There was widespread reporting recently of two Employment Appeals Tribunal (“EAT”) cases concerning two hospital consultants and their claims against the Health Service Executive ("HSE"). In Hogan v HSE and McDermott v HSE the claimants were successful in arguing that the HSE had breached the Payment of Wages Act 1991 by withholding certain salary payments set out in their contract of employment. The consultants were awarded €99,876 and €14,000 respectively. This has a major implication for the HSE, and the State, because of the number of hospital consultants with similar complaints who have been ‘waiting in the wings’ for the result of these test cases, and it is reported that the HSE is considering appealing.

The Payment of Wages Act

Whilst one might assume that an employee not receiving what they claim they are entitled to under their contract of employment would require a breach of contract claim to be brought in the civil courts, the case law of the Rights Commissioner, EAT and High Court clearly shows that where a deduction from ‘wages’ is concerned, the Payment of Wages Act 1991 is also applicable. This means that employees have a much cheaper alternative forum to make such a claim than having to proceed in the civil courts.

Section 5 of the Payment of Wages Act 1991 provides that “An employer shall not make a deduction from the wages of an employee (or receive any payment from an employee) unless-

  1. the deduction (or payment) is required or authorised to be made by virtue of any statute or any instrument made under statute,
  2. the deduction (or payment) is required or authorised to be made by virtue of a term of the employee's contract of employment included in the contract before, and in force at the time of, the deduction or payment, or
  3. in the case of a deduction, the employee has given his prior consent in writing to it.”

“Wages” is given a very wide definition and goes far beyond simply wages or salaries, and can include bonuses, commission, sick or holiday pay and various other emoluments.

The McKenzie Decision

In 2010, the High Court gave a seminal judgment regarding the Payment of Wages Act. Michael McKenzie & Anor v Minister for Finance & Ors1 involved a member of the Defence Forces who brought judicial review proceedings after the reduction of a certain allowance that had been paid to him up to that date. In rejecting the claim Mr Justice Edwards stated (at paragraph 5.8): 

“Finally, the Court agrees with the respondents’ submission that the Payment of Wages Act 1991 has no application in the circumstances of this case. First, as has been pointed out, correctly in the Court’s view, the reduction in the PDF allowance is not a “deduction” from wages payable. It is a reduction of the allowance payable. The Act has no application to reductions as distinct from ‘deductions’.”

This distinction between ‘reductions’ and ‘deductions’ was a novel one, that had not been seen in Payment of Wages cases previously. This was the highest level of determination on that point, and meant that in Payment of Wages Act claims from then on, lower fora were required to consider as a preliminary point the question: does the matter concern a deduction from wages or a reduction in wages? If it was a reduction only, then it was not unlawful under the Payment of Wages Act. As it stood, this was groundbreaking, as it allowed employers to reduce wages without facing claims under the Payment of Wages Act. Employees could still claim to the civil courts for breach of contract, but the costs involved meant that such claims were typically not taken.

Case Law following the McKenzie Decision

Since the McKenzie decision in 2010 the case law, and particularly EAT decisions, has consistently stated that the Payment of Wages Act has no application to “reductions” in pay, as distinct from “deductions”. Whilst in one case the Tribunal said that the distinction between a reduction and a deduction was “subtle”, the decisions have repeatedly stated that the fact that the High Court has so determined means that other fora investigating and deciding upon such matters must apply the law as it has been interpreted by the High Court in McKenzie.

However, there have now been a number of recent High Court decisions that cast doubt on the McKenzie decision. In the June 2015 decision in Earagail Eisc Teoranta v Doherty & Others2 , Kearns P. accepted the submissions of the respondent employees that the remarks of Edwards J. in relation to the “reduction vs deduction” issue were obiter dicta (meaning a judge's expression of opinion uttered in court or in a written judgment which was not essential to the decision and therefore not legally binding as a precedent). Furthermore he said that the McKenzie case related to the reduction of an allowance which was excluded from the definition of “wages” in the Payment of Wages Act in any event and, therefore, the McKenzie case related to “an entirely different situation to that in the present case where employees’ salaries were reduced.”

The EAT’s decisions in the two hospital consultant cases do not specifically refer to the Earagail Eisc Teoranta decision (likely because the hearing dates predated the Earagail Eisc Teoranta case), but still similarly found that “the deductions being complained of were not allowances or expenses but are clearly outlined in the contract as salary. Accordingly, the non-payment of this portion of the appellant’s salary is a deduction and the McKenzie case as referred to by the respondent in this instance clearly does not apply”. The EAT therefore found that the deductions were unlawful and that the appellant consultants should be compensated.

Interestingly, the EAT felt the need to state specifically that “there is no provision in the legislation which obliges the Tribunal to limit any award to the difference between what was paid and what should have been paid.” It is understood that the Tribunal then exercised its discretion to award more than the deduction itself in these cases.

Finally, only last Friday 8 January 2016, Mr Justice McDermott delivered his judgment in the case of Sandra Cleary & Others v B&Q Ireland Limited3 . This was also an appeal to the High Court under the Payment of Wages Act 1991 and concerned 10 employees of B&Q who claimed that an unlawful deduction had taken place when the company refused to pay a certain bonus and a ‘zone allowance’. The employees were unsuccessful before the EAT but, in the High Court, McDermott J decided similarly to the Earagail Eisc Teoranta case and stated that Mr Justice Edward’s decision on the ‘deduction vs reduction issue’ was obiter dicta. He also held that the McKenzie decision concerned a reduction of an allowance and was therefore not a deduction from “wages” such that the Payment of Wages Act 1991 applied in any event. He therefore held that the refusal to pay the bonus had been an unlawful deduction under the Payment of Wages Act, but that the refusal to pay the zone allowance was not. 

Where deductions from “wages” are concerned, the Payment of Wages Act is a much cheaper claim to bring rather than having to proceed in the civil courts for breach of contract. While the impact of the McKenzie case appeared to significantly reduce the efficacy of the Payment of Wages Act as a remedy, the two recent HSE cases, the Earagail Eisc Teoranta case and the B&Q case have put the possible availability of a Payment of Wages Act remedy back in frame. Unfortunately, in the absence of a Supreme Court or Court of Appeal decision reconciling the apparent inconsistency between McKenzie and other Payment of Wages Act cases, some uncertainty will remain as to the proper ambit of the Payment of Wages Act.

The Issue of “Vires”

A second issue of interest in the two hospital consultant case is the approach of the EAT regarding the alleged requirement of the HSE to obtain Ministerial consent. While it was clear that under Section 22(4) of the Health Act, Ministerial consent was required to the terms and conditions of such contracts, the EAT disagreed with the argument of the HSE which was to suggest that the absence of such consent renders that portion of salary not received by the appellant consultants as not properly payable. The EAT asserted that:

“The notion that an employee must assume or is deemed to be on notice that the section 22(4) approval and consent is absent at the time of entering into a contractual obligation, the contract having been settled by the Respondent body obliged to ensure Ministerial approval and consent) cannot be accepted. The Tribunal places emphasises on the entire agreement provision in the contracts which make clear that they reflect the “entire understanding of the parties”.

The EAT noted that it was, of course, open to the HSE to specifically set out a requirement or condition in the contracts that the statutory requirement must be fulfilled before any increase in salary would be paid, but this had not been done.

In the absence of this, the EAT determined that it was very reasonable for claimant doctors to assume that where the HSE had produced very detailed contracts, with three distinct options for consultants, it was reasonable for the consultants to assume that Ministerial approval had been obtained. Indeed, the EAT noted that on a plain reading of Section 22(4) itself that it was clear to it that the consent is required pre-contract rather than afterwards and noted that any suggested practice of seeking consent following entry into contract is “hardly sound on many fronts”.

While the EAT’s view does not mean that employees can be ignorant of statutory provisions or restrictions which may affect their employment contracts (for example, if the entire contract was unlawful for a particular reason) it suggests that the EAT will take a benign view (from the employee’s perspective) as to whether or not non-fulfilment of a statutory obligation of the employer should be prejudicial to the employee.

Secondly, it underlines the fundamental importance in all employment contracts of ensuring that employment contracts contain appropriate and well-considered conditions and pre-conditions. If it is an employer’s intention that a particular condition will apply, either at the outset, or at some stage during the contract, that this should be specified in writing in the contract itself. 

Conclusion

Recent case law has now cast serious doubt on the validity of the McKenzie decision as regards the issue of ‘reductions’ vs ‘deductions’. The rule of law in Ireland means that one High Court judge cannot overrule another High Court judge (this must instead be done by a superior court). However, in the Earagail Eisc Teoranta and B&Q cases the High Court has ‘distinguished’ the McKenzie decision; whilst not declaring that decision to be incorrect, they have stated that it was obiter dicta, or at least that it concerned allowances only and was not therefore a general rule stating that ‘deductions’ are unlawful but ‘reductions’ are not. The HSE cases are demonstrative of that particular division of the EAT finding favour with the reasoning in the Earagail Eisc Teoranta and B&Q cases. However, without a higher court decision definitively overruling McKenzie, uncertainty and inconsistency will remain.

This means that employers should be wary of reducing employee ‘wages’ (which has a very wide definition), or withholding such ‘wages’, with the intention of relying on the McKenzie decision as a defence. Employers now, more than ever, should ensure that their contracts of employment contain specific wording allowing such a deduction/reduction to be made, as per section 5(1)(b) of the Payment of Wages Act, otherwise they are likely to find themselves unsuccessful in attempting to defend a Payment of Wages Act claim.