UK: Staff Handbooks: Do They Create Contractual Rights?

Last Updated: 24 November 2006
Article by Christopher Booth

The Staff Handbook is a familiar document to HR professionals, not least because it needs regular updating to reflect changes in employment law and company policy. Frequently the Handbook will be expressly incorporated into employees' contracts. However, this does not mean that all of its provisions will have contractual force - some will clearly be aspirational rather than legally binding. The difficulty, of course, is deciding on which side of the line a particular provision falls. However, as the recent case of Keeley v Fosroc International Limited shows, where the disputed provision relates in any way to remuneration, the Courts are increasingly likely to find it creates contractual rights.

The Facts

In Keeley, the Staff Handbook was expressly incorporated into individual contracts and provided that in a redundancy situation ‘employees are entitled to receive an enhanced redundancy payment from the Company’. However no method of calculating the payment was given.Was this statement sufficient to create a legally binding obligation?

The Court of Appeal held that it was, despite the absence of a calculation method. Noting that the Handbook clearly referred to an ‘entitlement’, the Court distinguished ‘the quite distinct procedural, aspirational or discretionary matters [dealing with] the selection of employees for redundancy’ (which were not contractual) from aspects of the remuneration package, such as redundancy compensation or paid time off to look for work elsewhere (which were contractual).

Significantly, the remuneration provisions were apt for incorporation ‘even if couched in terms of information or explanation, or expressed in discretionary terms’. In support of this proposition the Court referred to an earlier case, Horkulak, to show ‘how far the courts will go to give practical effect to the reality of the bargain struck between employer and employee in an exchange of reward for labour’. That case concerned a provision for a discretionary loyalty bonus, whose amount had to be agreed between employer and employee. It was held this created not only a contractual right to be considered in good faith for a bonus, but also a right to an enforceable sum, determined by the courts if necessary.

Practical Implications

In the past, vague promises in Handbooks, expressed in discretionary terms, may have appeared unenforceable. Now, they may ground a claim for breach of contract. Handbooks and company policies should therefore be checked against the much looser, employee orientated test for incorporation applied today. One possible solution may be to separate out those parts of the Handbook establishing employee rights and to consider including an express clause denying contractual effect to the rest. However, much will depend on the shape of the individual Handbook. We understand that the employer has made an application for leave to appeal to the House of Lords.

Without Prejudice Discussions: Employers Beware

Negotiations to settle an employment dispute, whether conducted verbally or in writing, are usually conducted on a ‘without prejudice’ basis. This means that if a deal cannot be reached, details of the discussions will not normally be admissible in any subsequent litigation.

The policy behind the rule is to encourage settlement of disputes - parties are more likely to speak candidly if they know their discussions are completely confidential. However two recent cases suggest that the protection given by the without prejudice rule is being eroded, particularly in discrimination cases.

Erosion of the rule

In the first case, BNP Paribas v Mezzotero (decided in 2004) the EAT held that the without prejudice rule could not be used to keep evidence of ‘unambiguous impropriety’ such as discrimination from a tribunal. As a result evidence that, during negotiations, the employer had victimised the employee for complaining of sex discrimination was admissible.

In the second case (just reported), the EAT in University of Brunel v Vaseghi had to consider a victimisation complaint under the Race Relations Act. The Court confirmed that in discrimination cases ‘the necessity of getting to the truth and eradicating the evil of discrimination may tip the scales against the without prejudice [rule]’. Having considered all the facts, the Court allowed the claimant's solicitor to give evidence of the settlement negotiations which preceded the case.

Practical Implications

The protection given by the without prejudice rule can no longer be guaranteed. Employers may therefore have to take a more cautious approach, particularly when settling discrimination claims. Unguarded comments could lead to further claims.

Do You Need To Know…?

Legal Challenge to Age Discrimination Laws

The new rules outlawing age discrimination in the workplace, which came into force on 1 October 2006, are to be challenged in the High Court on 6 December 2006. Heyday, the organisation mounting the case, argues that certain aspects of the Employment Equality (Age) Regulations 2006 contravene the European Framework Directive on which they are based. In particular, it maintains that by providing for a default retirement age of 65, the Regulations effectively allow forced retirement of employees aged 65 or over, provided the employer follows the correct procedure.

Even if the High Court rejects Heyday's application (and it is by no means clear that it will), the Government is committed to reviewing the default retirement age in 2011 and many believe it will be phased out shortly thereafter in any event.

European Court to Determine Question on Holiday Pay

The House of Lords has decided that the controversial question of whether workers on long term sick leave are entitled to paid holiday pay under the Working Time Regulations should be referred to the European Court of Justice.

Previously, to the relief of employers, the Court of Appeal had decided that workers on long term sick leave, who had exhausted their entitlement to contractual or statutory sick pay, could not claim holiday pay from their employers under the Regulations. Although this decision left a number of grey areas, it did at least prevent employees who had been off sick for the whole of a particular leave year from claiming a windfall. The decision to make the reference means that considerable uncertainty remains in this area pending the ECJ's decision.

Review of Statutory Dispute Resolution Procedures: an Update

Criticisms of the statutory dispute resolution procedures introduced just over 2 years ago continue to mount. There is a general consensus that the rules are overly complex and need to be reconsidered urgently. The DTI's promised two year review of the procedures will be crucial in addressing these concerns. In anticipation of the review, the Department is currently speaking to stakeholders and considering options for improvement. A formal three month consultation is then likely to be launched early in 2007.

Cases referred to in this update:

Keeley v Fosroc international Ltd [2006] EWCA Civ 1277, 5.10.2006; Horkulak v Cantor Fitzgerald [2005] ICR 402; BNP Paribas v Mezzotero [2004] IRLR 508; Brunel University v Vaseghi EAT 0307/06; HM Revenue and Customs v Stringer and others (formerly Commissioners of Inland Revenue v Ainsworth);

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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