19 August 2016

A recent decision of the Court of Session serves as an important reminder that the written contract of employment may not tell the full story in relation to employees’ rights.

70 former employees who had been made redundant when a particular company ceased trading, raised court claims seeking payment of a debt – sums the pursuers said were due to be paid to them upon redundancy. These were “enhanced” termination payments well in excess of the statutory entitlement. The case came before the court as a legal “debate”, to decide whether the claims should be allowed to proceed.

It was accepted that the contracts of employment gave no entitlement to these sums, and the pursuers instead relied on “custom and practice”. They had transferred to the defender’s employment 2 years previously as a TUPE transfer from another company, Transocean. The pursuers said it was well known in their previous employment that employees would receive an enhanced sum if made redundant, and such sums had always been paid in the past. It was so well known and understood to be the company’s practice, that it had become an implied part of the contract of employment with Transocean. As it was part of the contract, the pursuers argued, the obligation to make enhanced payments transferred under TUPE to their new employer and became enforceable against it.

The employer argued that while in the past Transocean had sometimes paid enhanced payments, there was no obligation to do so, and payment had always been made in return for a Settlement Agreement giving up all claims. These Agreements also included a confidentiality clause, and that clause must have been breached if the workforce was aware that such payments were being made. It could not be said that there was any suggestion on Transocean’s part that there was an obligation to make enhanced payments.

The employees in turn argued that the implied term was that the enhanced payment would be made, conditional only on them signing a Settlement Agreement in standard terms – this had become a contractual obligation with the result that Transocean could not have elected to pay statutory redundancy only. The obligation to make an enhanced payment had transferred under TUPE to the new employer also.

The court accepted that the claims potentially had merit and the case was allowed to proceed to a full “proof” diet where evidence would be heard at a later date.

This case is a reminder that:

• Terms of employment are not just found in the written contract document. They can be agreed verbally, or found in a collective agreement. They can be implied to give the contract “business efficacy” and can be implied from custom and practice. For “custom and practice” the term must be “reasonable certain and notorious” – i.e. well known in the workplace. The employer’s argument that such knowledge had only arisen due to breaches of the confidentiality clauses in the Settlement Agreements and should therefore be ignored, did not win favour with the court.
   
• An employer may become under an obligation to make an enhanced payment simply by virtue of having done so repeatedly in the past. The employer’s argument in this case that the insistence on a Settlement Agreement showed there was never any obligation to make the payment appeared to be a good argument, but the court felt that the case should proceed to a proof. Employers might wish to try to avoid terms becoming contractual by varying their practice – not always making enhanced payments, and not making the same enhancement each time. Management should consider the matter afresh each time and not allow an “automatic” practice to build up. Ensure it is stressed to each employee that there is no obligation to make a payment and the offer of an enhanced sum is wholly discretionary and sets no precedent for the future.
   
• For employers involved in TUPE transfers, it is vital to note that the written contract of employment may not tell the full story in terms of what entitlements the transferring staff have. All contractual obligations will transfer, including obligations created by custom and practice, and including obligations that the transferor (old employer) does not consider to be enforceable at all. If you are acquiring a business under TUPE, it is essential to ensure that appropriate warranties and indemnities are provided from the old employer in relation to such issues. If, however, you are acquiring staff under a “service provision change” (a type of TUPE transfer) there is unlikely to be a contract between the old and new employer so little scope for warranties and indemnities. You may have to simply accept the risk that transferring employees could have these entitlements by “custom and practice”. 
  
  
• Breach of contract claims can be just as costly and disruptive for employers as claims for unfair dismissal or discrimination. Contract claims valued at up to £25,000 can be brought in the tribunal within a strict 3 month time limit from the termination of employment, or can be brought in the civil courts within 5 years of when payment should have been made.

We always stress the importance of getting the contract of employment right, but beware of other binding terms that are not set out in that document. Try to prevent obligations arising by “custom and practice”. The issues are complex and it pays to take expert legal advice.

Contact: Douglas Strang Senior Associate dst@bto.co.uk T. 0141 221 8012

Ref: Grant Fisher v Applied Drilling Technology International Ltd