The Court of Appeal has given guidance on when an enhanced redundancy package becomes an implied contractual term based on custom and practice.  The Court questioned some of the factors relied on in earlier cases and emphasised that the essential question is whether the employer, by its conduct, has demonstrated to the employees, an intention that they should enjoy the benefit as of right.

Park Cakes v Shumba

The claimants were employed at Park Cakes, their employment having been transferred under TUPE from a company within the Northern Food Group (the "Old Company").  The claimants were dismissed for redundancy in 2009 and they brought a claim for an enhanced redundancy payment.  The claimants' contracts of employment made no reference to any entitlement to enhanced redundancy payments but the Old Company had a group wide-policy of paying enhanced redundancy terms, which was on the same basis as claimed by the claimants.

The claimants argued that the enhanced terms had become contractual by custom and practice.  The argument was unsuccessful at the Tribunal, which was not satisfied that the enhanced payments had been paid automatically without exception and that the policy had been drawn to the attention of the claimants. 

The claimants appealed to the EAT which allowed the appeal and referred the case to a fresh tribunal to decide.  Park Cakes appealed the EAT's decision.

Decision

The Court of Appeal dismissed Park Cakes' appeal and upheld the EAT's decision.  It agreed with the EAT that the Tribunal had failed to give adequate reasons for its decision.  The Court emphasised that the essential question is "whether by his conduct in making available a particular benefit to employees over a period, in the context of the surrounding circumstances, the employer has evinced to the relevant employees, an intention that they should enjoy the benefit as of right".  It also gave guidance on the factors which may be relevant (although not exhaustive) on when benefits would become  contractually binding by custom and practice, as follows:

On how many occasions, and over how long a period, the benefits in question have been paid? The longer the period and the higher the frequency, the more likely it is that employees will reasonably understand that there is a right to be paid the enhanced redundancy payment.

Whether the benefits are always the same?  Variations to the amounts or terms of the enhanced redundancy payment are inconsistent with an acknowledgement of a legal obligation.  Whilst a late departure from the standard terms, once a practice has already become a contractual right, will not change its contractual status, any inconsistency during the period relied on as establishing the custom is likely to be fatal, although the evidence may show that the employer has bound itself to a minimum level of benefit.

The extent to which the enhanced benefits are published generally. Where the availability of the enhanced redundancy payment is published to the workforce generally, this will tend to convey that they are paid as a matter of obligation.  The Court stressed however that much will depend on the circumstances and how the employer expresses itself.

How are the terms described? The terminology used to describe the enhanced redundancy payment will be relevant, for example, describing the payment as an "entitlement" will point to a legal obligation, whereas "ex gratia" will not.  If the employer clearly and consistently describes the enhanced terms in language which makes it clear that they are discretionary, it is hard to see how employees could reasonably understand them to be contractual, however regularly they may be paid.

What is said in the express contract? Express terms will generally trump implied terms unless there is a clear intention to vary the contractual terms.

Equivocalness. The burden of proof is on the employee to prove that the practice has become contractual.  The burden will not be discharged where viewed objectively, the employer's practice is equally explicable on the basis that it is pursued as a matter of discretion rather than legal obligation.

The Court looked at previous decisions which had referred to whether the employer intended to be contractually bound by the terms and whether payments were made "automatically".  It clarified that the employer's actual intention is not relevant.  The question is what the parties must be taken to have understood from each other's conduct and words.  Similarly, whether payments were made automatically could only be relevant if the employees would or should have appreciated that.

Comment

The Court of Appeal's guidance on when an enhanced redundancy practice becomes contractual, and the factors that will be relevant to that assessment, is very useful.  The key will be whether, from an objective perspective, the employer has conveyed to the employee that the employer intended to be contractually bound.  This is a change of emphasis from previous decisions (such as Quinn v Calder and Albion Automotive v Walker).

The decision includes some helpful comments for employers who have applied a policy regularly but always described it as discretionary, although each case will turn on its facts.

Following this decision, there have been two further decisions considering whether there was a contractual entitlement to an enhanced redundancy payment:

Duncan v Scotland Developments: the claimant claimed that he had a contractual right to an enhanced redundancy payment of 4 weeks per year of service (he received three weeks per year of service) from his employer, based on an extract of an email that the finance manager had forwarded onto him from senior management stating that the "redundancy package offered to previous people already made redundant will apply to any future redundancies".  The Tribunal rejected the claim and held that the email did not make any offer to vary the contract of employment.  The email amounted to no more than a sharing of intent by the senior management of the respondent at that date and did not convey, in the Employment Judge's view, an intention to create a contractual variation by sending that email.  On appeal, the EAT considered that this was a reasonable decision for the Tribunal to make.

Allen v TRW Systems: The employer, which was a manufacturing company, established an enhanced redundancy payment scheme at its Stephenson plant (the "Scheme") which essentially mirrored a scheme that was agreed with their recognised union at their Wednesbury plant (the Stephenson plant did not recognise any union).  The employer carried out three redundancy exercises under the Scheme.  However, it misinterpreted the calculation method, paying out four elements of pay to redundant employees rather than three.  There was a further redundancy exercise where a completely different calculation method / scheme was used and subsequently the employer realised it had overpaid in the three redundancy exercises it carried out pursuant to the Scheme.  The claimant claimed that the calculation method of using four elements of pay had become a binding practice.  On the morning of the Court of Appeal hearing, the employer agreed settlement terms with the claimant, nevertheless Lord Justice Elias continued to set out his view that there was no binding practice.  He considered amongst other things that "looking at the matter purely in terms of practice, the fact that this policy was applied on three occasions by awarding four elements in the calculation of the enhanced payment is not in my view sufficient to establish a legally binding practice so that one can infer that there has crystallised a legal obligation to make that payment.  Those payments were entirely consistent with the company mistakenly assuming that this was what the policy required".  The Court also took into account the fact that on one occasion, a totally different policy was applied and that after the employers had been alerted of its calculation error, it had reverted to using three elements of pay.