Contractual handcuffs: enhanced redundancy rights

Employers may be ill-advised to reduce to a matter of rigid written policy, enhancements paid to employees as part of redundancy packages. This can be for a number of reasons.

First, in most redundancy situations employers may wish to use the lure of enhanced redundancy package proposals as a means of enticing affected employees to enter into compromise agreements, thereby reducing the risk of any further claims. In the event any written policy is interpreted as a contractual right or even, for practical purposes, becomes an expectation of the employee, the “attraction” to employees in signing a compromise agreement is lost. They might expect payment in any event.

Secondly, no employer is exempt from fluctuations in the economy and market trends, which may well dictate the amount an employer can budget for in terms of redundancy costs.

Thirdly, there may in any particular situation be circumstances specific to any particular employee which necessitate a difference in approach in respect of any financial package offered.

Clearly, these examples are not exhaustive. That said, some employers may view the reduction of enhanced redundancy package entitlements to writing as a genuine incentive, which may attract the best employees and stimulate their performance.

That employers might meet folly in reducing policy on enhanced redundancy packages to a matter of writing (even if the method of calculation is undefined) was highlighted recently in Keeley v FOSROC International Ltd [2006] IRLR 961 in a judgment of the Court of Appeal. Although not binding in Scotland, it is clear that the judgment shall be of significant persuasion in Scottish tribunals. In addition, it will be of importance to those practitioners advising clients who have English based operations.

K was employed by F under a contract of employment which incorporated, by reference, F’s staff handbook. This, in turn, included provisions regarding F’s approach to redundancy situations. In addition to general statements of the employer’s intention on how to approach redundancy situations and details of redundancy procedures, the handbook contained, under the heading “compensation”, the following provision:

“Those employees with two or more years’ continuous service are entitled to receive an enhanced redundancy payment from the company, which is paid tax free to a limit of £30,000. Details will be discussed during both collective and individual consultation.” Importantly, in the writer’s view at least, the provision made no reference as to how any enhanced redundancy payment would be calculated.

Following his dismissal by redundancy in July 2004, K claimed he was contractually entitled to receive an enhanced redundancy payment calculated on the basis of a general understanding within F’s workforce.

The matter came before the High Court who held in F’s favour and in particular that the relevant provision did not amount to a contractual right in favour of K.

K appealed to the Court of Appeal who overturned the High Court’s decision. F argued that even if, as a matter of construction, the relevant provision was “apt” for a contractual term, it was too uncertain to have that effect because of the absence from it of any formula for calculation of the payment. The Court of Appeal disagreed, holding as follows:

• The fact that a document is presented as a collection of “policies” does not preclude their having contractual effect if, by their nature and language, they are apt to be contractual terms. It is necessary to consider in their respective context incorporating words and the provision in question incorporated by them.
• If put in clear terms of entitlement, the term may have a life of its own, not to be snubbed out by context. Where the wording of the provision is clearly of a contractual nature not contradicted by any other provision, context is not all.
• The importance of the provision to the “overall bargain” is highly relevant. Provision for redundancy, notwithstanding statutory entitlement is now a widely accepted feature of an employee’s remuneration package and, as such, is particularly apt for incorporation by reference.
• The enhanced redundancy payment provision in this case was “apt” to be a contractual term incorporated by reference to the staff handbook. The use of the word “entitled” and its location in the staff handbook clearly referred to a “legal right”.
• Although the enhanced redundancy payment provision was conditional on its “details” being found elsewhere, it was not vitiated by uncertainty since, in the Court of Appeal’s view, it identified the means of reference by which the appropriate payment would be calculable when the time came.

The judgment may be of great concern to those employers who have made any reference to enhancement of redundancy packages in staff handbooks or other company documentation available to employees. This arguably amounts to a presumption that enhanced redundancy entitlements, in these circumstances, will have contractual status and, as a result, can be relied upon by employees claiming breach of contract. For those of us advising respondent clients, who encounter such claims in the aftermath of redundancy procedures born out of economic difficulties, the judgment could have radical consequences - particularly where larger scale redundancies are concerned.

In the writer’s respectful opinion, the reasoning of the Court of Appeal gives cause for some concern. Fundamentally, the court approached the matter from the perspective of enhanced redundancy packages representing “part of the remuneration package”. The court went on to state that it considered as “highly relevant” the importance of the provision to the “overall bargain” – “what [he] undertook to work for” (paras 7 and 34).

The court acknowledged that provision for redundancy is now a widely accepted feature of an employee’s remuneration package. This, in the writer’s view, gives rise to a particular difficulty with the reasoning of the court. It is respectfully submitted that (perhaps higher level management aside) it is not the norm that employees joining companies will be aware of, or even discuss, any financial package on their potential selection for redundancy. Certainly, it may in one view be surprising that parties would discuss the financials of termination packages as part of the contract of employment being agreed.

The court also drew much support from the “context” in which, it considered, the “compensation” provision was found. Significant reference was made to the fact that the broad section containing the redundancy provisions was entitled “Employee Benefits and Rights”. That said, the court also acknowledged that the particular “redundancy” section contained a “purpose” and “introduction” section which were “couched in terms of aim and intention”, directed at how F would determine “on a case by case basis, who should be made redundant”. These were acknowledged as not directed at “entitlement” to “or the manner of calculation of, compensation for redundancy once determined” (para 9).

In the writer’s respectful opinion, it may be regarded as curious that the Court of Appeal could derive such report from the remainder of the provisions in the relevant staff handbook whilst, on one view, apparently “leapfrogging” the (what one might regard as) definitive, guiding terms of the particular “redundancy” section itself.

The Court of Appeal noted that the relevant provision made no reference to any method of calculation or amount save the identification of a maximum sum which could be paid tax free. The court placed significant store, however, on the terms of F’s defence, which effectively acknowledged K’s quantification and method of calculation. The court rejected F’s argument that a “catch all” rebuttal of the claim was sufficient to overcome this hurdle.

Evidence which revealed a consistent pattern of resistance by F to acknowledging any contractual obligation to make such payments and suggested a sometimes acquiescent and ambivalent attitude to that stance by the union and individual employees, including in earlier years K, was equally unpersuasive.

The court found that the circumstances were not such that F maintained the documents concerned did not contain “the whole agreement... in relation to an enhanced redundancy payment” (para 29).

The writer respectfully questions that particular approach of the Court of Appeal. Arguably, the bedrock of F’s argument was that the provision relied upon by K lacked such “certainty” as to the mechanics and totality of the sum payable that this could not be relied upon. In the writer’s respectful opinion, another view may be that this, therefore, was indeed a case where F maintained that the “whole agreement” in relation to the enhanced payments sought was not within the documents themselves, which were pointed to by K.

The court, arguably somewhat confusingly, found that the provision, in its use of the expression “enhanced redundancy payment” identified by reference the means by which, when such payments fell to be made, they were calculable. This was demonstrated, in the court’s view, by F’s acknowledgment in its defence of the formula proposed by K (again disregarding F’s “general” denial to the claim). In the writer’s view, this might be regarded as something of a “interpretational leap”. The question arises, for example, as to what the court’s position would have been had economic trends and market conditions necessitated a change in F’s treatment of the alleged formula on that particular occasion. The court held inter alia that the fact the formula may change from time to time was not an argument against contractual effect and was, to the contrary, in favour of it (para 41).

In what appears to have been a relatively small step of interpretation for the Court of Appeal, something of a giant leap has potentially been created for larger employers. The judgment, on one view, comes perilously close to creating a presumption as to the contractual status of enhanced redundancy entitlements in company handbooks.