Fieldhouse & Co LLP

Employers sometimes cite a breakdown in trust and confidence as a justification for termination of employment where the surrounding circumstances cannot easily be fitted within one of the main potentially fair reasons for dismissal – conduct, capability or redundancy. In a recent case the EAT has emphasised that more is required than a simple assertion that trust and confidence has been lost. The case concerned an employee who had been offered 30% of the issued share capital of the company on joining. In the event the shares were not transferred to him but in two successive years he was given a bonus of 30% of the company’s net profits.

Over a period of about 3 years, the employer tried to formalise the terms of the individual’s employment and various draft agreements were prepared. In the event no agreement was reached. The situation became somewhat strained when a dispute arose over the calculation of the profit share and a solicitor wrote to the employer on behalf of the individual, referring to a possible constructive dismissal claim. Some 6 weeks later the individual was dismissed. The dismissal letter referred to a breakdown in the working relationship and alleged that the individual was not as committed as he had been. The individual claimed that the dismissal was unfair. The employer argued that the alleged breakdown in the working relationship amounted to some other substantial reason and was sufficient to make the dismissal fair.

The EAT agreed that the dismissal was unfair. They accepted that neither side had behaved as though the working relationship had broken down. The fact that a debate had been opened up about the terms of the individual’s employment did not destroy trust and confidence and neither did the manner in which the debate was conducted. The case is a useful reminder that an alleged breakdown in trust and confidence is not just a convenient label to be used as the reason for a dismissal which cannot otherwise be justified. A breakdown in negotiations or failure to agree terms about pay is not by itself a basis for saying that the entire working relationship has broken down and will not normally justify dismissal.

As part of the process of selecting employees for redundancy it is not uncommon for employers to use an interview and testing process for the purpose of awarding scores to employees. The Employment Appeal Tribunal has recently had to consider a case in which the employer’s scoring and selection process was conducted solely by a team of HR managers, using an assessment method which had been devised for recruitment purposes and without obtaining input from the line managers of the affected employees.   

The resulting dismissals were found to be unfair. The assessment method involved a written test, an interview and a group exercise in the form of an observed discussion of a hypothetical scenario. No reference was made to past appraisals of performance. Sickness absence and disciplinary records were taken into account but had less significance in the scoring process because of the weighting given to the three-part assessment.

The employer accepted that its procedure had produced some very surprising results and that some good workers were selected for redundancy as a result. Nonetheless the employer stood by the outcome in every case, regarding it as having been reached by objective and robust means and therefore valid. The EAT regarded the procedure as very unusual. The employer was criticised for adhering to its blind faith in its process, despite its surprising results, and thus losing touch with common sense and fairness. The case serves as a useful reminder of the dangers of artificiality in the selection process and the value and importance of traditional selection methods, including input from managers who actually know and work with the affected employees. 

In a recent case involving a highly paid employee of a bank, Société Générale, the Supreme Court ruled that in principle an employee is entitled to assert the right to keep a contract of employment alive in a situation where the employer attempts to terminate the employment wrongfully, i.e. without complying with the provisions for termination in the contract. This could arise, for example, in a case (not involving gross misconduct) where the employment contract does not contain a provision permitting immediate termination with a payment in lieu of notice but the employer decides to dismiss an employee with immediate effect.

In such a situation most employees will probably not have anything to gain by asserting that the contract remains in being and has not been effectively terminated. If the employer offers to pay a sum in lieu of notice within a short period after termination, the employee is likely to be attracted by the idea of receiving a sum equivalent to his salary for his notice period without having to work for it. However, there could be cases where it will suit an employee to argue that the contract remains in existence, for example to preserve the employee’s entitlement to a bonus or share option rights which will crystallise during the period of notice which ought to have been given.

Employers who propose to dismiss without giving the required notice should therefore consider whether there are possible reasons that an employee might have for wishing to keep the employment contract alive for the duration of the notice period. In some cases the better course may be to give the required notice of dismissal, to put the employee on garden leave and then to negotiate agreed terms for an early departure. This is more likely to produce an outcome in which arguments are avoided about whether the employment contract has been effectively brought to an end and possible claims arising from the dismissal are settled.

If an employee is to be fairly dismissed for misconduct, the employer must show that it carried out a reasonable investigation and had reasonable grounds for its conclusions. But how detailed does the investigation need to be? A recent EAT decision is a reminder that the thoroughness of the investigation will depend to some extent on the nature and seriousness of the allegations against the employee and his previous conduct record.

The case involved an employee at an airport who was dismissed for allegedly attempting to steal items from a duty-free shop in the terminal buildings. He had an impeccable conduct record. While in the queue to pay for the items, a colleague beckoned him over to a seating area outside the shop. He went over to speak to her, still holding the items. At that point he was approached by a police officer and accused of stealing the items.

The dismissing manager took oral statements from the shop manager and the employee. The shop manager did not personally see the employee acting suspiciously but had been told that at the time of the alleged theft the employee was hiding the items under his coat. The dismissing manager visited the shop premises but did not view relevant CCTV footage or take statements from other employees who may have witnessed the incident. He dismissed the employee for dishonesty.

The EAT ruled that this was unfair. The crucial evidence related to the alleged concealing of the items under the employee’s coat. In giving evidence about this the shop manager was only reporting what he had been told by another employee. There was no direct evidence from her. She was not interviewed by the dismissing manager even though her statement was completely contrary to the evidence of the employee. The employer’s investigation was therefore seriously inadequate. The EAT ruled that the employer could not show that it had formed a reasonable belief as a result of a reasonable investigation.

In many cases of misconduct there will be conflicting accounts of what took place and the outcome will hinge on what was seen or heard by a fellow employee and the reliability of that person’s evidence. Unless the decision maker personally interviews that fellow employee, the employer is unlikely to be able to show that it has reached a reasonable conclusion, particularly in cases of alleged dishonesty where the reputation of an employee with a previously unblemished record is at stake.

The Supreme Court has recently had to consider a case in which the outcome hinged on whether the employer had exercised its rights under a payment in lieu of notice clause precisely in accordance with the contractual terms. The case was appealed to the Supreme Court because of the huge amount of money (several million euros) which was at stake depending on the date on which the employment contract had legally come to an end. The employer was a bank, Société Générale.

The employee was told verbally and in writing that his employment was being terminated with immediate effect on 29 November. He was required to clear his office and leave the building on that day. A payment in lieu of notice was paid into his bank account on 18 December (without any specific notification to him). It was not until 6 January in the following year that he received formal written notification from the bank that it had terminated his employment in exercise of its rights under the payment in lieu of notice clause in his employment contract.

The timing of these events was important because of bonus rights that the employee had. If he could claim that his contract of employment was still in existence at 31 December, it made a difference of several million euros to his bonus entitlement.

The Supreme Court accepted that the employee’s contract was not formally terminated until 6 January because it was not until that date that the bank acted precisely in accordance with the payment in lieu of notice clause. The case turned on a legal principle which for decades has been the subject of conflicting judicial decisions, namely whether an employee is entitled in any sense to assert the right to keep a contract of employment alive in a situation where the employer attempts to terminate it without complying precisely with the provisions for termination in the contract. The Court accepted that the employee was entitled to do this. In this case therefore the employee’s argument that the contract was still in existence at 31 December was accepted, even though the employee had been prevented from working for the bank from 29 November onwards and had not been treated as being on garden leave during the subsequent period.

Failure to comply strictly with a contract’s provisions for termination will not normally have the colossal financial consequences that arose here. However, situations could arise in which an employer’s attempt to terminate an employment contract immediately without complying strictly with the relevant contractual provisions is not legally effective to deny the employee the continuing right to various benefits. For example, this might have an effect on the amount of pay for accrued unused holiday due to an employee on termination. In other cases it might affect an employee’s entitlement to continue receiving non-cash benefits (e.g. private medical insurance) or accruing pension or share option rights. The issue raised by the case is a factor which ought to be considered when drafting the termination provisions in an employment contract, in particular when deciding whether to include a payment in lieu of notice provision. This would apply particularly to any employee who is entitled to a relatively long notice period and has the right to valuable benefits over and above basic salary. It also means that where an employer relies on a payment in lieu of notice clause to dismiss an employee, it must read the wording carefully and do exactly what the clause requires. It strengthens the argument for negotiating an agreement in cases where the employment of an employee, particularly a highly paid one, is being terminated.

25 January 2013