Frontline case updates - January 2019

1. Botched and discriminatory disciplinary process led to constructive dismissal

2. HMRC fails to recover tax and NI from presenter legitimately engaged through PSC

3. "Bad leaver" provisions activated by an employee's voluntary resignation survive enforceability challenge

4. Employers should follow internal policies when considering reasonable adjustments

Botched and discriminatory disciplinary process led to constructive dismissal

The Governing Body of Tywyn Primary School v Aplin(EAT)

The EAT has confirmed that an openly gay headteacher was entitled to resign and consider himself constructively dismissed following a disciplinary investigation which involved egregious procedural flaws and suggested unconscious bias on the part of the investigating officer. In the absence of non-discriminatory reasons for such action, the Tribunal was entitled to draw an inference that sexual orientation discrimination had taken place.

The Claimant was an openly gay head teacher who had sexual relations with two 17 year-old boys with whom he had connected on a dating app. A local authority investigation cleared him of any criminal offence in relation to these events (and confirmed that no child protection issues were involved), but recommended that the school at which he worked consider disciplinary action. The investigating officer, notwithstanding his "fact-finding" role, took it upon himself to advise the school governors on the case, incorporated child protection considerations into the investigation (notwithstanding the local authority's opposite conclusion) and relied on/shared information from the local authority's investigation which the Claimant has not himself seen. After appealing the school's decision to terminate his employment, the Claimant became increasingly concerned about the fairness of the procedure being followed. He resigned and brought a claim for constructive unfair dismissal and discrimination on the grounds of his sexual orientation.

The ET agreed that the unfairness caused by the procedural issues mentioned above (amongst others) breached the mutual duty of trust and confidence, entitling the Claimant to resign in response. It also noted that the report produced by the investigating officer was neither factual nor objective. Indeed, it contained many value judgements which suggested a degree of unconscious bias. This enabled the Tribunal to draw an inference of sexual orientation discrimination, which the school were unable to rebut. In accordance with the reverse burden of proof rules under the Equality Act 2010, this meant that his claim for sexual orientation discrimination was successful. On appeal, the EAT agreed with the ET's approach regarding the above; in particular that the inexplicable failures on the part of the school enabled adverse discriminatory inferences to be drawn.

This decision serves to highlight that unreasonable behaviour by employers (whether or not influenced by unconscious bias) which cannot be explained by non-discriminatory factors can be susceptible to discrimination claims. This is because, under the Equality Act 2010, a claim of discrimination will generally succeed where claimant is able to show a prima facie case which the employer is unable to explain on the basis of non-discriminatory factors. More generally, this judgment illustrates the importance of a clear disciplinary policy which delineates a clear role for investigating offers and ensures that the subject has sight of materials on which any decisions are based.

HMRC fails to recover tax and NI from presenter legitimately engaged through PSC

Albatel Ltd v HMRC (First Tier Tribunal)

The First-tier Tax Tribunal has held that the factual arrangements by which an individual delivered presenting services through her personal services company ("PSC") did not engage the UK's "intermediaries" legislation, otherwise known as IR35, which would have obliged that PSC to deduct and account to HMRC for employment taxes and national insurance notwithstanding her "label" as an independent consultant.

In this case, a well-known television personality had provided presenting services to ITV on a consultancy basis through her PSC for many years. HMRC claimed that a hypothetical, direct contract between ITV and the individual would, in reality, constitute a contract of employment (rather than of genuine independent consultancy) and so the IR35 regime should apply to the relationship. On that basis, HMRC initiated proceedings to recover the £1.2 million worth of outstanding income tax and national insurance contributions which they alleged the PSC should have deducted at source from her fees, as if it were her employment salary.

Taking the reality and all of the facts of the arrangement into account, the First-tier Tax Tribunal decided that a hypothetical contract between the individual and ITV would not have constituted an employment contract and that, as a result, the IR35 regime would not apply. HMRC had pointed to numerous practical factors which they felt made this an employment relationship in all but label, including: (i) a practical obligation on the individual to perform services personally at ITV's request; (ii) some control over the content of her shows; (iii) the existence of guaranteed minimum payments; and (iv) the existence of specific holiday allowances. The individual contended that she was not obliged to provide services to ITV exclusively, carried out a wide variety of work for other clients in practice and had significant control over the content of her own shows.

Whilst the Tribunal considered that the "irreducible minimum" of an employment relationship (namely a mutuality of obligation) was evidenced by the arrangements in practice, this was not sufficient to engage the IR35 regime due to other factors which were inconsistent withhypothetical employment status. In particular, it considered that ITV had "minimal or no supervision" over the presenter's activities and the ultimate running of the show; it was instead contracting for the services of the individual's brand and personality which were provided by someone who was genuinely in business on their own account and therefore entitled to use the label of independent contractor as a matter of law.

Whilst this outcome shows that there is clearly a place for the legitimate use of PSCs in the context of genuine consultancy arrangements, it highlights HMRC's increasingly active stance in challenging arrangements where it has doubts as to this label. Importantly, the lessons from this decision will be of greater significance to private sector end-users of services provided through PSCs (subject to a yet-to-be-defined threshold based on employer size), to whom revised IR35 rules will apply from April 2020, requiring them to ensure the correct tax treatment of payments to any PSC service providers they engage. Such organisations would be well advised to conduct an audit of their consultancy arrangements prior to this date to mitigate the prospects of unwanted attention from HMRC.

"Bad leaver" provisions activated by an employee's voluntary resignation survive enforceability challenge

Nosworthy v Instictif Partners Ltd (Employment Appeal Tribunal)

The EAT has upheld a "bad leaver" provision in a company's Articles of Association which obliged an employee who voluntarily resigned to forfeit their loan notes and sell back their shares at minimal value. When challenged by the employee, it was determined that the bad leaver provision was neither: (i) unconscionable as a matter of law; nor (ii) an invalid penalty clause, on the basis that its enforcement did not depend on any breach of contract.

The Claimant was employed by and held a 2% shareholding in Communications Operations Limited ("CO"), which was acquired by the Respondent. Under a Share Sale Agreement, the Claimant (along with all other CO shareholders), sold her shares in CO to the Respondent in exchange for both initial and deferred consideration. The deferred aspect included an entitlement to earn-out shares and loan notes, subject to good / bad leaver provisions contained in the Respondent's Articles. The definition of "Bad Leaver" included an employee who had voluntary resigned. The Claimant subsequently resigned and, in accordance with the bad leaver provision, was required by the Respondent to forfeit her loan notes and sell back her earn-out shareholding at the lower of acquisition cost or fair value. Upon resignation, the Claimant sought to challenge this requirement on the grounds of, amongst other things, it being an unconscionable bargain and an unenforceable penalty clause at common law.

The ET and the EAT rejected the Claimant's arguments. On unconscionability, the EAT accepted that it was an oddity for voluntary resignation to fall under a bad leaver provision but found that the clause was not unconscionable. Given that there was no evidence the Claimant was at a serious disadvantage (through lack of legal advice, for example) or that the Respondent had sought to exploit an overreaching/oppressive transaction in a morally culpable manner, the EAT would not depart from a clearly demarcated definition of "Bad Leaver" found in the Company's Articles. Furthermore, the EAT did not accept that the bad leaver provision constituted an unenforceable penalty clause. The Claimant reasoned that forfeiture of her loan notes and repurchase of shares at a minimal level was a "double penalty" and out of proportion to any loss suffered by the Respondent as a result of her resignation. However, the EAT found that since the consequences of the bad leaver provision did not depend on the existence of a breach of contract, the rule against penalty clauses was not relevant in this instance. Instead, the Respondent had merely relied on the terms of its own Articles to take the action complained of; this clearly set out the consequences of being a bad leaver and applied to employees regardless of breach.

Employers should take comfort from the fact that this decision, generally speaking, effectively excludes well-drafted good / bad leaver provisions from challenge under the "penalty clause doctrine" which exists under English contract law and was recently revised by the Supreme Court. Employers should nevertheless ensure that "Bad Leaver" provisions in any employment documentation are clearly drafted and consistent to avoid disputes over their meaning or applicability.

Employers should follow internal policies when considering reasonable adjustments

Linsley v Commissioners for Her Majesty's Revenue and Customs (EAT)

The EAT has held that an employer which failed to allocate a dedicated parking space to a disabled employee in breach of a generally applicable policy had potentially failed in its duty to make reasonable adjustments under UK discrimination legislation, notwithstanding the policy's status as non-contractual or discretionary and the fact that the relevant decision maker appeared not to know of its existence. The issue of whether there was in fact a failure to make reasonable adjustments would be remitted to the same Employment Tribunal for re-assessment.

The Claimant was an employee at the Respondent, HMRC. She suffered from ulcerative colitis, which caused the Claimant to urgently need the toilet at short notice and can be aggravated by stress. It was accepted by HMRC to be a disability under the Equality Act 2010 ("EA"). The Respondent had a generally applicable car parking policy which stated that priority for dedicated car parking spaces was to be reserved for staff that required one as a reasonable adjustment. The Claimant, whilst working for HMRC at two previous locations, was granted a dedicated parking space as a reasonable adjustment in line with a recommendation from an occupational health report. In November 2016, her place of employment moved to a third site but she was not given a dedicated space.

Instead, the Respondent offered her something they regarded as equivalent; namely the opportunity to park near to the toilets, subject to signing in at reception, or otherwise to park her car in an unauthorised zone (although the latter could incur a sanction, the Respondent stated that they would ensure that this sanction would not be enforced against the Claimant). The Claimant was dissatisfied with this new stance, which she stated caused her stress and forced her to be absent from work. She subsequently brought claims against the Respondent, including for a failure to make reasonable adjustments under the EA.

The ET found that HMRC's adjustments were reasonable. Whilst acknowledging that HMRC had failed to follow the strict terms of its own parking policy, the ET did not consider this policy to be binding on the employer nor determinative on the question of reasonableness. On appeal, the EAT disagreed with this finding for two principal reasons. First, the ET had erred in its assessment of the relevance of HMRC's parking policy; an adjustment which is recommended in the employer's own policy, even if rights are discretionary, is one that is likely to be a reasonable adjustment to make unless there are cogent reasons not to – that was not the case here. Secondly, the ET had failed to fully appreciate and consider reasonableness in the context of the particular disadvantage, namely stress, which would be suffered by the Claimant as a result of their decision and risked exacerbating her disability.

This outcome shows that employers must be cognisant of their own internal policies when it comes to making decisions concerning reasonable adjustments, regardless of whether such policies are expressed as contractual or discretionary. If an employer fails to follow its own policies, even if the relevant decision makers were ignorant of them, there is a good chance that it will have failed to make a reasonable adjustment, unless it can provide a good reason for departing from them.