The Employer’s Liability for Financial Advice

Originally published July 2004

Two recent Court of Appeal cases have examined the circumstances in which employers can incur liability for advice to employees. There are many situations in which employees are faced with a range of options: to retire early, perhaps on ill health grounds, or take redundancy and seek another job, or continue at work on sick pay… Tax, benefits, and pension implications all have to be considered. Is there a general duty on employers to provide advice in this context? If an employee makes a poor choice, can they sue the employer for failure to advise correctly?

In Crossley v Faithful & Gould, Mr Crossley was told by his psychiatrist that he was unlikely ever to be able to return to work. He knew the firm had permanent health insurance, and that he was eligible to claim. However, he did not realise that benefits were dependent upon him remaining an employee. Unprompted he decided to resign whereupon the insurance company paid him for a year, and then exercised their discretion to discontinue payments. Had he not resigned, but remained an employee, they would have been bound to continue paying him. The Court ruled that the company were not obliged to advise him on the dire consequences of resignation. There was no general duty to provide advice: he was a senior employee, with independent advice readily available to him.

By contrast, in Lennon v Metropolitan Commissioner, there was a different outcome. In that case Mr Lennon was transferred from the Metropolitan Police to the RUC, and was assured by the personnel officer to ‘leave everything to me’: she had handled hundreds of transfers and would see it went smoothly. Having been assured by her that taking time off would have no adverse financial consequences, Mr Lennon took a brief period of unpaid leave to sort out his move. In fact the unpaid leave broke continuity and meant he lost a housing allowance that would otherwise have continued indefinitely. Because the personnel officer had specifically assumed responsibility for advising him, the employer was liable for damages of £45,000.

There is no general implied duty to take care of an employee’s financial health or to advise an employee of the financial consequences of a particular step, but if an employer voluntarily chooses to give advice, responsibility follows. As the judge observed, Mr Lennon could have been referred to the Police Federation, his union, for advice. In practice, it often will be the HR officer who is asked for advice; the safest course is to refuse and refer elsewhere.

Faced with a labour shortage, many companies are increasingly recruiting from overseas. However, checks are necessary to ensure workers have the necessary permission to work here. Under the Asylum and Immigration Act 1996 an employer commits a criminal offence if the employee has no such permission, unless the employer has carried out certain document checks beforehand. (The rules on document checks changed on 1 May 2004: further information can be found on the Home Office website: www.homeoffice.gov.uk).

To avoid liability, many employers routinely ask all new recruits for such documents. However in the recent case of Olatokun v Ikon Office Solutions the employer, rather than check everyone, asked employees where they were born; and only asked those born outside the European Community for their documents. The employee claimed this practice was discriminatory, under the Race Relations Act. On the basis of her national origins, she was being asked to undergo a step which other employees, of European national origin, were not. Moreover, the CRE Code of Practice recommends; ‘The best way to ensure you do not discriminate is to treat all applicants in the same way at each stage of the recruitment process.’, and ‘.if you ask for a document from one applicant make sure you ask for a document from all applicants being considered at that stage.’ The Employment Appeal Tribunal agreed that this was potentially unlawful direct discrimination, but held the employer had a defence because it was acting in pursuance of the 1996 Asylum and Immigration Act.

The case illustrates the difficult line to be drawn in employment law between enforcement of immigration restrictions on the one hand, and avoiding discrimination on the other. Ikon’s shortcut, in only asking those born outside the EC to produce documents, may have saved them paperwork, but at the cost of defending a race discrimination case. Moreover, it would not necessarily have prevented illegal employment. Birth in the UK (or in other EC countries) does not necessarily confer any right to live or work here. The safest course is that recommended by the Code of Practice; to impose the same requirements on all applicants.

The legality of ‘rolled up’ pay rates - where an element of holiday pay is included in the hourly rate - has still not been finally resolved. In England, the Court of Appeal has ruled that holiday pay included in the hourly rate is compatible with the right to paid leave, providing the contract expressly allocates a specific proportion of the hourly rate to holidays. In Scotland, the Court of Session has ruled the opposite: holiday pay must be paid at the time the holiday is taken, and the employer cannot claim credit for holiday pay paid earlier as part of the hourly rate. The issue has been referred to the European Court with a request that the case be heard as soon as possible. Pinsents is acting for one of the employers involved in this case and we will keep you informed of developments.

The formula in the SMP Regulations for calculating the earnings related element of maternity pay is retrospective: 9/10ths of normal weekly earnings in the 8 weeks before the 14th week before the expected week of childbirth. What happens if a pay rise is subsequently given during maternity leave? We know that SMP must reflect any pay rise which is backdated to the calculation period. Now the ECJ has ruled that SMP must also take account of any other pay rises during maternity leave - even if not backdated. The SMP Regulations will have to be amended, but the decision has immediate effect, and could open the door to retrospective claims. In the meantime, maternity pay should be increased in line with any pay awards.

The revised ACAS Code on Disciplinary and Grievance Procedures has now been published, and, subject to parliamentary approval, comes into force on 1st October 2004. The new Code has been extensively revised to take account of the new statutory dispute resolution procedures (which also take effect on 1 October 2004), and is a useful introduction to how they will work in practice. ACAS have also reissued their Guidance Booklet on Redundancy Handling: see www.acas.org.uk/publications.