepted that the Claimants contributed indirectly; and certainly in the last 18 months of their careers, directly. Mr Bourne accepted also that had the earlier authorities dealing with common law principles been applied in this case, the judgment would have been to the reverse effect and the Claimants would not have been required to give credit. But this is a just and equitable jurisdiction and the authorities have now been comprehensively reviewed by the EAT in Morgans v Alpha Plus Security Ltd [2005] IRLR 234 which gives a clear answer.
15. As to life insurance, Mr Bourne again helpfully accepted that had any of the Claimants died prior to the assessment of compensation, there would have been a liability on his client to compensated to make up for the benefits which would be payable to the beneficiaries of the scheme. In that case, as he put it, his client was fortunate that the Claimants had succeeded because the only liability would be for ongoing payments of life assurance into the future at market rates. Further, he accepted that if the Claimants had actually produced vouchers showing that they had taken out insurance cover after the date of dismissal, there would be liability in respect of that.

The legal principles

16. The legal principles to be applied in a case such as this appear to be as follow. In unfair dismissal, the principle is loss calculated according to what is just and equitable. We accept the summary which is unchallenged and given by Mr Draycott

a. if an employee is entitled to receive a collateral benefit in addition to their contractual benefits from their employer, the value of the collateral benefit should not subsequently be deducted from compensation for the loss of their contractual benefits;

b. if an employee receives a collateral benefit on or after the termination of their employment, which they would have received in any event, that sum should not be deducted from compensation for the loss of their contractual benefits.

17. The starting point for the principle of compensation is the judgment of the EAT given by Arnold J in Sun and Sand Ltd v Fitzjohn [1979] IRLR 154 at p.155, paragraph 3 where he said this:

The appellants before us say that that amount of sickness benefit should be deducted from the amount awarded within the compensatory award for the 13 weeks of pay between the date of dismissal and the date of new employment. The matter for consideration seems to us to depend upon whether the amount of the loss sustained by Miss Fitzjohn in consequence of her dismissal was the whole amount of lost pay or was the amount of lost pay less the sickness benefit. If the applicant was entitled to retain the sickness benefit to which she was justly entitled, so long as her employment continued, in addition to receiving her pay, the loss would in our judgment be the net pay lost without any deductions; but if either she was obliged to accept some reduced amount of pay by reference to the sickness benefit she had received or so long as she was being paid under a continuing contract of employment was disentitled from receiving sick benefit at all, then in either of those cases it seems to us that the compensatory award for lost pay should be reduced by the amount of the sickness benefit which she received. It is not contended by the appellants that so long as her contract of employment continued she would have been obliged to accept any deduction from her wages by reference to the amount of sickness benefit she had received or otherwise obliged to account to her employers for the amount of that sickness benefit. They do however submit that the applicant was not in fact entitled to receive sickness benefit so long as her contract of employment continued and that therefore all that she lost, if she had received no more than she was justly entitled to, would have been the net pay and it would follow from that that, since during the period of unemployment she received in fact sickness benefit, then her loss would be the amount of net pay less the amount of sickness benefit. For this proposition the appellants rely on the language of s.14(1)(b) of the Social Security Act 1975; the relevant part of the sub-section reads thus:

'A person shall be entitled to unemployment benefit in respect of any day of unemployment which forms part of a period of interruption of employment and to sickness benefit in respect of any day of incapacity for work which forms part of such a period'

and they point out that 'such a period' plainly means a period of interruption of employment. So they say she is entitled to sickness benefit only during a period of unemployment since this is what 'interruption of employment' means, so that if she had continued to be employed by the appellants she would not, so long as that employment continued, notwithstanding that she was off work for sickness, be entitled to sickness benefit. The answer to that proposition is in our judgment plainly contained in the definition which is to be found in s.17(1)(c) of the Social Security Act 1975, which provides that the expression 'day of interruption of employment' means a day which is a day of unemployment or incapacity for work. It follows from this, in our judgment, that where a person suffers from an incapacity for work such as that from which Miss Fitzjohn suffered during the relevant period it matters not that she has the benefit of a current contract of employment, in relation to her entitlement to sickness benefit.

18. That judgment was expressly followed by a subsequent division of the EAT in a judgment given by Mummery J (P) in Puglia v C James & Sons [1996] IRLR 70 where, in respect of an issue arising on statutory sick pay, this is said:

"(a) Statutory sick pay ~

In our judgment, the industrial tribunal correctly applied the law in deducting from the estimated loss of earnings the statutory sick pay received by Mr Puglia over the relevant period. The law on this topic was settled by the Appeal Tribunal in Sun & Sand Ltd v Fitzjohn [1979] IRLR 154 at p.155, paragraph 3 [cited above]

It was not suggested in this case that Mr Puglia's contract of employment provided that he would be entitled to his full wages in addition to any statutory sick pay which he received. The industrial tribunal were therefore correct in making a deduction for the statutory sick pay received by Mr Puglia.

19. An analysis of what was described as conflicting EAT authority was made by a division of the EAT presided over by Burton J (P) in Morgans (above) which was a claim, it must be recalled, where the central issue was whether or not a non-recoupable incapacity benefit should be set off. There, the EAT resolved the issue which had arisen in the authorities in favour of the judgment in Puglia. In Morgans, Burton P said, on behalf of the EAT:

"19. We leave aside entirely the question of whether there could be said to be a duty to mitigate, in the sense of a duty to claim benefits. That might arise for argument in some future case, dependent perhaps on the precise facts. But in this passage Judge Hicks himself confirms that "such benefits can be described in a general sense as 'mitigating' the damage", i.e. the damage has been mitigated, reduced or extinguished as a result of the receipt of the benefits. It is not therefore "the reverse situation" to one where there is an issue as to the duty to mitigate, but one where, irrespective of whether there is a duty, the mitigation has occurred. If credit is then not given, then the tribunal would be compensating the applicant in a greater amount than the loss he or she has suffered.

….

22. We turn to our conclusions, which are as apt to deal with issues as to giving credit for receipt by the applicant of earnings from a new employer as for receipt of benefits which would not have been paid had the applicant remained employed and are not recoupable.

23. The only basis whereby it is said to be "just and equitable" to calculate the loss by disregarding the benefits (or part of them) or by not giving credit for them (or all of them) is by reference to practice in personal injury cases. Mr Jones for the Applicant had two cases, a primary case and what he called a fallback case, which latter in the event he abandoned in the course of argument. That fallback case, as originally formulated, was, by reference to Faraji so as to suggest that the whole of the incapacity benefit should be disregarded: this would be on the basis that the benefits should be seen as equivalent to an insurance payment. It is plain, however, that the entitlement to claim and receive benefits is not equivalent to purchasing and receiving an insurance claim from a commercial insurance company. In personal injury cases, this could amount to the purchase of a policy to cover personal accident insurance. There can be similar provisions which might provide for the circumstance of unemployment: this most usually arises in respect of insurance to cover mortgage or hire-purchase payments. Such purchase of insurance is regarded (Latin still being permissible in these courts) as res inter alios acta or, as Judge Hicks himself described it in Rubenstein in paragraph 15 of his Addendum a "policy with commercial insurers, negotiated independently of the employment relationship". In abandoning the argument Mr Jones conceded, and it must obviously be the case, that such a description cannot be applicable to benefits receivable from the Government, and it is plain that at common law such benefits would be recoverable, as Judge Hicks describes, and as is, for example, plain from such authorities as Hodgson v Trapp [1989] 1 AC 807. As Judge Hicks points out in paragraph 25 of his Addendum, it was thus left to Parliament to pass legislation

'in mitigating the extremity of the common law as it applies to contributory benefits within the statutory social security regime',

adopting

'solutions which involved treating employer and employee usually, either by dividing the value of the benefits between them by the device of half deduction or by removing it from both by requiring recoupment….the authorities refer to the statutory provision for half deduction as an example of a compromise (by inference desirable) unavailable in quantifying common law damages'

…

26. We consequently resolve the inconsistency between the decisions of the EAT, by Mummery P in Puglia and by Judge Hicks in Rubenstein (and a fortiori that by Judge Hargrove in Faraji), in favour of Puglia. This appeal is dismissed".

20. In Babcock Fata Ltd v Addison [1987] IRLR 173 CA ex gratia payments were held not to be recoverable where the judgment of the EAT on this topic was not the subject of an appeal by the employers.
21. For the purposes of the common law, the judgment of the House of Lords in Parry v Cleaver above contains the following where Lord Reid stated (page 558E-H):

"As regards moneys coming to the plaintiff under a contract of insurance, I think that the real and substantial reason for disregarding them is that the plaintiff has bought them and that it would be unjust and unreasonable to hold that the money which he prudently spent on premiums and the benefit from it should ensure to the benefit of the tortfeasor ...why should it make any difference that he insured by arrangement with his employer rather than with an insurance company?'

'It is generally recognised that pensionable employment is more valuable to a man than the mere amount of his weekly wage. It is more valuable because by reason of the terms of his employment money is being regularly set aside to swell his ultimate pension rights whether on retirement or on disablement. His earnings are greater than his weekly wage. His employer is willing to pay £24 per week to obtain his services and it seems to me that he ought to be regarded as having earned that sum per week. The products of the sums paid into the pension fund are in fact delayed remuneration for his current work. That is why pensions are regarded as earned income.

But the man does not get back in the end the accumulated sums paid into the fund on his behalf. This is a form of insurance. Like every kind of insurance what he gets back depends on how things turn out. He may never be off duty and may die before retiring age leaving no dependants. Then he gets nothing back. Or he may by getting a retirement or disablement pension get much more back than has been paid in on his behalf. I can see no relevant difference between this and any other form of insurance. So, if insurance benefits are not deductible in assessing damages and remoteness is out of the way, why should his pension be deductible? ...

A pension is intrinsically of a different kind from wages. If one confines one's attention to the period immediately after the disablement it is easy to say that but for the accident he would have got £x, now he gets £y, so his loss is £x -£y. But the true solution is that wages are a reward for contemporaneous work but that a pension is the fruit, through insurance, of all the money which was set aside in the past in respect of his past work. They are different in kind".

22. To similar effect, speeches made by Lord Wilberforce and Lord Pearce pages 582B-D and 576-577C are relevant which we do not reproduce.
23. Secondly in this review of the common law, the judgment of the House of Lords, this time by a unanimous committee, upheld the majority decision in Parry v Cleaver and the ratio is found in the speech of Lord Templeman which provides as follows:

'In the present case counsel for the appellants sought to distinguish the decision of this house in Parry -v- Cleaver on the ground that the appellants are in the triple position of employers, tortfeasors and insurers. In my opinion this makes no difference to the principle that the plaintiff has bought his pension, which is, in the words of Lord Reid, 'the fruit, through insurance, of all the money which was set aside in the past in respect of his past work'. The fruit cannot be appropriated by the tortfeasor".

24. Thirdly, the House of Lords in Smoker v LFCDA [1991] 2 AC 502 held that pension benefits are the fruits through insurance of moneys set aside in the past in respect of past work and could not be appropriated by a tortfeasor so as to reduce its liability to compensate the victim.
25. Finally, we have been referred to the analysis of damages given by the editors of MacGregor on Damages 17^th Edition at paragraph 19.003.

"Turning to the case of compensatory damages, which is much more important because it represents the norm, there is at the very start a basic, though somewhat latent, distinction between contract and tort. This distinction is in the general rule which is the starting point for resolving all problems as to measure of damages. The distinction is latent because the leading formulation of the general rule is sufficiently wide to cover contract and tort equally: this formulation is that the claimant is entitled to be put into the same position, as far as money can do it, as he would have been in had the wrong not been committed. In contract, however, the wrong consists not in the making but in the breaking of the contract and therefore the claimant is entitled to be put into the position he would have been in if the contract had never been broken, or in other words, if the contract had been performed.9 The claimant is entitled to recover damages for the loss of his bargain. In tort, on the other hand, no question of loss of bargain can arise: the claimant is not complaining of failure to implement a promise but of failure to leave him alone".

Conclusions

26. Applying those authorities to this appeal, we prefer the arguments of the Claimants on the early pension point and those of the Respondent on the life assurance point. We give the following summary

a. pension monies received by a Claimant, should not be deducted from their compensation, whether the claim is made either in contract or in tort,

b. the principle is applicable whether the relevant pension scheme is contributory or non-contributory;

c. the principle is applicable whether the scheme is occupational or private;

d. these principles are also relevant in the application of section 123 of the Employment Rights Act 1996

The pension

27. It is important to appreciate that pension is deferred wages. Here, the scheme was non-contributory for most of the Claimants' careers, but they did contribute towards the end and the effect of there being a contracting out certificate is that, as Mr Bourne accepts, they indirectly contributed to their pension. They could have left their pensions intact but the two Claimants decided to take early payment. Why should the Respondent reduce its exposure because the Claimants decided to take their pension earlier rather than later? It could not be said, if they received insurance through their own prudence or payments from charity, that they would have to give credit for that. Those forms of payment would occur only upon them becoming unemployed but, nevertheless, they would not be brought into the account. It seems to us that drawing down the early pension which is only available after the termination of the relationship does not make the Respondent any less liable to compensate the Claimants for the loss. The pension is a way of plugging the income gap. That is a personal decision about money management or, more graphically, making ends meet for unemployed workers out of the money which, in this idiom, represents deferred wages or saved wages in the pension pot.
28. In our judgment, Mr Draycott is correct. The Tribunal appears to say that the pensions payments were not independent of the terms and conditions and therefore could not be compared to insurance payments, that the decision in Morgans was preferred to that in Parry v Cleaver, and that Parry v Cleaver was not a case which dealt with the application of s123.
29. We have already cited paragraph 23 in Morgans (para 19 above). It is true that on a simple reading Morgans, applies to benefits of any kind, but we do not read that passage as covering an occupational pension. That was not the issue before the EAT. It is not apt, in the context of the Morgans judgment to regard occupational pension as a benefit, for the context was a claim to offset incapacity benefit which is not recoupable. We prefer to regard this issue as being one relating to occupational pensions which are not aptly described in this context as a benefit.
30. We would follow, as being the best example, the judgment in Smoker and hold that the Employment Tribunal erred in its careful analysis of the authorities when it applied by analogy the occupational pension payments here to the incapacity and sickness benefits cases. In our judgment, this ought to have been seen as a protected fund for the Claimants so that they could draw upon it early or later, according to the necessities and vicissitudes of the life they found themselves in following their unfair dismissals. This ground of appeal is upheld and we have been asked to substitute our judgment in the figures provided by Counsel.

Life assurance

31. In this part of the claim, Mr Draycott struggled to convince us of the justice of the position. As a matter of fact, thankfully, none of the Claimants has suffered the insured event, that is death. Because of the helpful way in which Mr Bourne accepted what would be liabilities in a different case, our task is made easy. There is no claim for non-financial loss. It might be constructed as loss of piece of mind. There is no claim for financial loss because the Claimants did not go out and an insurance policy immediately after their dismissal. If they had, they would have put in a voucher for it and it would have been part of the compensation, we hold, which ought to have been awarded, but this was not the case.
32. Having survived for 70 weeks without the insured event occurring, they have suffered no financial loss and if they were to be paid the sum which has been calculated as due to them, respectively Mr Van Bellen £306.25 and Mr Daniel £920.50, they would receive a windfall. This would be in respect of their being covered after the event for an event which never occurred and therefore they have not been required to go out and pay for it. It simply is not possible to restore these Claimants to the position they would have been in had they had insurance cover. It would only be possible to do that if they died and a claim was made against the Respondent for what would otherwise have been the payments made by insurers to the dependents. We regard this claim as over-ambitious and as being properly met by the Tribunal and the Respondent in this case by making payments to cover the cost of life insurance after the date of the Employment Tribunal hearing.
33. We would very much like to thank both Counsel for their very helpful written and oral submissions today. The appeal is allowed in part. Permission to appeal to the Court of Appeal refused [reasons not transcribed].