ABG Employment Newsletter – July 2016

Court of Appeal upholds finding of implied contract between group companies

The Court of Appeal has held that intra-group arrangements where a service company seconded employees to another group company were necessarily binding contractual commitments. The issue arose when the group went into administration and there were disputes about which company should meet certain pension liabilities. For several years the company using the seconded employees had reimbursed all the employment costs of the service company which provided them. There was no express contract in place between the two group companies but the group’s holding company had contracted with the service company to procure that whichever group company used the employees should pay their employment costs.

Case law suggests that a contract cannot be inferred from conduct unless that conduct can only be explained by the existence of a contract. In this case the Court of Appeal did not accept that the previous payments were explicable as compliance with the holding company’s instructions. In practice the holding company had no involvement in the arrangements and the sums were so significant that it was unimaginable that their payment would have been left to a non-contractual arrangement.

The judge noted that arrangements of the type considered are common in large corporations, and that this is the first reported case in which a contract has been inferred from the conduct of well-advised substantial commercial companies within a group. Companies may wish to review how they structure and document their intra-group service arrangements in the light of this decision.

‘Culpable conduct’ required for Acas Code to apply

The EAT has confirmed that the Acas Code of Practice on Disciplinary and Grievance Procedures only applies to dismissals where there is ‘culpable conduct’, whether in the form of misconduct or poor performance, which either requires correction or punishment. Therefore, where poor performance is a consequence of genuine illness, it is unlikely that the Code will apply since there is no ‘culpable conduct’ on the part of the employee.

Acas Code does not apply to SOSR dismissals for breakdown in working relationship

The EAT has confirmed that the Acas Code of Practice on Disciplinary and Grievance Procedures does not apply to dismissals for some other substantial reason (SOSR), where the dismissal is attributed to an irretrievable breakdown in the working relationship. The EAT held that while elements of the Code are capable of being, and should be, applied to SOSR dismissals, Parliament could not have intended to impose a sanction for failure to comply with the letter of the Code in this situation, without stating so expressly. Therefore there should be no 25% uplift to an unfair dismissal award in these circumstances.

In this case, the EAT upheld an employment tribunal’s decision that a dismissal for SOSR was both substantively and procedurally unfair. An objective, reasonable employer would not have concluded that the employment relationship was beyond repair. During the dismissal meeting, the employer had started from the position that the relationship had broken down, and put the burden on the employee to prove otherwise. The employee had not had an adequate opportunity to put her case or to effectively challenge the assertions that had been made against her. When an SOSR dismissal is contemplated, the employer should fairly consider whether or not the relationship has deteriorated to such an extent that the employee cannot be reincorporated into the workforce without unacceptable disruption.

Pre-termination negotiations: protection extends to the existence of negotiations and privilege cannot be waived

The EAT has held that the wording of section 111A of the Employment Rights Act 1996 means that any reference to the fact that pre-termination negotiations have taken place between the parties is inadmissible in a subsequent employment tribunal hearing for unfair dismissal, not just the details of any offers made. Section 111A of the ERA 1996 therefore extends further than without prejudice privilege which can allow reference to negotiations having taken place, but prevents disclosure of the detail of any offers.

The EAT further held that privilege under section 111A cannot be waived, unlike under the common law without prejudice rule. The wording of the section did not appear to give the parties such an option.

The EAT declined to decide whether section 111A could apply to negotiations where an employer had failed to make any offer, or the extent to which an employer’s conduct could amount to “improper conduct” rendering the discussions admissible under section 111A(4), remitting those issues to the tribunal to determine.

Payment on early termination of fixed term contract under mutual consent clause not taxable as earnings

The First-tier Tribunal has determined that payments made by an employer to two professional football players on early termination of their fixed term contracts were not earnings but termination payments, and, therefore, outside the scope of NICs. The payments compensated for the surrender of rights as part of the abandonment of the players’ contracts; they were not from the employment but from its destruction.

HMRC argued that the payments were earnings because the terms of the players’ employment contracts provided for early termination by mutual consent and, applying EMI Group Electronics Ltd v Coldicott [1999] EWCA Civ 1868 any payment received in consequence of implementing those terms was “from” the employment. The appellant applying Henley v Murray (Inspector of Taxes) (1950) 31 claimed the payments were for the surrender of rights on the abandonment of the contracts. Further, the Upper Tribunal in Martin v HMRC [2014] UKUT 429 had confirmed that a payment need not be in the form of damages for breach of contract for the payment to fall within the Henley principle.

The tribunal noted that all contracts can be terminated by mutual agreement and, therefore, such a right arises from general contract law rather than the contract. Further, while the High Court in Richardson v Delaney [2001] STC 1328 envisaged that a breach of contract is required before the Henley principle is engaged, the Upper Tribunal in Martin did not. On balance, it preferred the decision in Martin.

While the decision is good news for employers, the benefit will be relatively short-lived because the government has announced that from April 2018 all taxable termination payments will be subject to employer NICs.

The comments in this note are of a general nature only. Full advice should be sought on any specific problems or issues.

Christopher Gigg cgigg@abg-law.com +44 (0)115 9343310

Kathryn Meir kmeir@abg-law.com +44 (0)115 934 3308