UK: Enhanced Redundancy Payments – How Far Does Your Past Generosity Bind You In The Future?

Last Updated: 12 May 2014
Article by Laura Conway

In Peacocks Stores v Peregrine, the EAT confirmed the ET's decision that a historic consistently applied practice of enhancing redundancy payments had established an implied contractual entitlement through custom and practice. Even though the practice had not been applied consistently since 2006, by that point the contractual term had already been incorporated into the contracts of employment and it had not been contractually varied by later deviations from the enhanced redundancy payment calculation.

Many businesses enhance redundancy pay above the statutory entitlement. Some businesses decide to have an express contractual formula for enhancing redundancy pay (whether this be generally or in relation to a particular redundancy programme); others prefer to "keep shtum" and not expressly incorporate the formula in writing. Where a redundancy pay policy is not recorded in writing this does not mean that one has not developed through custom and practice, although of course many businesses do successfully maintain discretion over any enhancements.

The burden is on an employee to prove that a particular term has been incorporated through custom and practice. For incorporation there needs to be a consistently applied and well understood policy; it should be "reasonable, certain and notorious". This has been interpreted to mean that not only does the formula need to be clear and consistently applied but also it needs to be well known amongst the workforce, essentially so that it becomes expected.

In Peregrine, three long-serving former Peacocks Stores' employees claimed that the business had routinely applied a redundancy formula since the 1970s based on the statutory formula but without the cap on the weekly wage or length of service with the result that it had been incorporated into their contracts by custom and practice and should have been applied to their redundancies in 2012. There was no redundancy payment policy in writing.

The ET held that there was a "consistently applied and well understood policy of enhanced redundancy payments" up until 2002. Between 2002 and 2006 the evidence was less clear, but the Tribunal concluded that by 2006 the term had been incorporated into the claimants' contracts.

Between 2006 and 2012, there was evidence of inconsistency in what payments were made. However the term had already been incorporated into the claimants' contracts and could not be varied by future varying practice. As a result, Peacocks had no discretion to pay less than the standard enhanced payment without being in breach of contract.

Interestingly, in this case the decision appears to have been reached without consideration as to whether the policy had been communicated to the wider workforce; however, the appeal Judge noted that such policies can be communicated by conduct. There was also no comment on how the decision would have been applied to employees who had not been in service during the period when the practice genuinely was consistent and well-known.

This case is a reminder not only of the fact that enhanced redundancy policies, if consistently and automatically applied, can become contractual, but also that once incorporated such a policy can only be varied with express consent. Therefore those businesses with long-serving employees who have in the past paid enhanced redundancy payments, even if they have not done so for a significant period of time, may still be bound by these historic enhanced payments.

Action Points:

  • Businesses who wish to avoid incorporating an enhanced redundancy policy should not enhance redundancy pay automatically. Instead, vary the method of enhancing redundancy payments, making this less formulaic and more discretionary.
  • Asking employees to sign settlement agreements if they are receiving an enhanced payment could help, as it ensures an element of confidentiality over the payments to prevent communication to the wider workforce. However, this does not in itself prevent a policy from becoming contractual.
  • If redundancies usually take place in rounds, consider issuing a redundancy policy for a particular period of time but make it clear that the policy is to be applied for that period only.
  • For those who are concerned that a policy is already incorporated, consider starting to vary redundancy payments over time to move away from an incorporated policy. This could help to ensure that new employees, at least, will not have contractual enhanced redundancy. This will be a delicate process, since employees made redundant on less favourable terms are likely to assert their rights to the standard payment. Alternatively, consider whether the policy can be varied with an update to the contract or handbook, especially if it looks like a new round of redundancies is on the cards. However, consultation and agreement – which will be difficult to obtain – will be necessary if the policy has become contractual.

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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