August 2010
Authors:
Noel Deans
noel.deans@klgates.com
+44.(0)20.7360.8187
Paul Callegari
paul.callegari@klgates.com
+44.(0)20.7360.8194
The August Edition of On Notice considers the issue of discretionary bonuses
recently revisited by the High Court (Humphreys v Norilsk Nickel International
(UK) Limited), an EAT decision on whether capping redundancy entitlements is
discriminatory (Kraft Foods UK Ltd v Hastie) and whether employers are
permitted to reverse a dismissal made in clear, unambiguous terms (Willoughby v
C F Capital Plc). We also report on a decision of the Court of Appeal in relation to
the circumstances in which a contract of employment may be implied by the Courts
(RSA Consulting Ltd v Evans). Further topics of interest are covered in the “In
Brief” section.
Daniel J Wise
daniel.wise@klgates.com
+44.(0)20.7360.8271
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
In the recent decision of Humphreys v Norilsk Nickel International (UK) Limited
the High Court considered again the principles underlying the level of discretion
afforded to employers when making bonus awards to employees.
In this case the Claimant, Dr Humphreys was an economist specialising in the
mining industry. The Defendant Company was a subsidiary of a Russian parent
who described their commercial activity as “exploration, extraction, refining and
sale of base and precious metals”. Dr Humphreys was employed by the Company
as their chief economist and one of his principal duties included the forecast of
nickel prices on the global market.
In addition to his annual salary Dr Humphreys was also entitled to a performance
bonus, the entitlement to which was to be assessed by the management board. The
contract provided fixed bonus levels on a graded scale; no bonus would be paid if
performance was deemed “unsatisfactory” or “failed to meet expectation” (grade
1), with the highest bonus amount being paid where performance was deemed
“superior” or “exceeding expectation on 100% of agreed objectives” (grade 6). For
the year complained of, Dr Humphreys was assessed at grade 1 and received no
bonus at all.
The Court found that the assessment of whether Dr Humphrey’s performance was
“unsatisfactory” or “failed to meet expectation” could only be judged subjectively
by the management board. It was not for the Court to substitute its own
determination for that of the employer. The Court found that it lacked authority to
evaluate Dr Humphreys' level of performance only if it were first demonstrated that
the employer’s decision was perverse, or made without good faith, or was one
which no reasonable employer could reach. On the facts of the case, it was found
that inaccurate forecasts by Dr Humphreys had at least been partially responsible
for substantial losses suffered by the Company. The Court held that in these
circumstances it was not perverse or irrational for the Company not to pay Dr
Humphreys a bonus.
On Notice
This case serves as another example that the
Courts will be less likely to interfere with bonus
arrangements where plan documents afford
employers a high level of discretion. A
disgruntled employee will need to prove that the
decision not to pay a bonus was one that no
reasonable employer would have made in order to
establish an entitlement in such circumstances.
The recent cases in this area demonstrate that this
is a very high hurdle to cross. It should, however,
be borne in mind that the level of discretion
afforded to employers will always depend upon
the particular construction of bonus arrangements
and the facts of any particular case.
In Kraft Foods UK Ltd v Hastie, the EAT
considered the question of whether a cap on a
redundancy payment based upon the outgoing
employee’s age constituted unlawful
discrimination contrary to the Employment
Equality (Age) Regulations 2006 (the “Age
Regulations”).
Mr Hastie had worked with the Company for
forty years when the company initiated a
voluntary redundancy scheme. The scheme
provided that the employee was to receive three
and a half weeks pay for each year of service.
The tribunal commented that these were
“exceptionally generous” terms in the current
economic climate. However, the scheme
contained a provision – referred to as “the cap” –
to the effect that the maximum amount payable
should not exceed the amount that the employee
would have earned, at his current rate of pay, if
he had remained in employment to his normal
retiring age.
On the basis of his annual income and length of
service, Mr Hastie would have received over
£90,000 had it not been for the cap. However,
because on the date of his redundancy he was just
over two years away from his sixty-fifth birthday,
the cap operated to reduce his entitlement to
£76,560 (two years’ pay).
Under the Age Regulations, a discriminatory
practice which is applied to all employees may be
justified by an employer if it is a proportionate
means of achieving a legitimate business aim.
The parties agreed that the cap was
discriminatory within the meaning of the Age
Regulations because it more substantially
affected those close to retirement age. However,
the Company argued that the cap was
nevertheless justified as it prevented employees
receiving a windfall, i.e. an amount in excess of
that which they would have been entitled to had
their employment continued up to retirement.
The tribunal upheld Mr Hastie’s claim. The loss
was significant but, taken as a proportion of its
redundancy bill, it was not significant to the
Company. Since the cap did not strike a balance
between the effect of the measure and the needs
of the Company, it was not justified. The
Company appealed.
The EAT allowed the appeal. It held that the
object of the scheme was to compensate
redundant employees for the loss of earnings that
they had a legitimate expectation of receiving if
their employment continued. It was therefore
legitimate for the scheme to incorporate a
provision to prevent excess compensation and
imposing a cap on redundancy payments was a
proportionate means of achieving this aim.
This case is broadly favourable to employers,
reaffirming the view that the object of a
redundancy payment is to compensate for loss of
employment. Therefore any measure designed to
prevent over-compensation will not be unlawful
simply because the measure more substantially
affects those close to retirement age.
When either party to an employment contract
gives notice to terminate, it is a general rule of
law that the notice should be clear and
unambiguous. In Willoughby v C F Capital Plc
the EAT considered whether an employer
dismissing an employee in unambiguous terms is
entitled to subsequently reverse the dismissal.
The Company had entered into discussions with
Miss Willoughby with a view to switching her
from employment to self-employment as a way
of avoiding redundancy. The exact terms of the
self-employment had not been discussed and
Miss Willoughby had stated she would need
further details. On 22 December 2008 the
Company provided Miss Willoughby with details
in the form of a written agreement, mistakenly
assuming she had already agreed to the terms,
which stated:
“the termination of your existing employment
contract will be effective from 31 December
2008. Your Agency Agreement will commence 1
January 2009".
After the employer had discovered their mistake,
they sought to retrieve their position and stated
that Miss Willoughby would be able to continue
her employment on existing terms. Miss
Willoughby refused to do so, contending that she
had been dismissed. The EAT found that as a
August 2010
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On Notice
general rule, an employer who uses
“unambiguous words of dismissal” will thereby
dismiss the employee and terminate the contract
of employment. Similarly, an employee who uses
“unambiguous words of resignation” will
thereby resign.
The position can only be retrieved by the party
dismissing or resigning in “special
circumstances”, such as if it is known to the other
party that the decision was not “conscious or
rational” if for instance such words were spoken
in the heat of the moment or where the speaker
was acting under a mental impairment. The EAT,
however, found that no such special
circumstances existed in this case.
This case confirms that employers and employees
will rarely be able to rely on “special
circumstances” to reverse a dismissal or
resignation and in particular highlights to
employers that when words of dismissal are
spoken unambiguously and with intent it will, in
most cases, be too late to retrieve the position.
In Dr Patricia Evans v RSA Consulting Limited
the Court of Appeal considered the circumstances
in which it might be possible and legitimate to
imply a contract of employment between parties
where there was no express contract. The short
point raised in the appeal was whether the
claimant, Dr Evans had an arguable case that she
was a worker in an employment relationship with
the defendant company, RSA Consulting
Limited.
Dr Evans was a molecular immunologist working
as a consultant to the pharmaceutical industry.
She entered into an agreement with a company
called Parasol who in turn agreed to provide her
with payroll services on payment of a monthly
fee. Parasol was described in the contract as her
employer. Parasol had also entered into a separate
agreement with RSA Consulting Limited under
which Parasol agreed to provide services
to third parties.
Dr Evans was introduced by RSA, through
Parasol as agent, to a scientific services company
(“SCS”). When Dr Evans’ services were
terminated by SCS, she brought proceedings
against SCS, Parasol and RSA alleging that they
had made unauthorised deductions from her
wages, claiming that she was entitled to one
months’ salary as a payment in lieu of her notice
period. RSA argued that it had a contract with
Parasol, but not with Dr Evans and that her claim
was therefore ill-founded. The tribunal found that
all the documentation was inconsistent with the
argument that an employment agreement existed
between Dr Evans and RSA, and it therefore
struck out her claim against them.
It was found on appeal however that the tribunal
had not gone far enough in its application of the
legal test. Even where there were a series of
contractual arrangements and no express contract
between Dr Evans and RSA, it may be possible
to imply a contract – but only if it is necessary to
give effect to the actual relationship between the
parties. Whether a contract can be implied
requires a consideration of all the evidence
relating to the nature of the relationship between
the parties, and not merely the documents. The
tribunal were mistaken in effectively finding that
the documents were the "beginning and end of
the story" and failed to consider that Dr Evans
had at least an arguable case on the other
evidence.
This case demonstrates that employment
contracts can be implied or inferred in order to
give effect to the intention of the parties, even
where documents appear to point to the contrary.
It also highlights that a claimant need only show
an arguable case in order to avoid having their
claim struck out at the pre-hearing stage.
In Brief
In Brown v Baxter the EAT summarised the
principles to be used to determine when, in
connection with a claim for unfair or wrongful
dismissal, damages may be awarded in relation
to the stigma prospective employers may attach
to a previous dismissal, which may have the
affect of preventing an individual from finding
new employment (“Stigma Damages”). The
Court held that when considering an award of
compensation, the questions for the tribunal are:
1. was the loss occasioned as a consequence of
the dismissal?; 2. was the loss attributable to the
conduct of the employer?; 3. if so, was it just and
equitable to award compensation?
It now seems clear that the inability to find a new
job is a loss that may be compensated for if this
inability was caused as a result of the stigma of
dismissal. However, the case also makes clear
that the employee must be able to demonstrate
that the loss was as a direct consequence of the
dismissal rather than as a result of any
other factor.
August 2010
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On Notice
Coalition government’s plan to strip
the “gold plating” of EU Directives
The coalition’s “Programme for Government”
indicated an intention to end the “gold plating” of
EU Directives (which refers to Regulations
introduced by the previous government to
implement EU Directives which go further than
the minimum level of protection required by the
Directives themselves). Examples of potential
targets include the Part Time Workers
Regulations 2000 and the Fixed Term Employees
Regulations. Potential amendments include
introducing a qualification period for part-time
workers to achieve a parity with full-time
workers and excluding casual workers from the
Part-Time Workers Regulations.
The Agency Workers Regulations 2010 (the
"Agency Regulations"), due to come into force
in October 20111, were singled out for criticism
by the Conservative Party prior to the election.
The aim of the Agency Regulations is to provide
agency workers with the same equal basic
working conditions as other employees,
including pay and holiday entitlement. One
problematic issue in particular is that “pay” is
not defined in the Agency Workers Directive and
the inclusion of overtime payments, holiday pay
and commission pay within the definition
contained in the Agency Regulations was
criticised as unnecessarily wide. One anticipated
amendment would be to limit “pay” to basic pay.
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August 2010
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