The strengthening of employment rights

Industrial tribunals (now employment tribunals) were created with the purpose of providing a relatively informal means of pursuing complaints against employers and as employment claims have tended to have their origins in statutory provisions, the vast majority have been routed through the tribunal system.

A fundamental characteristic of most claims that are dealt with by tribunals is that they arise from the termination of the employment relationship.  Bearing in mind the fact that re-employment orders are hardly ever granted (and when they are, seldom complied with) the employer has always had the upper hand.  Any entitlements that the employee may have had by virtue of the contract of employment as opposed to statute have tended to be of little or no practical value in preventing or compensating for dismissal.  Not to put too fine a point on it, unscrupulous employers have been able to act with impunity in the knowledge that the employee’s remedy would be limited to an award of compensation by a tribunal.  While statutory compensation limits exist, such a liability can be assessed relatively easily.

However, as a result of a number of relatively recent events, this state of affairs is changing.  The purpose of this article is to draw attention to some developments which at first glance may appear unconnected, but which are actually moving towards the same end point.  What they have in common is that they articulate an underlying change of attitude on the part of lawyers and politicians to the contract of employment itself.  In particular, the courts in the United Kingdom are now moving away from the traditional position that at common law an employee’s entitlement on termination of the contract of employment is limited to damages calculated with reference to the notice period.  At the same time the publication in May this year of the DTI White Paper “Fairness at Work”, while emphasising the Government’s desire to view working relationships as partnerships, at the same time postulates radical changes to individual and collective rights.

Of particular significance is the proposal that the statutory limit on compensation for unfair dismissal should be removed altogether.  European influence is obvious in the White Paper through the judgments of the European Court of Justice (ECJ).  For example, one of the matters mentioned in this article is the question of variations of employment contracts before or after a “relevant transfer” under the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE).  Guidance from the ECJ forces domestic courts to examine very closely the terms of contracts of employment.  If contracts of employment transfer (as they do under TUPE) it is necessary to identify exactly what they consist of in order that the rights of the parties be determined.  Although arguably this issue is only relevant to transfers, the fact that disputes arising from transfers are now relatively commonplace before employment tribunals may result in an increased willingness on their part to pay close attention to contractual terms in other types of dispute.  While the jurisdiction of employment tribunals to hear contractual claims is limited to those arising from or outstanding on termination of employment, in effect other issues relating to contractual terms are frequently litigated before them.  For example, claims involving written particulars of employment or unlawful deductions in pay inevitably require tribunals to examine contractual terms.  The following examples are only representative of a number of recent developments but it is hoped that they do serve to illustrate the fundamental strengthening of the contract of employment that appears to be taking place at the moment.

Transfer of undertakings

Readers will be well aware that the decision in Suzen v Zehnacker Gebaudereinigung GmbH [1997] IRLR 258 was interpreted by the courts in this country (see Betts v Brintel Helicopters and KLM [1997] IRLR 361 and Superclean Support Services PLC v Lansana and Wetton Cleaning Services Ltd (EAT/281/96)) as narrowing the applicability of the Acquired Rights Directive (ARD) and therefore TUPE.  In particular the decision of the EAT in Superclean has encouraged some employers to attempt to circumvent the consequences of TUPE applying (particularly in relation to the transfer of contracts of employment and protection against unfair dismissal) by refusing to accept employees from a transferor.

The logic of this position is that the ECJ themselves in Suzen and the courts in this country in the two cases referred to above have emphasised that a significant factor in the assessment of whether a transfer has taken place will be whether the employees have actually transferred.  If the employees associated with an economic activity do not transfer, this makes it less likely that a transfer has taken place.  However, the Superclean decision should be treated with caution and must be compared and contrasted with another decision of the EAT in ECM (Vehicle Delivery Service) v Cox and others [1998] IRLR 416.

In the latter (more recent) case the industrial tribunal had found that a van delivery contract together with associated activities was capable of amounting to an undertaking for the purposes of TUPE.  The employees did not transfer with the contract but this was because the transferee sought to avoid obligations which would then be inherited under the legislation.  In the EAT Mr Justice Morison applied a purposive approach to the legislation, holding in effect that a transferee cannot defeat the application of TUPE simply by refusing to employ the employees in the undertaking.  This may be correct but it will be difficult if not impossible in many cases for employees to establish the transferee’s motive for refusing to employ them.

One reason why a transferee may wish to avoid taking on employees is because some may be surplus to requirements.  However, in those circumstances the employer may avail himself of the statutory defence.  If he can show that there existed “economic, technical or organisational reasons entailing changes in the work force” then dismissals are potentially fair.  In these circumstances the liability may be limited to redundancy and notice entitlements for each employee.

However, the stakes are raised if the employees come with contractually enhanced redundancy entitlements, in which case a transferee may have compelling financial reasons for not wishing to take on the employees at all.  There is another significant reason why transferees sometimes attempt to avoid the full consequences of a TUPE transfer.  As readers will be aware, the general thrust of Regulation 5 of TUPE is that the contract of employment transfers to the new employer (with the exception of provisions relating to pension entitlement).  Therefore, for virtually all purposes the new employer is substituted for the old.  That in itself can create a significant financial burden for the transferee if it is supplemented by the additional protection provided by the ARD (as interpreted by the ECJ) and consequently by TUPE.  The ECJ in the Daddy’s Dance Hall case (Foreningen af Arbejdsledere I Danmark v Daddy’s Dance Hall A/S [1988] IRLR 315 ECJ) held that the mandatory provisions of the ARD could not be overridden by agreement between employer and employee.

Put another way, a purported alteration of terms and conditions of employment (even if arrived at by agreement with the employee) would not be effective if the operative reason for it was the transfer itself.  However, in the same case the ECJ pointed out that this would not preclude the employer and employee agreeing a change to terms and conditions in so far as such an alteration is permitted by the applicable national law in cases other than transfers of undertakings.

The progress of the case of Wilson v St Helens Borough Council (and its sister case of British Fuels Ltd v Baxendale and another) [1998] IRLR 706 HL through the English appeal system has demonstrated very tangibly the tensions that exist between principle and practicality in the application of European law in this area.  By interpreting the ARD as effectively giving employees an extra tier of protection against changes in terms and conditions for transfer related reasons, the ECJ has created enormous practical difficulties for employers and employees alike.  For example, practitioners appearing before employment tribunals in the UK will be comfortable with the proposition that, before proceeding to the stage of carrying out redundancies, a reasonable employer should explore ways of avoiding such dismissals.

One way of avoiding redundancies is to agree a (sometimes temporary) reduction in pay with the affected employees.  Frequently employees and their representatives will understand the reason for such a course of action and will prefer it to the prospect of enforced job losses.  It goes without saying that when a business changes hands the new owner (for a variety of perfectly valid reasons) may require to consider redundancies.  The fact that he may be prohibited from agreeing new terms and conditions with the transferring employees is likely to encourage him to skip that step and proceed to reduce numbers.

In a decision that does not necessarily fit easily with the earlier case of Berriman v Delabole Slate Ltd [1985] IRLR 305 CA, the Court of Appeal has held in effect that where “economic, technical or organisational reasons entailing changes in the workforce” are the principal reason for a variation in terms and conditions of employment occurring on a transfer then such variations may be effective.

Following the Court of Appeal decision in Wilson, the Employment Appeal Tribunal in Cornwall County Care Ltd v Brightman and Others [1998] IRLR 228 highlighted the problems raised in relation to consensual variations, describing the decision in Wilson as causing “concern and surprise”.  In particular, Mr Justice Morison drew attention to the Berriman decision referred to above.  As he pointed out, where consensual variations in terms and conditions of employment are involved, it is usually the case that precisely the same number of employees are employed before and after the transfer.  It is very difficult to see how this set of circumstances could allow the employer to invoke the statutory defence, a critical part of which is “entailing changes in the workforce”.  In the Cornwall County Care case, the Berriman issue did not arise.  The EAT expressed the hope that the House of Lords would give some guidance on the issue when it came to deal with the Wilson and British Fuels appeals.

Unfortunately, in the recently reported decision, no specific guidance has been given in relation to the question of varying terms and conditions of employment in the context of a relevant transfer.  Rather in the particular circumstances of the Wilson and Meade cases, their Lordships found that it was sufficient to hold a dismissal is effective even if the reason for it is a transfer.  In these circumstances the employee’s remedy lies within the law of unfair dismissal.

It is suggested that practitioners dealing with issues such as this before employment tribunals should concentrate on the evidential aspects of the changes in question.  In particular, one should always carefully consider whether the transfer itself is indeed the reason for the variation rather than some other reason related to the conduct of the business.  Surely if the purchaser of a business takes the view that to ensure its survival a down-grading in terms and conditions of employment has to take place, and the employees agree to that, there should be no legal impediment to that course of action, particularly where it may have the direct consequence of saving jobs.  Over-strengthening the protection afforded by the fact of a transfer can only have the effect in the fullness of time of backfiring on the very employees for whose benefit the legislation exists.

While statutory compensation limits remain, a transferee may find the prospect of reducing numbers more attractive than attempting to change an apparently unchangeable contract.  The removal of such limits in due course will create a double protection for employees who, in the context of transfers at least, may rely on a combination of the common law of contract, UK and European legislation, and the jurisprudence of the ECJ and UK courts to enforce their rights in a meaningful way.

Remedies for breach of contract

For many years employment lawyers have been accustomed to the proposition that a dismissed employee has little redress against an employer under the law of contract.  As a result of the decision in the House of Lords in Addis v Gramophone Company Limited [1909] AC 488 HL any damages payable to an employee following, for example, a successful claim for wrongful dismissal were limited to net losses sustained by the employee during the notice period.  Generally speaking, only senior managers and directors are able to negotiate substantial notice periods and this has meant that the vast majority of employees in this country have never had meaningful contractual claims following termination of employment.  In many cases contractual entitlements simply reflect the statutory minimum.

The Addis principle has been a source of frustration for many years for those representing employees.  However, in Malik v Bank of Credit and Commerce International SA [1997] IRLR 462 HL it was clearly felt by the House of Lords that this approach could be softened not least to bring it into step with modern thinking on the employment relationship.  In particular the House of Lords noted that the concept of the implied term of mutual trust and confidence in the employment relationship did not sit well with the decision in Addis.  It was specifically held that “if conduct objectively considered is likely to cause serious damage to the relationship between employer and employee a breach of the implied obligation may arise”.

As practitioners are well aware, the concept of the mutual duty of trust and confidence is of particular relevance in relation to constructive dismissal claims which, to be successful, depend on the employee establishing a fundamental breach of contract by the employer.  Malik underlines the importance of this principle as well as apparently taking it a step ahead.  It will be interesting to see the extent to which employment tribunals may be prepared to deal with claims of this nature, for example, from employees with less than the requisite qualifying period of service for unfair dismissal.

Another important aspect of the decision in Malik is the court’s ruling that in the circumstances of the case the employees could claim for “stigma damages” to compensate for losses arising from the fact that the employees were at a disadvantage in the labour market.  The disadvantage arose from their association with the bank, which had operated in a dishonest way.

Undoubtedly in due course we will see the principles that derive from the Malik decision being used in both tribunals and courts to create more meaningful remedies for employees whose employment has been terminated in such a way that they can establish a link between the employer’s actions and their inability to find employment.

In the second part of this article, Malcolm Mackay will deal, inter alia, with the Government’s White Paper “Fairness at Work”.