Ground rules confirmed for applying Polkey in unfair dismissal cases
The case Contract Bottling v Cave illustrates the importance of what lawyers refer to as the Polkey principle - this guides tribunals on assessing losses arising from dismissal when awarding employees compensation. A Polkey reduction in compensation can have the effect of reducing a sizeable compensation claim to nothing and is, therefore, a significant part of any tribunal decision. In this case, both employees and their employer ended up in the same employment tribunal on two occasions and before the Employment Appeal Tribunal twice.
Compensation
On the face of it, the financial loss suffered by employees who have lost their jobs is open-ended and it would seem fair to calculate it at their full pay rate prior to dismissal. However, employees are likely to have the opportunity of obtaining another job post-dismissal and compensation for unfair dismissal is designed to reflect this. If employees act unreasonably in failing to obtain alternative employment, their compensation will be reduced accordingly. When assessing an appropriate level of compensation, a tribunal will look at whether a substitute job is likely to be at the same rate, and when the employee is likely to obtain such a job.
In some cases, the employee’s income may not have continued at the same level regardless of whether dismissal occurred. For example, the pay rate for the employee’s existing job may have gone down because of circumstances such as ill-health or retirement, or gone up because of gaining promotion, or changed because of following a partner moving elsewhere, or because the employer has chosen to reduce the employee’s pay rate, perhaps as a result of changed business circumstances or restructuring. It is to this final category of compensation assessment that the Polkey principle applies.
Facts
Contract Bottling was brought out of administration by new owners who saw an urgent need to reduce staffing costs. Ten employees were placed in a pool, from which four were selected for redundancy and dismissed.
Tribunal
The two claimants won their claim for unfair dismissal because of failings in the employer’s redundancy selection procedure. They were awarded compensation but no deduction for Polkey was made. The employer appealed the Polkey deduction issue.
EAT
The Employment Appeal Tribunal held that there was plainly an established need to reduce manpower among a relatively small workforce in the company, and there was evidence to suggest a chance that the claimants would have been dismissed anyway.
The matter was remitted to the employment tribunal which reduced the employees’ compensatory award by 20 per cent. The respondent appealed again on the basis that there was no clear reasoning for this figure.
The EAT allowed the appeal and, when asked by the parties to assess the appropriate deduction, decided it should be 33 per cent. The EAT took into account the fact that the employer needed to make savings, which it did by making genuine redundancies (in other words, the dismissals were because the need for work of a particular kind had reduced). Four out of 10 in the workforce had lost their jobs. Furthermore, there was good reason for thinking that those employees who had worked on the financial arrangements involved in bringing the company out of administration might be more at risk of their work being no longer required.
Comment
This case re-emphasises some important points about how tribunals should assess the right level of compensation for unfair dismissal. The EAT commented that “The fact that many matters are imponderable does not mean to say that a tribunal should not grapple with them insofar as it can”. It also confirmed that a tribunal is seeking to determine the likelihood in percentage terms of a future event (for example, a dismissal) occurring when assessing a percentage reduction in compensation. It said it was important for tribunals to spell out, as best they can, what factors they have taken into account when determining a particular percentage.
Significantly for employers, the EAT also said it is for the employer to show that the need for a Polkey reduction is a real one and to produce sufficient and satisfactory evidence to that effect. An absence of such evidence is something which is likely to be held against an employer rather than a claimant. If there is not sufficient evidence, there can be no Polkey deduction at all on the amount of compensation to be paid.
Naeema Choudry is a partner at Eversheds
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For more on how Polkey operates, go to dismissal (http://www.cipd.co.uk/hr-inform/employment-law/termination/dismissal/indepth.aspx )