This post is kindly written for us by Lord Justice Underhill of the Court of Appeal.  Actually, that’s not entirely (or indeed at all) true.  However, while reciting long tracts of Court Judgments is rarely a good way to make friends and influence people, his recent guidance on when enhanced redundancy terms will become contractual through custom and practice contains little scope for improvement.  So here it is, more or less verbatim, courtesy of last week’s decision in Park Cakes –v- Schumba, and with a few small thoughts of our own added at the end.

In considering what, objectively, employees should reasonably have understood about whether a particular benefit is conferred as of right, it is necessary to take account of all the circumstances known, or which should reasonably have been known, to them.  I do not propose to attempt a comprehensive list of the circumstances which may be relevant, but in a case concerning enhanced redundancy benefits they will typically include the following: 

  1. On how many occasions and over how long a period, the benefits in question have been paid.  Obviously, but subject to the other considerations identified below, the more often enhanced benefits have been paid, and the longer the period over which they have been paid, the more likely it is that employees will reasonably understand them to be being paid as of right.
  2. Whether the benefits are always the same.  If while an employer may invariably make enhanced redundancy payments, he nevertheless varies the amounts or the terms of the payment, that is inconsistent with an acknowledgement of legal obligation; if there is a legal right it must in principle be certain.  Of course a late departure from a practice which has already become contractual cannot affect legal rights, but any inconsistency during the period relied on as establishing the custom is likely to be fatal.  It is however possible that in a particular case the evidence may show that the employer has bound himself to a minimum level of benefit even though he has from time to time paid more on a discretionary basis. 
  3. The extent to which the enhanced benefits are publicised generally. Where the availability of enhanced redundancy terms is published to the workforce generally, that will tend to convey that they are paid as a matter of obligation though…. much will depend on the circumstances and on how the employer expresses himself.  …Employment Tribunals should be able to judge whether, as a matter of industrial reality, the employer has conducted himself so as to create “widespread knowledge and understanding” on the part of the employees that they are legally entitled to the enhanced benefits.
  4. How the terms are described.  If an employer clearly and consistently describes his enhanced redundancy terms in language that makes clear that they are offered as a matter of discretion – e.g. by describing them as ex gratia – it is hard to see how the employees or their representatives could reasonably understand them to be contractual, however regularly they may be paid. …. conversely, the language of “entitlement” points to legal obligation.
  5. What is said in the express contract.  As a matter of ordinary contractual principles no term should be implied, whether by custom or otherwise, which is inconsistent with the express terms of the contract, at least unless an intention to vary can be understood.
  6. Equivocalness.  The burden of establishing that a practice has become contractual is on the employee, and he will not be able to discharge it if the employer’s practice is, viewed objectively, equally explicable on the basis that it is pursued as a matter of discretion rather than legal obligation.

Lord Justice Underhill’s decision contains two other pointers for employers seeking to avoid the development of a custom and practice entitlement to enhanced severance terms.

First, the question is not what the employer intended, but what the employee might reasonably perceive it to intend.  Therefore if its choice to pay at a particular level is the subject of a separate decision-making process each time it is important that the employees are made aware of this “non-automaticity”.  (“I apologise for the ugliness of this termsaid the Judgebut it is too convenient to be eschewed”).  Suggestions for a better word gratefully received, please.

Second, if you are content to pay enhanced figures but only subject to a binding settlement agreement, make this condition clear from the outset, both through notice to the employees and through its invariable application.  If you allow exceptions you may find that redundant staff have a right to the redundancy payment even if they then intend to (or do) make further claims against you on top.