Welcome to our Autumn round up of employment law developments.

With the doubling of the qualifying period for unfair dismissal claims and the introduction of fees to file tribunal claims, there are significant changes ahead. So this quarter we begin with the latest important Government announcements and legislative changes affecting employment law.

On the case law front, we take a look at notable developments on references, unfair dismissal and holiday entitlement, as well as a useful point to remember regarding termination payments.

Legislative developments

Significant changes afoot

The Government is proceeding full steam ahead when it comes to cutting down on regulations. However, when it comes to announcing those changes, the Government seems to be taking the view that more is better. Numerous separate announcements have come out over the course of a week, leaving employers to piece together a jigsaw of "what" and "when".

Doubling of the unfair dismissal qualifying period and introduction of fees

On 28 September, the Government published its Second Statement of New Regulation reporting on the first year's operation of the 'One-in, One-out' rule. The statement said the Government was:

"proposing to increase the qualifying period for employees to be able to bring a claim for unfair dismissal from one to two years and we will be introducing fees for lodging employment tribunal claims to transfer the cost burden from tax payers to the users of the system."

Subsequently on 3 October, in his speech to the Conservative Party Conference, George Osborne confirmed that the decision had been made to increase the unfair dismissal qualifying period from one to two years. He also confirmed the introduction of fees for lodging claims, which claimants will only get back if they win. This, he stated, is designed to end "the one-way bet against small business".

This was swiftly followed by a press release from the Department for Business, Innovation and Skills (BIS), confirming that the increase to a two year qualifying period will come into effect on 1 April 2012. While we await the amending legislation, we anticipate that the change will affect all cases where the effective date of termination (EDT) falls on or after 1 April 2012, not by reference to the date the claim is issued or heard.

At the time of writing, we still await announcements as to timing (rumoured to be April 2013) and level of tribunal fees. While these seem higher than we might have expected, unconfirmed reports suggest:

  • an upfront fee of £250 when lodging ET1
  • a further fee of £1,000 payable by claimant when the hearing is listed
  • higher fees if the claim is for more than £30,000
  • the fee is to be refunded if claimant wins, and forfeited if they lose
  • fees are to be waived for those without the means to pay.

A consultation on the introduction of fees was originally promised for Spring 2011. While the decision in principle appears to have been made, presumably a consultation over the detail will be issued shortly.

Removal of third party harassment provisions

Section 40 of the Equality Act 2010 requires businesses to take reasonable steps to prevent persistent harassment of their staff by third parties. On 23 March, the Government stated in its 'Plan for Growth' that it will consult on removing what it describes as the "unworkable requirement" that employers take reasonable steps to prevent third-party harassment.

The Second Statement of New Regulation further confirms the Government's "outlined plans to consult on removing Equality Act requirements for businesses to take reasonable steps to prevent harassment of their staff by third parties". We still await confirmation as to when the consultation will take place.

Red Tape Challenge: spotlight on employment regulations

October is employment focus! For the first three weeks of October, the Red Tape Challenge will focus on "more than 160 different cross-Government employment-related regulations that businesses have to deal with in all areas of the workplace".

The spotlight on employment-related law is broken down into four sub-categories:

  1. Compliance and enforcement
  2. Letting people go
  3. Managing staff
  4. Taking people on

To launch the spotlight on employment, the Government has published a discussion paper: 'Flexible, Effective, Fair: promoting economic growth through a strong and efficient labour market'. This sets out the principles guiding the Government's approach to the labour market framework, the steps the Government is already taking in the on-going Employment Law Review and the areas where there is more to be done. The following points are of particular note:

  • BIS and the Department for Work and Pensions have commissioned an independent review of the system for managing sickness absence to be published "this autumn".
  • The Low Pay Commission is to consider what changes could be made to the National Minimum Wage rules to make them simpler and easier to administer.
  • There are plans to examine the rules that govern outsourcing under the Transfer of Undertakings (Protection of Employment) Regulations.
  • There are plans to examine the consultation periods on collective redundancy.
  • Identifying ways to reduce the burden of paperwork, for example through proposals to make the right to request flexible working a lighter-touch process. Consulting on compensation awards by employment tribunals in discrimination cases "later this year".

Lots of changes to come!

October changes

While the focus of the Coalition Government has been the review and reduction of legislation - the Red Tape Challenge - two key changes came into force on 1 October:

The Agency Workers Regulations 2010 in force

The much-anticipated Agency Workers Regulations (AWR) 2010 were rather begrudgingly brought into force, providing a significant improvement in the employment rights of agency workers. The regulations will ensure that:

  • after 12 weeks in a given job, agency workers will be entitled to equal treatment on basic working and employment conditions;
  • from the first day of their assignment, agency workers will be entitled to information about the hirer's vacancies, to give them the same opportunity as other workers to find permanent employment, and equal access to onsite facilities such as childcare and transport services; and
  • additional rights for new and expectant mothers.

Just days before the implementation of the AWR, the Government issued its Second Statement of New Regulation. There the Government again pointed out that it understood that businesses have genuine concerns about the costs the regulations may impose and that it looked long and hard at whether to re-open negotiations on the regulations.

However, the absolute priority was to protect the 12-week qualifying period, rather than risk losing the derogation entirely and ending up with a much worse position for business, with rights accruing on day one. So, even the Coalition Government contends this represents "the best deal for British business".

For further information please see our July alert: Agency Workers Regulations 2010: the home stretch.

Annual changes to the National Minimum Wage

The new hourly rates will be:

  • Standard (adult) rate (workers aged 21 and over): £6.08 (rising from £5.93).
  • Development rate (workers aged between 18 and 20): £4.98 (rising from £4.92).
  • Young workers rate (workers aged under 18 but above the compulsory school age who are not apprentices): £3.68 (rising from £3.64).
  • Apprentice rate: £2.60 (rising from £2.50).
  • The accommodation offset will rise from £4.61 per day to £4.73.

Case law developments

References

The measure of fairness - reference highlighting unsubstantiated allegations made against an ex-employee was fair

It has long been established that if a former employer provides a reference then it has duties towards the subject of that reference to take reasonable care to ensure that the information contained is true, accurate and fair. Failure to do so could result in claims including defamation, malicious falsehood, negligent misstatement and/or discrimination.

While determining whether information provided is true or accurate may be relatively easy to assess, how do you determine 'fairness'?

The Court of Appeal (CA) in Jackson v Liverpool City Council has provided some welcome guidance on the provision of a reference when allegations about an ex-employee's capability or conduct come to light after they have left.

Mr Jackson was employed by Liverpool City Council (Liverpool) as a social worker and left in 2007. Shortly after, concerns were raised about his work but these were not investigated as he was no longer employed. A year later he was offered a similar position with another local authority, which was subject to satisfactory references.

In its response to a request for a reference, Liverpool outlined Mr Jackson's strengths but also, in response to a specific question about his weaknesses, referred to issues regarding his record-keeping. It noted that these would have led to a formal improvement plan, but he had left before it could be instigated. In a follow up phone conversation, a manager at Liverpool made it clear to the prospective employer that the concerns raised had not been formally investigated, and so she could not give a positive or negative answer to the question "would you employ the employee again?"

When Mr Jackson did not get the job, he brought a claim against Liverpool for damages. The County Court judge held that Liverpool was in breach of its duty of care. While the reference was true and accurate, it was not fair. In the judge's view, it was unfair to refer to the allegations without investigating them or giving Mr Jackson a chance to answer them. Liverpool should have either investigated the allegations or refused to provide a reference at all. Liverpool appealed.

Overturning the County Court decision, the CA said the judge was wrong to conclude that the reference given was unfair because it had referred to unsubstantiated concerns about his performance. Accuracy and truth went to facts which formed the basis of the reference, but fairness went to the overall balance of the reference and any opinion contained within it. The CA did not see how Liverpool could honestly have answered the questions posed without indentifying the concerns that it had, which it clearly stated had not been investigated or tested. Taken together, the reference and the subsequent telephone conversation were careful and fair.

The County Court judge had recognised that there were many reasons why as a matter of law, good employee relations or sheer practicability, an investigation was not instigated by Liverpool when the issues arose after Mr Jackson's departure. Nevertheless, it still concluded investigations could have been instigated with the appropriate reference to follow. The CA rejected this noting that "recognition that investigation was fraught with legal and practical difficulty is significant". Such a course would have placed Mr Jackson in a more difficult position. Furthermore, Liverpool could not be criticised for providing a reference in the first place, as to refuse could have led the prospective employer to draw even more adverse inferences.

Lesson

Welcome guidance for those providing a reference. Where employees leave in circumstances where issues over their performance or conduct come to light after their departure, employers may be able to show that it was not practicable to investigate the concerns. In such cases, a former employer may disclose such issues in response to a reference request but must make it absolutely clear that the issues have not been investigated and therefore they are unable to comment on their accuracy.

Unfair dismissal

Don't jump to conclusions - employee unfairly dismissed for working in second job while on sick leave

Scenario

Employee X is signed off work for several weeks on medical grounds and in receipt of contractual sick pay. You then discover that X has been working for another employer while on sick leave. You think obviously X is not too sick to work and so must have made a fraudulent sick pay claim. While such a conclusion may easily spring to mind, the case of Perry v Imperial College Healthcare warns against jumping to conclusions.

In this case, Ms Perry worked as a midwife part-time for two different employers. Her job for employer number one (Imperial) was as a community midwife, which involved cycling to patients' homes and often climbing stairs in high-rise council flats. Due to a knee condition, she was signed off work and received sick pay. However, she carried on with her job for employer number two (Ealing), which was desk-based and therefore not affected by her knee condition. The Ealing job was carried out outside the hours she would otherwise have been working for Imperial.

On discovering that Ms Perry was still working for Ealing while signed off sick, Imperial carried out a disciplinary procedure and dismissed her for intentionally defrauding Imperial of "a large sum of money", by claiming sick pay while undertaking paid work. It refused to consider a letter from Ms Perry's GP confirming that, while she was unfit for her Imperial duties, she was still fit for her Ealing job which was completely separate in nature and did not put any stress on her knee.

At the internal appeal, the Trust changed tack, relying on a clause in Ms Perry's contract preventing her from working elsewhere during sick leave without the permission of her manager. Imperial claimed that, had she mentioned earlier that she was fit for desk-based work, it could have redeployed her instead of putting her on sick leave. It confirmed her dismissal. An employment tribunal dismissed Ms Perry's unfair dismissal claim, and she appealed.

The Employment Appeal Tribunal (EAT) upheld the appeal and substituted a finding that the dismissal was unfair, but that compensation should be reduced by 30% for contributory fault.

  • Employee can claim sick pay while working in another job

Referring to the HMRC Employer Helpbook for Statutory Sick Pay E14, the EAT pointed out that "it is perfectly in order for an employee with two employments to be claiming sick pay in respect of one employment whilst continuing to work under the other". Provided the contracts are not with the same employer or two associated employers (which these were not), the employee can claim statutory sick pay if incapable of work under one contract, while still being capable of work under the other.

It was not the case here that Ms Perry was being paid twice for the same hours. There was no overlap in the hours she was working for Ealing and the hours for which she was receiving sick pay from Imperial.

  • Attempt to "salvage" misconceived dismissal via contractual clause

The EAT held that the contractual requirement to obtain permission was not designed to provide Imperial with information about redeployment options. Instead it was aimed at addressing the questions over whether (a) such other employment was inconsistent with Ms Perry being unfit for her duties with Imperial; and (b) it would delay her return to work at Imperial.

In the light of the letter from Ms Perry's GP, the EAT held that there had been no reason for Imperial to be concerned about either of these issues. They were simply trying to salvage, after the event, what "had plainly been an initially misconceived decision to dismiss".

  • 30% contribution to dismissal

The EAT did, however, recognise that her dismissal was partially attributable to her failure to seek permission to carry on her Ealing job, as required by her contract. It therefore held that her compensation should be reduced by 30% for contributory fault.

Lessons

  1. It is clear that an employee with two jobs for two different employers can be on sick leave and receive sick pay from one employer, while continuing to perform their duties for the other employer. This only becomes a problem if the circumstances suggest that the employee is not really incapable of performing the first job, or is carrying on the second job during the hours she would otherwise have worked for the first employer.
  2. Beware of jumping to conclusions. Proper investigation is always required.

Lucky escape no mitigation - illegal driving justified dismissal

In Wincanton plc v Atkinson and another, the employer discovered during a routine check, that two of its lorry drivers had allowed their HGV licences to expire. They had therefore been carrying dangerous loads with no licence or insurance. As a result the drivers were dismissed, even though no accidents had happened during the relevant period.

The EAT has overturned a tribunal's decision that the two drivers had been unfairly dismissed. The EAT held the tribunal had placed too much emphasis on the fact that no accidents had happened. In the EAT's view, it had been well within the band of reasonable responses for the employer to dismiss the employees, taking account of the potentially 'horrific' consequences of their mistake, even if those consequences never actually materialised. If either driver had been involved in an accident or road traffic offence, the consequences for the employer included a criminal offence, invalidated their insurance, put the company's reputation at risk in a competitive market, and potentially jeopardised the company's Operator's Licence.

Lesson

Employers are entitled to take account of serious adverse consequences that might arise from an employee's negligence, and are not prevented from fairly dismissing an employee just because those consequences thankfully did not materialise.

Déjà vu - effect of summary dismissal during notice period

The "effective date of termination" (EDT) is all important for calculating whether an employee has enough continuous service to bring a particular claim and whether the claim has been presented within the required time limit. Where the contract is terminated with notice, the EDT is the date on which the notice expires. Where the contract is terminated without notice (summary dismissal), the EDT is the date on which the termination takes effect.

Regular readers will have read the above in last quarter's edition as well as in our last several year end reviews. As ever, issues around determining the EDT continue to arise regularly.

In M-Choice UK Ltd v Aalders, Miss Aalders began employment on 1 February 2010. Six months into her employment, Miss Aalders was given notice of termination, to expire on 1 February 2011 and placed on garden leave. Accordingly the EDT would be 1 February 2011 - so one year's service. Three weeks before the notice was to expire she presented a claim of unfair dismissal to the employment tribunal. Ten days later, on 21 January 2011, she was summarily dismissed - now less than one year's service. Miss Aalders amended her claim to add a second complaint of 'automatically' unfair dismissal, claiming the reason for the summary dismissal was that she had put in her claim.

At a pre-hearing review, an employment judge had to consider whether Miss Aalders had rights to an 'ordinary' unfair dismissal claim and/or an 'automatic' unfair dismissal claim.

Employees can issue an unfair dismissal claim after notice has been given, but before the EDT under section 111 Employment Rights Act 1996. The employment judge therefore took the original dismissal on notice as determinative of the EDT, disregarding the subsequent summary dismissal. So, with an EDT of 1 February 2011, the one year service requirement was met, and an 'ordinary' unfair dismissal claim could proceed. M-Choice appealed.

The EAT allowed the appeal and substituted a finding that the EDT was 21 January 2011, the date on which the employee was summarily dismissed. When determining the EDT, there was no basis for freezing things at the point in time when a claim was presented to the tribunal, effectively ignoring anything which happened afterwards which might affect the EDT. The summary dismissal of an employee who is under notice brings forward the EDT, even if that leaves him or her with insufficient continuous service to claim unfair dismissal.

Accordingly, Miss Aalders did not have the necessary period of qualifying service to bring a claim of ordinary unfair dismissal. A goal disallowed for Miss Aalders, but a possible own goal by the employer? While Miss Aalders did not have sufficient service to support an 'ordinary' unfair dismissal case, the case will now go back to the employment tribunal to consider the merits of her alternative 'automatic' unfair dismissal claim:

  • If the principal reason for her dismissal was that she had presented a claim for unfair dismissal, she would not need a year's qualifying service to bring such a claim.
  • If, on the other hand, the reason for her summary dismissal was something else, she would have needed a year's continuous service to bring her claim.

Lessons

  1. An employer, having given an employee notice, is not prevented from summarily dismissing the employee during their notice period. This has been the established position for a number of years. Otherwise, an employer would not be able to summarily dismiss an employee where evidence of gross misconduct is found after an employee is dismissed or resigned on notice, which clearly is not the case.
  2. This may deprive an employee who does not have one year's continuous employment of the right to claim 'ordinary' unfair dismissal. However, if the reason for the summary dismissal is the fact that the employee has asserted their statutory right to bring an unfair dismissal claim, the employer will hand the employee a claim for 'automatically' unfair dismissal for which the one year qualifying service requirement does not apply.

The facebook generation - employee unfairly dismissed for facebook comment

Issues surrounding employees' use of social networking sites continues to be a hot topic.

In our Summer Employment Watch, we reported on the case of Preece v JD Weatherspoons where the pub chain successfully defended an unfair dismissal claim. This followed a pub manager's dismissal for making inappropriate comments on Facebook about two customers who had verbally abused and threatened her. However, the case of Whitham v Club 24 Ltd t/a Ventura suggests employers need to be very careful in this area.

Mrs Whitham was a team leader at Club 24 which provided customer services for Skoda and Volkswagen. Representatives from Skoda and Volkswagen worked at Club 24's offices. Following a hard day, Mrs Whitham posted on her Facebook account: "I think I work in a nursery and I do not mean working with plants". One of her colleagues posted a reply and Mrs Whitham commented: "Don't worry, takes a lot for the b**tards to grind me down. LOL". A former colleague then said that Mrs Whitham worked "with a lot of planks" to which she replied, "2 true xx".

Mrs Whitham was summarily dismissed on the basis that the comments were an 'extreme embarrassment' to the company and put its reputation at risk. Unfortunately for the employer, the Tribunal held the dismissal was unfair.

The Leeds Tribunal considered the Facebook comments were a complaint about working conditions rather than a criticism of Volkswagen. Given Volkswagen wasn't even referred to in the posts, it was unlikely to have any impact commercially and thought it significant that Volkswagen themselves had made no attempt to comment on the incident. As her prior record was exemplary and she had apologised for the comments at the first opportunity, the Tribunal held the dismissal was outside the range of reasonable responses and was unfair.

Lessons

  • Employers shouldn't be too quick to dismiss when derogatory comments are made on social networking sites.
  • As recommended in the Acas Guidance on Social Networking, treat 'electronic behaviour' in the same way as 'non-electronic behaviour' and react reasonably to social networking issues by thinking about the likely impact on your business.
  • We are frequently being asked to help draft policies on the use of social media as these could be crucial in justifying dismissals if they are breached. Without such a policy, employers will need to consider the impact of the comments carefully when considering the appropriate sanction.
  • Who have the more 'hip' judges - Liverpool or Leeds? Well, unlike the Liverpool Tribunal, the Leeds Tribunal appreciate that 'LOL' stands for "laugh out loud". In the Weatherspoons case, the judge felt the need to explain that 'LOL' was a "psydoneum [sic] for the phrase lots of love"!

Holidays

European vacation - holiday leave and pay entitlements for those on sick leave

Are workers on long term sick leave able to claim holiday pay on termination for holiday never taken or even requested?

There have been a number of high-profile cases, at both domestic and European level, concerning statutory holiday rights for workers on long-term sick leave. In essence, the ECJ in Stringer and Schultz-Hoff, ruled thatworkers on long-term sick leave continue to accrue paid statutory annual leave and can take such leave even if still on sick leave. However, if such a worker is 'prevented' from taking their leave, they must be allowed to carry it over to the next holiday year.

Adding fuel to the fire, the ECJ subsequently ruled in Pereda that a worker who falls sick during a period of previously scheduled annual leave has the right to take that leave at another time, even if it is not possible to take rescheduled leave in the same leave year.

But doesn't the Working Time Regulations (WTR) prohibit carry-over? Last year we saw a number of tribunal claims concerning this issue and we now have the view of the EAT in NHS Leeds v Larner.

Mrs Larner went on sick leave on 5 January 2009. She did not return to work, and NHS Leeds terminated her employment on 8 April 2010 by reason of capability. Mrs Larner brought a tribunal claim seeking a payment in respect of the statutory holiday entitlement that she did not use or request during her sickness absence.

The tribunal upheld Mrs Larner's claim for holiday pay for the leave year from 1 April 2009 to 31 March 2010. She did not pursue a claim for payment in respect of the previous leave year ending 31 March 2009, during which she had been receiving full pay under her contractual sickness provisions. NHS Leeds appealed to the EAT on the basis that Mrs Larner had lost her statutory holiday entitlement for the relevant leave year on 31 March 2010, as she had failed to give notice that she wished to take it before that date.

The EAT upheld the tribunal's decision that a worker, who had been on sick leave for an entire leave year and had not taken any holiday during that period, was entitled to a payment in respect of that year's unused statutory holiday entitlement on the termination of her employment. The claimant's failure to request holiday during the relevant leave year did not mean that she lost the right to payment. In the EAT's view, following Pereda, Mrs Larner's statutory holiday entitlement for that leave year carried over to the next year. This was the case, whether or not she formally requested carry over.

The EAT's judgment is relatively short and, unfortunately, fails to address some of the important issues in detail. Rather than helping employers and workers to know where they stand, the decision has arguably laid the foundations for further litigation.

Can holiday be carried over under the WTR?

In the Pereda case, the ECJ held that the Working Time Directive (WTD) requires, in certain circumstances, that a sick worker's statutory holiday entitlement be carried over to the next leave year. Since the ECJ's decision, there has been much debate as to whether the WTR can be interpreted as giving effect to this requirement. The EAT noted that the holiday provisions of the Directive do not have direct effect, meaning that the WTR had to be considered. However, having set out the provisions regarding carry over, the EAT did not address any potential conflict. In Larner the EAT appear to simply accept that the WTR must be interpreted in line with Pereda, even if that means disapplying the provision preventing carry over. But is that right?

In a case currently pending before the ECJ (Dominguez v Centre informatique du centre Ouest Atlantique), the Advocate General (AG) has issued an interesting opinion casting doubt on this. In the AG Opinion, EU law would not permit a national court from simply disapplying a national statutory provision where it cannot be interpreted in conformity with the WTD in a dispute between an individual and a private employer. The individual is instead left with a 'Francovich claim', that is, a claim against the government for failure to implement Community law. European case law allowing for the disapplication of domestic provisions when necessary in the discrimination sphere does not apply to the WTD.

What about the distinction between regulation 13 and regulation 13A leave?

Mrs Larner was awarded her holiday pay for both regulation 13 leave (four weeks) and 13A leave (a further 1.6 weeks). The EAT seems to have simply accepted Pereda related to any statutory leave entitlement even though regulation 13A leave is not derived from the Directive without any discussion.

This is at odds with the Government's view as set out in the 'Consultation on Modern Workplaces' published in May. In the Government proposals to bring the WTR in line with European case law, the carry over of leave for those on sick leave would only be permitted in relation to regulation 13 leave (first four weeks).

How many years of leave can be carried forward?

As Mrs Larner did not pursue her claim other than for the leave year immediately preceding the year of her dismissal, we have no further domestic guidance. However, we do have another AG Opinion in KHS AG v Schulte suggesting that annual leave untaken by workers on long-term sick leave may expire after 18 months.

Although the earlier ECJ's decision in the Schultz-Hoff case appeared to rule out any expiry of annual leave entitlement that a worker has not been able to exercise because of sickness, the AG states that ruling should not be interpreted quite so widely.

Why 18 months? The simple answer is that this was the time limitation period set out in the question referred to the Court. Furthermore, the AG noted that the International Labour Convention No.132 envisages entitlement to annual leave expiring 18 months after the end of the leave year in which it arises.

The 18-month period is stressed to be a guideline only. While, the AG expressly considered that a six-month carry over period would be insufficient, what about 12 months?

As set out in the 'Consultation on Modern Workplaces' in May 2011, the Government is proposing to amend the annual leave provisions of the WTR 1998. The proposals include where a worker has been unable to take their annual leave due to sickness absence and it is not possible to reschedule the leave in the current leave year, they will be able to carry it over into the following leave year (limited to the four week leave entitlement under Regulation 13). We wait to see if this will need to be adjusted once the ECJ makes it ruling.

NB: While Advocate Generals' Opinions are often followed they are not binding on the Court of Justice. We await the binding judgments in both Dominguez and Schulte. The employer is currently seeking permission to appeal to the Court of Appeal in the Larner case.

Termination payments

And finally, a gift is a gift - ex-gratia payment was not pay in lieu of notice

The EAT in Publicis Consultants UK Ltd v O'Farrell has held that a termination payment described by the employer as 'ex gratia' could not be used to meet its obligation to pay notice pay.

Ms O'Farrell's contract entitled her to three months' notice of dismissal. She was dismissed for redundancy with four days' notice and given statutory redundancy pay and holiday pay. Additionally, she was also given a payment described by the employer as, "Ex-gratia Payment - You will receive an ex-gratia payment equivalent to three months' salary."

Ms O'Farrell brought a claim for breach of contract for failure to pay her salary for the three months' notice period. The employer argued that the ex-gratia payment was actually made in respect of the notice pay.

Both the tribunal and EAT found in Ms O'Farrell's favour as nothing in the language used in the letter suggested that the ex-gratia payment was a payment for a period of notice. To an ordinary reader the wording of the letter indicated the payment was made freely and not under obligation.

It is not apparent from the judgment what the employer's reason was for using the phrase ex-gratia to describe the payment. Presumably, it was for tax reasons. The first £30,000 of a genuinely ex-gratia payment made to a departing employee is free of tax. However it is not free of tax if the employee has a contractual right to it.

Lessons

  1. Do not describe a payment intended to meet a contractual obligation as 'ex-gratia'.
  2. Trying to get around HMRC rules for the benefit of an ex-employee by dressing up pay in lieu of notice as an 'ex-gratia' can be a costly decision.