UK: Golden Parachute Clauses: Court of Appeal Allows a Soft Landing

Last Updated: 20 October 2005
Article by Christopher Booth

Many executive service agreements contain ‘golden parachute’ or ‘liquidated damages’ clauses which provide for the payment of a predetermined amount where the agreement is terminated on short notice. Such a provision is unenforceable under general contractual principles if it amounts to a penalty clause. However, there has been little judicial guidance on exactly what this means in the employment context. However, in the recent case of Murray v Leisureplay plc the Court of Appeal made it clear that courts should be slow to strike down such clauses unless the sum payable is ‘extravagant and unconscionable’.

The facts

The case concerned the service agreement of Mr Murray, the respondent's chief executive, which provided for a twelve month notice period. However, in the event of wrongful termination (ie where the company terminated on no notice or on short notice) he was entitled to liquidated damages equal to one year's salary, pension contributions and other benefits in kind. This liquidated damages provision took no account of Mr Murray's duty to mitigate his loss by seeking alternative employment and so was likely to give him more than he would receive in a common law claim for damages for wrongful dismissal. As a result, when the Company subsequently dismissed Mr Murray on short notice they argued that they did not need to pay out under the clause because it was unenforceable as a penalty.

Was the clause a penalty?

The Court confirmed that a clause will be a penalty if its primary function is to deter a party from breaching the contract, rather than compensating the innocent party for the breach. However, the Court recognised how difficult it is, when drafting the contract, to estimate what would amount to genuine compensation in the event of wrongful dismissal some years down the line. Some leeway was therefore necessary and it was only if the clause was truly excessive that it would be struck down.

Practical Implications

The case gives useful guidance for those negotiating executive service agreements. It suggests that a golden parachute of up to one year's pay and benefits is likely to be enforceable - even if the clause makes no allowance for mitigation. However, fundamental problems with such clauses remain, particularly for listed companies as they go against corporate governance guidelines that compensation commitments on termination should avoid rewarding poor performance and reflect the director's obligations to mitigate loss. Consequently, employers should seek legal advice before agreeing to such provisions.

Statutory Grievance Procedures: What Constitutes a Statement of Grievance?

The statutory dismissal and grievance procedures, which lay down minimum procedures for dealing with workplace disputes, have now been in force for a year. Although it is too early to say whether these procedures have, as the Government intended, reduced the number of tribunal claims, it is clear that they have created a number of problems for employers.

One of these relates to the Step 1 statement of grievance which an employee must send the employer before commencing most types of tribunal claim. Unfortunately there is no statutory guidance on the form the statement should take and this is becoming a live issue in a growing number of cases. For example, in one recent case a tribunal held that there was no requirement that the claimant should have included the word 'grievance' or referred to the statutory procedures in his statement. In another, the tribunal held that a Solicitor's letter sent on behalf of the claimant to the respondent's lawyers could constitute a grievance letter. However, that was an unusual case as Solicitors were already involved prior to the grievance arising.

It is more likely that the statutory procedures were intended to require the employee to raise the grievance personally as this seems to accord more with the purpose of resolving disputes without resorting to litigation. Tribunal cases such as these do not create binding precedents and so clarification is needed from the EAT.

Practical Implications

Whilst uncertainty remains, the risk for employers is that they receive a letter from an employee (or his solicitor) and do not realise it is a grievance statement and so do not comply with the rest of the procedure. This could lead to liability to pay substantially increased compensation if the employee subsequently wins his case at tribunal. As a result, if you are in any doubt about the status of a communication from an employee, exemployee or his solicitor, you should seek legal advice immediately.

Do You Need To Know…?

New employment laws take effect on 1 October

A number of measures came into force on 1 October 2005. These include:

  • The Employment Equality (Sex Discrimination) Regulations which amend both the Sex Discrimination Act and the Equal Pay Act and, amongst other things, introduce a new definition of indirect discrimination;
  • The remaining provisions of the Employment Relations Act 2004. These changes include clarifying the extent of the employer's duty to give a union access to its workers pending a union recognition ballot and making some amendments to the information which unions have to give employers prior to industrial action;
  • An increase in the national minimum wage from £4.85 per hour to £5.05. At the same time the youth rate for 18-21 year olds went up to £4.25, whilst the rate for 16- 17 year olds remains unchanged at £3 per hour;
  • The new style tribunal forms (ET1 and ET3) became mandatory. Note that such forms will only be accepted if the form used is a paper copy provided by the Employment Tribunals Service (ETS) or is one completed on or downloaded from the ETS website. Any version not produced by the ETS (such as an in-house version) will not be accepted.

Maternity leave: keeping staff in the loop

Employers need to keep in contact with employees on maternity leave and should not leave them out in the cold - that is the message sent by the EAT in Athis v Blue Coat School.

In that case, whilst Mrs Athis was absent on maternity leave, the head posted details of the school's performance related pay scheme on the staff notice board. As a result, she was unaware she could make representations to the Head before he made his decision. She subsequently failed to get a pay rise. The EAT held that the failure to give Mrs Athis information which was available to other teachers in school could amount to sex discrimination. Employers should therefore check their systems to ensure that women on maternity leave are not overlooked, particularly on matters affecting terms and conditions of employment.

Cases referred to in this update:

Murray v Leisureplay plc [2005] EWCA Civ 963; Cooke v Secure Move Property Services Ltd ET 2400449/05; Aspland v Mark Warner Ltd ET 2200483/05; Athis v Blue Coat School EAT/90541/04.

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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