A long-running dispute over the contractual status of redundancy arrangements at a cake factory in Oldham has led to a Court of Appeal judgment which gives further guidance on how tribunals should approach cases about implied contractual terms.

Like many employers, Park Cakes did not consider itself legally bound to offer its employees enhanced redundancy terms. However, the evidence was that each time redundancies had been declared in recent years, employees had been given enhanced payments calculated by doubling the statutory multiplier and ignoring the upper limit on a week’s pay. The main question was whether the mere fact that these payments had been made without exception meant that a contractual obligation could be implied.

The short answer was no, but the full picture is a little more subtle. Of course the regularity and consistency of such payments is a powerful sign that they are contractual. However the Court of Appeal stressed that it was important not to lose sight of fundamental contractual principles. That meant the key issue was not what the employer intended, but how its actions could reasonably be understood by the employees. It was therefore important to consider how the terms had been communicated and whether the employees were aware that payment was not automatic but a matter of discretion.

Where does this leave employers? This case re-emphasises the dangers of allowing a gap to develop between an employer’s subjective intentions and how its actions will be understood by staff. So if enhanced redundancy terms are said to be discretionary, but invariably paid out, it is important to be clear in communications with staff why this is the case. Among other things, it would be helpful to be state in all communications that the payments are ex gratia and are not an automatic entitlement. Varying the way they are calculated over the years would also support an inference that they are not contractual, though the failure to be consistent could give rise to industrial relations and other problems.