Ireland: Record Award Of €1.25 Million By The Employment Appeals Tribunal To Chief Executive

A recent landmark decision of the Employment Appeals Tribunal ("EAT") is significant not only for the size of the award in favour of Mr. Philip Smith, former Chief Executive of Royal Sun Alliance ("RSA") but also because Mr. Smith had resigned and was therefore claiming constructive dismissal which imposes a very high burden of proof on a claimant.

Background

In November 2013, Mr. Smith was suspended (with pay) as part of an investigation by RSA into financial concerns relating to the large insurance claims process and motor claims in RSA. During the investigation process, Mr. Smith resigned from his role as Chief Executive, and subsequently claimed he was constructively dismissed in breach of the Unfair Dismissals Acts 1977-2007 (the "UD Acts"). 

In summary, Mr. Smith's claim was based on:

  1. The public way in which he was suspended;
  2. The content of a draft report sent by RSA to the Central Bank; and
  3. The adding of difficulties with motor claims with separate issues relating to large insurance claims reserves as part of the investigation. 

Constructive Dismissal – "Very High" Burden of Proof

Under the UD Acts, where an employee is dismissed by his employer, the onus is on the employer to demonstrate that the dismissal was fair.  In a constructive dismissal claim however, the burden of proof is on the employee to demonstrate that his resignation was not voluntary but due to the employee's position becoming untenable and as the EAT noted, this burden "is a very high one". 

The EAT confirmed that the test for a constructive dismissal claim is an "and / or test" as follows: 

  1. Did the employer's conduct amount to a significant breach of the employee's contract of employment going to the root of the contract; and / or
  2. Taking into account all of the circumstances, was it reasonable for the employee to terminate his/her contract of employment.

Investigation – Procedurally Flawed

The EAT accepted that procedures relating to an investigation or a disciplinary matter do "not have to be perfect".  However, it considered whether any failings in the process could lead an employee to believe that he would be prejudiced if he engaged with the process or alternatively that the employer was merely "paying lip service to the process in order to disguise its predetermined result, ie dismissal."

Confirming that Mr. Smith was entitled to the principles of natural justice at an investigation stage, the EAT held that he was entitled to know the precise nature of the matters being investigated.  It expressed concern that a letter inviting Mr. Smith to a disciplinary meeting was not only sent prior to the finalisation of the investigation report but also contained findings which it would expect to see at the conclusion, and "most definitely not at the beginning ", of the disciplinary process.  

The EAT also found that one of the investigators should not have been part of the investigation as he had previously been involved in related matters. Therefore, it was reasonable for Mr. Smith to be concerned that he would not receive a fair hearing during the investigation.  

Suspension

The EAT was highly critical of Mr. Smith's suspension by RSA, which was announced on national television.  The decision of the EAT referred to examples set out in the recent High Court decision of Bank of Ireland v Reilly1, of when suspension by an employer might be justified:

  1. To prevent repetition of the conduct complained of;
  2. To prevent interference with evidence;
  3. To protect individuals at risk from such conduct; or  
  4. To protect the employer's business and reputation.

In circumstances where prior to his suspension Mr. Smith's licence (which was necessary for carrying out his role) was revoked, and he was advised to stay away from RSA premises and not to talk to colleagues about the ongoing investigation, the EAT found that it was "hard to understand why he was suspended when all the possible risks were covered."

It was the manner in which Mr. Smith was suspended however that the EAT was most critical of, noting that the announcement was "the equivalent to taking a sledge hammer to his reputation, to his prospects of ever securing employment in this industry again... and it  sealed his fate with [RSA]." The EAT found that Mr. Smith's suspension was "in fact a dismissal, disguised as a suspension."

Failure to exhaust RSA's grievance procedure

Mr. Smith did not raise a grievance in relation to RSA's conduct prior to his resignation. On that basis, RSA argued that it was unreasonable for Mr. Smith to resign in advance of invoking its grievance procedure. Whilst accepting that an employee's resignation prior to exhaustion of the grievance procedure would "generally" be found by the EAT to be unreasonable, the EAT stated that "each case must be assessed on its own facts."     

In the circumstances, the EAT found that Mr. Smith was entitled to believe his grievance would not receive a fair hearing and was therefore "justified" in not engaging RSA's grievance procedure.  

Award of €1.25 million – Reflective of Reputational Damage 

The award of €1.25 million made by the EAT in favour of Mr. Smith was the largest monetary award made by the EAT to date and represents close to the maximum award of 2 years remuneration under the UD Acts.

In determining an appropriate award, the EAT will have regard to an employee's actual financial loss and efforts by the employee to mitigate his loss and the extent to which he contributed to his dismissal. 

While the EAT accepted that Mr. Smith was responsible for ensuring that practices such as RSA's reserve practice, did not develop and continue, the practice was known for a long period of time by "too many company employees to lay the blame solely at the feet of [Mr. Smith]."  In making the award, the EAT reiterated that the manner in which Mr. Smith's suspension was publicly announced entirely destroyed his reputation and his prospects of securing employment in the industry again.  

The EAT decision in Mr. Smith v RSA grabbed many headlines for the size of the award given. However the decision serves as an important reminder for employers and HR practitioners in particular, of just how essential the basics are when carrying out an investigation into alleged employee conduct.  Employers should bear in mind that:

  1. While they do not have to be perfect, fair procedures are paramount when invoking a disciplinary procedure, even at the initial investigation stage and regardless of the seniority of the employee.  It is clear that in reviewing an employer's procedures the EAT will scrutinise whether an employer was merely paying "lip service" to a process to cover up a predetermined decision; and
  2. Suspension of an employee should not be a knee-jerk reaction by employers, each situation should be addressed on its own merits and careful consideration must be given before suspending an employee.  For further information on what employers should consider before suspending employees click here to read our takeaways from the decision of Bank of Ireland v Reilly

RSA have indicated its intention to appeal the EAT decision to the Circuit Court and we will keep you updated on noteworthy developments in this case

Footnote

1 Bank of Ireland v Reilly [unreported] 2015 IEHC 241 – click here to read our analysis of this decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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