A recent case shows how discretionary enhanced redundancy payments can become a legal obligation
In Park Cakes v Shumba the Court of Appeal had to consider whether a group-wide policy of paying enhanced redundancy pay had become an implied term and condition of employment through ‘custom and practice’.
A term can be implied into an employment contract by custom and practice if it is regularly adopted in a particular organisation or industry, and it is reasonable, well-known and clear-cut. Where the term arises from an employer’s own policy, that policy must have been drawn to employees’ attention, or been followed without exception for a substantial period.
Facts
The four claimants in this case were made redundant. They claimed they had not been paid enhanced redundancy pay to which they were entitled under their contracts. They argued that although their contracts made no reference to it, the employer had an enhanced redundancy pay policy in its HR manual and had a group-wide policy of making such payments. Therefore an implied contractual right to enhanced redundancy pay had arisen on the basis of custom and practice.
Tribunals
The employment tribunal rejected the employees’ claims, on the grounds that the policy had not been drawn to the attention of the claimants (although it had been available on request from HR), and that enhanced payments had not been made in the past without exception. The employees appealed. The Employment Appeal Tribunal decided the tribunal had provided no reasons for not inferring that enhanced redundancy pay was paid without exception. It upheld the claimants’ appeal and remitted the case to a different tribunal. The employer appealed.
Court of Appeal
The Court of Appeal rejected the appeal and remitted the case to a fresh tribunal. The employment tribunal had failed to give adequate reasons for its decision. The findings of fact and the reasoning did not support its judgment that enhanced redundancy pay had not being paid automatically in the past. Likewise the tribunal’s conclusion that the employer had not drawn the enhanced redundancy pay policy to the employees' attention had not been based on facts and it had failed to consider how the policy might have come to the employees’ attention, particularly as the document had been available on request.
Comment
This case is a reminder that great care must be taken in drafting contracts, employee handbooks and policy documents. It should be absolutely clear which terms, benefits or rules form part of the employment terms and conditions and are, therefore, contractual, and which are not. In particular, if a benefit or entitlement is purely discretionary, such as enhanced redundancy pay, the danger is employees may argue they have an entitlement arising from custom and practice if the discretionary element is not plain.
The court explained that in deciding such questions, the primary considerations will be:
- on how many occasions, and over how long a period, the benefits have been paid
- whether the benefits are always the same
- the extent to which the enhanced benefits are publicised generally (in other words, whether the employer has created widespread knowledge and understanding that employees are legally entitled to the enhanced benefits)
- how the terms are described (for example, “entitlement” in a policy indicates a legal obligation, whereas clearly and consistently describing enhanced redundancy pay as a matter of “discretion” and ex gratia ordinarily does not).
Even if a term is judged to be purely discretionary, employers must act with caution. A disgruntled employee cannot easily claim a right to any entitlement if an employer clearly reserves an absolute discretion, and operates the scheme accordingly. But the employer must exercise that discretion in a way which does not destroy the implied term of trust and confidence. This may happen if a decision not to award an entitlement is judged to be totally illogical or vindictive.
Makbool Javaid is a partner and head of employment law at Simons Muirhead and Burton
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