Be careful with ex gratia payments!
The Employment Appeal Tribunal (EAT) recently considered the case of an employer who made a particular employee redundant. The employee was contractually due 3 months’ notice. The employer paid a redundancy payment and also paid “an ex gratia payment equivalent to 3 months’ salary”. The employee claimed breach of contract, arguing that she had not received any notice pay and therefore her dismissal was wrongful. At the tribunal hearing, the employer argued that the “ex gratia” payment of 3 months’ salary was in fact notice pay, therefore nothing else was due. The tribunal disagreed – to say that a payment is ex gratia must mean that it is something voluntary, over and above what the employer is obliged to pay. Consequently, there had been no notice pay paid, and the employee was awarded £20,000 for breach of contract/notice pay. The EAT upheld the decision.
On a strict legal analysis, this decision must be right, but this is a cautionary tale for any employers who issue termination letters without proper thought, or who wish to appear generous by making “ex gratia” payments, when they are simply paying the employee their legal entitlement...
Dismissing for refusal to agree pay cut
In the current economic climate, many employers may be asking employees to consider taking a pay cut, but what if employees refuse to agree? If they are dismissed, would that be fair? The EAT recently considered one employee who was dismissed for refusing a 10% pay cut – he was the only one of 77 employees to refuse. The employer argued that there was “some other substantial reason” for dismissing the employee. The employment tribunal had found in favour of the employee and held that the dismissal was unfair, since it had been reasonable for the employee to reject a pay cut, and because the employer could not show that its survival depended on making the pay cut across the board. The employer’s appeal to the EAT succeeded – the tribunal had erred in its application of the law.
The tribunal’s task is not to consider whether it was reasonable for the employee to refuse the pay cut, rather the question is whether it was reasonable for the employer to dismiss an employee who refused to agree the pay cut. The tribunal’s requirement that the employer show that the survival of the business was at stake was also far too strict a test. It is for the employer to show that there were sound business reasons for the pay cut, but it need not show that the business would close if the changes were not made. Employers must remember, however, that pay cuts cannot be imposed unilaterally. The recommended approach is to seek employees’ agreement, and if that is not forthcoming then it may be necessary to dismiss. Dismissal should always be a last resort having exhausted all avenues.
When is a contract not a contract?
The Supreme Court recently considered the circumstances in which the terms of a written contract between two parties can be disregarded. The case concerned car valeters who had entered into contracts with a company stating that they were self-employed, that they could send along a substitute to do the work instead of attending themselves, and that they had no requirement in any case to turn up and do any work. The company was, of course, seeking to avoid these individuals acquiring employment status and having rights such as the right not to be unfairly dismissed.
Normally, if a worker was not obliged to carry out work, and could send a substitute, these would be strong indications that the worker was not an employee. The company here argued that as the contract contained these provisions, the workers could not be employees. The Supreme Court held that where the contract does not reflect the reality of what the parties actually intended their relationship to be, these clauses can be ignored. The reality was that the workers were expected to attend work full time and could not in fact send a substitute.
The court is entitled to look behind the terms of the written contract and ask “what is, in reality, the bargain between the parties?” This is a warning for any organisation that might try to defeat employment status by inserting “self employment” clauses in a contract. Our advice has always been that the contract must be reflected by the reality of the parties’ relationship, and that clauses in the contract which do not reflect that reality will not assist. In each case, consideration needs to be given to how the arrangement will work in practice with the documentation reflecting this.
Contact:
Douglas Strang