Custom & practice and the right to enhanced redundancy pay
Some employers make enhanced payments to employees; for example, as sick pay or redundancy pay. They are often referred to as “ex gratia” or discretionary payments and are said not to be contractually binding on the employer, meaning that the employee cannot enforce payment. However, it is sometimes possible to argue that the enhanced payments have become contractually binding through “custom and practice”. In other words a contractual term may be implied into an employee’s contract of employment by virtue of the fact that the business habitually makes those payments.
That was the issue in the next case.
The Claimants, who had been subject to a TUPE transfer, were made redundant and claimed that they were entitled to enhanced redundancy pay. There was nothing relating to enhanced redundancy payments in the Claimants' written terms of employment or staff handbook but the Claimants' case before the ET was that their previous employer had operated a policy of paying enhanced redundancy payments over very many years, whenever redundancies occurred; and the existence of that scheme was well-known both to the union and to the workforce and was understood by them to reflect an implied contractual entitlement.
The employer did not dispute that there was a policy of paying enhanced redundancy terms but argued that it was not a contractual entitlement.
The question for the ET was whether, by paying enhanced redundancy pay to employees over a long period, the employer had evinced to the relevant employees an intention that they should enjoy payment of enhanced redundancy pay as of right.
Dismissing the employees' claims, the ET ruled that, although enhanced redundancy pay had been paid to employees in the past, it was not clear on how many occasions it was paid, and the tribunal was unable to infer that it was paid without exception. The ET was not satisfied that payment of the enhanced redundancy pay was made automatically and the Claimants had therefore failed to prove on the balance of probabilities that there was an implied term entitling them to an enhanced redundancy payment.
The Claimants appealed to the EAT. Taking a different view to the tribunal of the evidence, the EAT concluded that the enhanced redundancy terms had been paid on the occasion of every redundancy exercise from 1993 to 2006. The question whether an enhanced payment has been made consistently over a substantial period and a substantial number of redundancies was of central importance in deciding whether it is to be treated as contractual. The fact that the ET should have found that the payments were made without exception meant that its decision could not stand and the case had to be remitted to the ET for re-hearing.
A subsequent appeal to the Court of Appeal by the employer was rejected.
There are likely to be a number of factors important in assessing whether a policy originally produced by management unilaterally has acquired contractual status. Those factors include:
a) On how many occasions, and over how long a period, the benefits in question have been paid. The more often enhanced benefits have been paid and the longer the period over which they have been paid, the more likely it is that employees will reasonably understand them to be being paid as of right;
b) Whether the benefits are always the same. If, while an employer may invariably make enhanced redundancy payments, they nevertheless vary the amounts or the terms of payment, that is inconsistent with an acknowledgment of legal obligation - if there is a legal right, it must in principle be certain;
c) The extent to which the enhanced benefits were publicised generally. Where the availability of enhanced redundancy benefits is published to the workforce generally, that would tend to convey that they are paid as a matter of obligation;
d) How the terms are described. If an employer clearly and consistently describes their enhanced redundancy terms in language that makes clear that they are offered as a matter of discretion – e.g. by describing them as ex gratia – it would be hard to see how the employees could reasonably understand them to be contractual;
e) What is said in the express contract. As a matter of ordinary contractual principles, no term should be implied, whether by custom or otherwise, which is inconsistent with the express terms of the contract;
f) Equivocalness. The burden of establishing that a practice has become contractual is on the employee and they will not be able to discharge it if the employer's practice, viewed objectively, is equally explicable on the basis that it is pursued as a matter of discretion rather than legal obligation.
The lesson for employers is they need to make it very clear what they intend the status of such payments to be. Policy documents need to state that the payments are not contractual, are discretionary and may be reviewed or withdrawn at any time. Custom and practice should not deviate from the policy. However, this latest case suggests that even in these circumstances an employer might be vulnerable if the payments have been made consistently over the years.
If you would like advice about how the issues in this note apply to your situation, please contact Tony Brown on 01225 740097 or by e mail to email@example.com
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