UK: Summer 2004 Employment Case Law Round Up

The last few months have seen an enormous amount of activity in the Court of Appeal and the House of Lords on employment issues. They have had the opportunity to give welcome clarity on several key issues that had been causing a great deal of uncertainty. They have also caused some controversy.

The current unfair dismissal legislation is to be found in the Employment Rights Act 1996 but this largely reflects, at least for these purposes, earlier legislation introduced in 1972. The Employment Rights Act 1996 provides that the compensatory award for unfair dismissal should be such amount as the Tribunal considers just and equitable in all the circumstances "having regard to the loss sustained by the complainant in consequence of the dismissal".

In 1972, the National Industrial Relations Court (the precursor to the current Tribunal system) had to consider, in the case of Norton Tool Co. Limited v Tewson, whether that award (under the equivalent legislation of the day) could incorporate non-economic loss such as damages for injury to feelings or psychiatric injury caused by the unfair dismissal. The court decided that it could not and this ruling was followed without question for 30 years. Parliament never took the opportunity to review this interpretation and must be taken, so everyone thought, to have agreed with it.

Then came Lord Hoffmann’s views in the House of Lords decision in Johnson v Unisys in 2001. That case was concerned with whether a breach of contract claim arising out of the manner of a dismissal could give rise to damages caused by the manner of the dismissal. The House of Lords decided that loss arising from the manner of the dismissal was intended by Parliament to be dealt with under the unfair dismissal regime; therefore, such damages cannot be claimed under a breach of contract claim.

This gave rise to an anomaly in that if the breach of contract about which the complaint was brought did not involve dismissal then the complainant could be eligible for damages for non-economic loss. It was only where the breach of contract involved dismissal that the unfair dismissal regime stepped in and precluded such damages being claimed under breach of contract. That anomaly clearly troubled Lord Hoffmann. Although his comments were arguably not relevant to the actual decision in the case, he questioned whether the limitation in the Norton Tool case was actually right.

Lord Hoffmann’s comments were the key to the issue in Dunnachie v Kingston-upon-Hull City Council. Mr Dunnachie had worked for the council for five years and was forced to resign following a period of sustained bullying and other mistreatment which the council had failed to address properly. The Tribunal found that he had been unfairly dismissed on a constructive dismissal basis and, in addition to other awards, awarded him £10,000 compensation for psychiatric injury as part of his unfair dismissal award. In doing so, it followed Lord Hoffmann’s suggestion that such damages were recoverable in unfair dismissal claims despite Norton Tool.

The council appealed to the Employment Appeals Tribunal ("EAT") which applied the clear authority of Norton Tool and upheld the appeal.

Mr Dunnachie then appealed to the Court of Appeal. The Court of Appeal upheld the original award made by the Tribunal and held that Norton Tool was wrongly decided and the compensatory award for unfair dismissal could include non-economic loss.

The Court of Appeal’s decision caused much concern because of its wide ranging implications. Thankfully, on 15 July, the House of Lords overturned the Court of Appeal’s decision. The final word (at least for now) is that the compensatory award cannot include damages for injury to feelings and other non-economic loss. This decision is very welcome in terms of preserving the certainty of the pre-existing law and avoiding the additional costs and risks that dealing with injury to feelings type awards might involve.

Relief for employers and employment lawyers seeking certainty in the law was, however, short-lived. Minutes after giving its decision in Dunnachie the House of Lords delivered judgement in a number of conjoined appeals, referred to as Eastwood and Another v. Magnox Electric plc, McCabe, the Cornwall County Council and Others.

That decision was concerned with whether an employee who had been dismissed could claim not just that he had been unfairly dismissed (in breach of the statutory right not to be unfairly dismissed), but also that the dismissal gave rise to a claim for damages for breach of the contractual obligation to act in good faith (or, put another way, not to breach the mutual obligation of trust and confidence between the employer and employee). Apparently somewhat reluctantly, the majority of the House of Lords concluded that the existence of the statutory remedy for unfair dismissal did preclude the additional claim for breach of contract in the dismissal context.

The problematic issue, however, is that the majority of the House of Lords then went on to make it very clear that this only applied to a contractual claim for damages for a breach of the duty of good faith based upon the dismissal itself and did not preclude an action based upon acts of the employer prior to, but not forming part of, the dismissal itself. The result would be that if an employee could point to acts preceding dismissal that did not form part of the act of dismissal itself, such as suspension or, as in one of the cases in point, encouraging other employees to give false testimony in support of the disciplinary proceedings, the employee might be able to bring a separate claim (without any statutory cap on the award of damages) in the County or High Court for breach of contract. Their lordships acknowledged that this might on occasion be a difficult, and perhaps artificial, boundary to draw but nonetheless concluded that it was a material legal distinction.

They gave strong support to the notion that the inter-relationship between the common law claim for breach of contract in this area and the statutory claim for unfair dismissal was something that Parliament needed to address as a matter of urgency. This does not help employers in the meantime of course.

The implications of this decision are likely to be far reaching. Dismissed employees (and particularly those whose earnings are high or who have suffered substantial loss such that their loss would exceed the £55,000 limit on the compensatory award for unfair dismissal) are likely to try to bring breach of contract claims in addition to unfair dismissal claims to "top up" their damages where they can distinguish the dismissal from other previous breaches. Settlement negotiations on the termination of employment are also likely to be inflated by the possibility of this additional breach of contract claim.

Further, in cases where an employee might previously have resigned claiming constructive dismissal, the employee might seek to continue the employment relationship but nonetheless bring a breach of contract claim whose value might well exceed the statutory cap for unfair dismissal which would have applied had the employee resigned and claimed constructive dismissal.

It is worth noting that a claim for breach of contract could include a claim for the sort of non-economic loss held in the Dunnachie case not to be recoverable in an unfair dismissal claim.

As their lordships noted, the uncertainty that now exists is wholly unsatisfactory and demands urgent attention from Parliament.

In Lawson v Serco the Court of Appeal clarified the jurisdiction of Employment Tribunals to hear complaints of unfair dismissal with regard to overseas employment. Section 196 of the Employment Rights Act 1996 ("ERA") used to exclude employees who ordinarily worked outside Great Britain from claiming unfair dismissal and a number of other rights under the Act. Section 196 was, however, repealed by the Employment Relations Act 1999 which left uncertainty as to whether there was any limitation on the jurisdiction of Employment Tribunals and whether, in fact, any employee, regardless of where he or she worked in the world, could claim unfair dismissal. A number of contradictory tests were suggested in a series of judgments in the EAT.

The case concerned a British national recruited in Britain by a British company to provide security services on Ascension Island. The Court stated that it was inherently unlikely that Parliament had intended to give the right to claim unfair dismissal to all employees, regardless of where they worked in the world. It pointed to a number of provisions in the ERA where the jurisdiction of Employment Tribunals was specifically extended to activities outside Great Britain, such as offshore workers. That would suggest, the Court said, that in the absence of such specific extensions, the jurisdiction would be limited to employment in Great Britain.

The Court then went on to reject a number of earlier tests such as that the employment needed "substantial connection" with Great Britain or that the employment must be "based" in Great Britain. The Court of Appeal said that the true test was where the employment was, and the location of the base was merely evidence in that regard. Mr Lawson’s employment was clearly in Ascension Islands and not Great Britain.

This approach from the Court of Appeal has an initially attractive simplicity. The problem that has been left, however, is determining what "employment in Great Britain" actually means. In rejecting other tests, the Court has indicated what it does not mean but it gave very little guidance as to what it actually does mean. What if an employee spends time in various places or begins employment in the UK but then is seconded for several years to another country. The Tribunal will be left to take a view in each case.

It is important to note that the Lawson case was concerned with the Tribunal’s unfair dismissal jurisdiction only. Different tests apply to discrimination claims which can be brought by employees working wholly abroad where the work is done for the benefit of an establishment in the United Kingdom and the employee was ordinarily resident in the United Kingdom at the time of recruitment or at some stage during the employment.

Can an employee who has been dismissed in breach of contract and who does not have the requisite one year’s employment to claim unfair dismissal, but would have done had the employment not been terminated in breach of contract, include in a breach of contract claim damages for the lost opportunity to bring a claim for unfair dismissal? In Raspin v United News Shops Limited in 1999, the EAT had held that Mrs Raspin, who was dismissed (prior to the first anniversary of her start date) in breach of a contractual disciplinary procedure, could include such a claim in a claim for breach of contract because, had the contractual disciplinary procedure been followed, it would have taken a couple of weeks thereby taking her over the one year period of employment.

This decision had caused some concern because it appeared to override Parliament’s intention in the unfair dismissal legislation that an employee had to have been employed for a year in order to benefit from that statutory protection. Commentators were waiting for a decision based purely upon the failure to provide contractual notice. In the meantime, employers were advised to include in their contracts the right to terminate summarily by making a payment in lieu of notice (a so called "PILON" clause) so that employment could be terminated summarily (in cases not involving gross misconduct) without being in breach of contract.

The opportunity for clarity came in Harper v Virgin Net.

Mrs Harper had the right to three months’ notice of termination under her contract of employment and just under 11 months after starting work she was dismissed without notice. She sought damages for the lost opportunity to claim unfair dismissal.

The Court of Appeal rejected the claim. It noted that there had been an amendment to the original unfair dismissal legislation to provide that where an employee was dismissed without notice, the period of continuous employment should be extended by the statutory minimum period of notice, one week, for the purposes of determining whether the employee had the requisite one year’s employment. The Court took the view that Parliament, when making that change, could have extended the period of continuous employment by the period of contractual notice which had not been given. Parliament had chosen not to do so and it was not the role of the court to rewrite the legislation.

This is one of those decisions which could easily have gone either way. It has, however, provided the clarity that was needed.

The decision removes one of the reasons for including a PILON in the contract. Such a provision still allows summary termination without cause without jeopardising the enforceability of restrictive covenants and can (if properly drafted) clarify what should happen in respect of bonus or commission payments during the relevant notice period. On the other hand, the unavailability of the £30,000 tax exemption for the PILON element of a termination payment militates in favour of not including a PILON. It is a difficult balance but this case removes some of the justification for including a PILON.

Department for Work & Pensions v Thompson was the DWP’s appeal against a Tribunal decision that attracted a great deal of press attention at the time on the application of dress codes. In April 2002 a new dress code was introduced in job centres requiring all staff to dress in a "professional and business like way". It stipulated that male employees were required to wear a collar and tie and female staff were asked to "dress appropriately and to a similar standard". Mr Thompson, who had no face to face contact with the public in his job, refused to wear a collar and tie and received a formal warning. He complained of sex discrimination to the Tribunal.

The Tribunal upheld his claim on the basis that men had a stipulated item of clothing whereas women did not and he had been forced to change his clothing when women had not. The DWP appealed to the EAT while thousands of Mr Thompson’s colleagues up and down the country lodged their own complaints.

The EAT observed that the discrimination legislation is concerned with less favourable, as opposed to different, treatment. Requiring different dress from men than women is not necessarily less favourable. The EAT said that one had to apply an even handed approach looking at the overall context of the situation, namely the general requirement for all staff to dress in a professional, business like way.

The EAT said that the Tribunal should have considered whether men could only achieve the required standard of dress by wearing a collar and tie. If the required degree of smartness could be met by allowing men more flexibility, the stipulation that they had to wear a collar and tie would be less favourable treatment. The question was not, however, whether the stipulation that men had to wear a collar and tie meant that men were effectively required to dress more smartly than women.

The EAT concluded therefore that the Tribunal had asked itself the wrong question and remitted the case to a fresh Tribunal.

The case makes clear that treating the genders differently is acceptable and that an employer has at least some discretion to set dress codes differently for the different genders.

In Brook Street Bureau (UK) Limited v Dacas the Court of Appeal was faced with the classic tripartite arrangement between someone who provides services through an employment agency, the agency itself and the end user to whom the services are ultimately provided.

Mrs Dacas provided cleaning services through Brook Street Bureau ("BSB") to Wandsworth Council. There was a contract between the Council and BSB under which BSB was to provide a worker to do the cleaning and the Council would pay the agency a fee, and a separate contract between BSB and Mrs Dacas under which Mrs Dacas would provide cleaning services as directed by BSB and BSB would pay for it. That contract between BSB and Mrs Dacas specifically provided that it would not give rise to a contract of employment.

Mrs Dacas worked under this arrangement for four years before the arrangement was terminated. She wanted to claim unfair dismissal but to do so had to show that she was an employee of either the Council or BSB. She brought a claim against both. The Tribunal respected the contractual arrangements between the three parties. It said that there was no contract between Mrs Dacas and the Council and therefore the Council could not be regarded as her employer. The contract between Mrs Dacas and BSB, the Tribunal said, was not a contract of service and therefore she was not the employee of BSB. As a result she could not claim unfair dismissal against anybody.

Mrs Dacas appealed to the EAT but only with regard to the decision concerning BSB. The EAT decided that despite the specific wording of the agreement to the contrary, the contract that Mrs Dacas had with BSB was a contract of service and therefore she was an employee and could claim unfair dismissal. BSB appealed to the Court of Appeal.

The Court of Appeal concluded that the reality of the situation was that Mrs Dacas had been working for four years for the Council providing service at its direction and that the Council exercised all of the ordinary functions and roles one would expect of an employer save that it did not actually pay Mrs Dacas. That, the Court of Appeal decided, did not matter and it concluded that Mrs Dacas was the employee of the Council. It then concluded Mrs Dacas could not have two employers and that therefore she was not the employee of BSB.

Underlying the Court’s approach appears to have been a desire to strip away what it regarded as being the legal fiction created by the three way arrangement. It stated that whenever somebody worked under this sort of arrangement for a year or more, they ought to be regarded as being the employee of the end user.

The result in this case was that Mrs Dacas lost. She had not pursued her appeal against the Council and therefore the Court’s decision deprived her of a remedy. The Council was not a party to the litigation and so had no standing with which to appeal the decision at the House of Lords. BSB had, in effect, won in the Court of Appeal.

In striving to achieve justice, the Court of Appeal deprived Mrs Dacas of a remedy, ignored the fact that many people in her position choose to work under this arrangement in order to benefit from higher rates of pay and greater flexibility and has caused employment agencies and those who use their services to fundamentally reconsider the arrangements.

The Court of Appeal’s decision that the Council was the employer did not actually determine the issues in the case because the Council was no longer a party to the litigation, so it is arguable that the decision does not represent binding authority on subsequent cases. It would, however, be a brave tribunal that ignored such clear guidance. Accordingly, unless and until this issue is reconsidered by the Court of Appeal or the House of Lords, employment agencies and those to whom they provide services would be well advised to make sure that no worker is engaged on the same contract for a year or more. In addition, any end user of the services of someone who has been working for more than a year under this kind of arrangement must assume that the worker will be treated as its employee and so must act accordingly in how it treats that person both during employment and at termination.

The Court did not make it clear whether the decision should be taken to be the relevant test for other rights dependant upon being an employee but the answer to that question must be "yes". Other questions that are left unanswered are:

• what happens once you get beyond the year - do you then become an employee or are you then treated as having always been an employee so that while you thought you had been a worker for the first year, suddenly you realise you had been an employee all along? Can you then claim benefits that you did not receive because you were a worker not an employee?
• when does continuity of employment start to run?

Clarification is going to be needed if this decision is to stand.

The Regulations implementing National Works Councils in the UK will begin to come in force from March 2005, initially for employers with over 150 employees but ultimately for all employers with over 50 employees. The mandatory requirements of the Regulations are likely to be fairly burdensome. Employers have the opportunity, prior to the Regulations coming into force and their employees seeking to establish a works council, to negotiate a more favourable and flexible arrangement. For larger employers, at least, that window of opportunity is fast closing and employers would be well advised to seek advice on the opportunities available now.

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.