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Just in case you have missed all the budget coverage

Sestini & Co

There are myriad budget commentaries available at this time of year, on TV, radio, the internet and in pretty much all of the newspapers.  Rather than adding to the maelstrom, my aim is to provide a simple summary that’s easy to read and which might provide you with questions or ideas to explore to benefit you or your business.  So here goes:Image

As the learned tax professional John Whiting is wont to say, with the Budget as with so many things, the devil is always in the detail.

These notes and reflections are based on my initial review of the draft Finance Bill 2013, as posted on the HM Treasury website, and there will no doubt be a few changes before Finance Act 2013 receives Royal Assent in the summer.  Finance Bill 2013 is due to be published on 28 March 2013 and so this note will be updated…

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Guest post by Elizabeth Stern, Employed Barrister

Interesting Judgments on final written warnings and more besides have recently emanated from LJ Mummery and LJ Lewison in the Court of Appeal in Davies v Sandwell Borough Council [2013] EWCA Civ 135. In addition to considering whether an employer can rely on a final written warning when dismissing an employee, the Lord Justices took the opportunity to give their own warnings.

Ms Davies, a teacher, received a final written warning that she appealed against but the appeal never took place. Whilst the warning was still live, she was dismissed by the Council for further alleged misconduct. There is a complex procedural background to this case involving it ping-ponging between the Tribunal and the EAT. I won’t go into all that here; suffice it to say that Ms Davies’ appeal from the EAT to the Court of Appeal was on narrowly formulated grounds which were solely about whether the final written warning should be treated as a nullity on the particular facts of the case.

LJ Mummery dealt specifically with the final warning point by approving the principles laid down in Stein v Associated Dairies Limited [1982] IRLR 444 and Tower Hamlets Health Authority v Anthony [1989] IRLR 394; in order for a tribunal to question the imposition of a final warning, it must be either bad faith, an oblique or improper motive or be manifestly inappropriate.

However, he prefaced this, firstly, by reinforcing the fundamental importance of the statutory test of reasonableness laid down in S98(4) Employment Rights Act 1996; was it reasonable for the employer to treat the conduct reason, taken together with the circumstance of the final written warning, as sufficient to dismiss the claimant? In his Judgment, cases were but instances of the application of s.98(4) to particular sets of facts. Secondly, the function of Tribunals was to apply the statutory reasonableness test and not to re-open the circumstances of the issuing of the final warning.

LJ Lewison, a self-confessed newcomer to the field of employment law, weighed in by delivering a slap on the hand to Tribunals and, indirectly, to claimants and their representatives. He said that a Tribunal’s function was to review the employer’s decision and not to conduct a primary fact-finding exercise. In this case, much of the evidence that the Tribunal had heard was irrelevant, adding to costs and wasting court time. He urged Tribunals to take a firm grip on the case.

As this is a Court of Appeal case, it would be wise for Tribunals and for lawyers to heed the Lords Justice’s warnings when preparing for and hearing misconduct cases: do not re-open the employer’s investigation; apply the guiding principle of the statutory reasonableness test and case manage robustly.

With regard to the final warning itself, the Lords Justice held that the Tribunal did not err in law by concluding that the final written warning was properly relied on by Ms Davies’ employer. Showing that the imposition of a final written warning is manifestly inappropriate or was bad faith is not going to be easy, although coincidentally, another case concerning reliance on a final warning in the EAT – Simmonds v Milford Club (UKEAT/0323/12/KN) – has just been remitted to the Tribunal to determine whether the final written warning was manifestly inappropriate, so watch this space.

Any views or opinions expressed in this post are solely those of the author who is writing in a personal capacity

If you’ve ever studied law, and feel nostalgic about wading through Supreme Court cases with multiple judgements dealing with the fundamentals of contract law (as opposed to still having anxiety dreams that you are taking your finals without having read any of the cases), take a look at Geys v Société Générale [2012] UKSC 63, which lays to rest the old “automatic/elective” controversy in relation to employment contracts…..or does it?

If you don’t have an essay to write, you can , of course skip reading Lord Sumptions’ dissenting judgment (no disrespect intended, but let’s stick to the ratio decidendi here, as we are in academic mode) and focus on Lady Hale and Lord Wilson’s judgements which plump for the elective theory. But what does this mean, I hear you ask? The effect, and the reasoning behind it, are that when one party commits a fundamental breach of contract, that contract does not automatically come to an end, but continues until the other party “accepts” the breach – so for example, if an employer unilaterally cuts an employee’s pay – the contract continues until the employee walks out in response to that breach. Sounds familiar. But what about the situation in this particular case?

Mr Geys was a banker. He had a contract which expressly allowed his employer to terminate the contract by making a payment in lieu of notice (PILON, for short). In November, he was called in, told he was sacked, and frogmarched out of the building with the traditional black plastic bag of personal effects. In December he received a large sum of money into his bank account – purporting to be the PILON, but with no breakdown of how it was worked out. He asked for a breakdown, via his solicitors, which he got on 6 January. So when did his employment end? According to the automatic theory, that would have been back in November. According to the elective theory, it was only when his employer had complied with its obligation to pay the PILON. It was no academic debate: a later termination date meant he was entitled to a more money. A lot more money. The Supreme Court, or at least a majority of it, considered that it is unfair for the party at fault to be able to dictate the termination date – and thus potentially reduce the damages payable. Fair enough.

What the Supreme Court didn’t discuss, was how this judgment might affect the date from which time limits are calculated for unfair dismissal purposes. This is known as the “effective date of termination”,. It has been established since 1974 that for statutory purposes, where a contract is terminated by payment of a PILON this will be the date of dismissal –  not when notice would have expired, had it been given (see  Dedman v British Building & Engineering Appliances Ltd, Court of Appeal, [1974] ICR 53 where you can further indulge your nostalgia by reading a Lord Denning judgement, if you feel so inclined)

So we are left in the position that in a situation like the present (by no means an uncommon one) there could be two termination dates –one for calculating contractual damages (likely to be the more substantial for higher paid employees) and another for working out time limits to make an unfair dismissal claim.

One action point for employers who use PILONs to come out of this case comes from the finding by Lady Hale that a PILON won’t be effective to terminate employment until the employee knows it a payment has been paid, and how that payment has been worked out:

“It is necessary, therefore, that the employee not only receive his payment in lieu of notice, but that he receive notification from the employer, in clear and unambiguous terms, that such a payment has been made and that it is made in the exercise of the contractual right to terminate the employment with immediate effect. He should not be required to check his bank account regularly in order to discover whether he is still employed. If he does learn of a payment, he should not be left to guess what it is for and what it is meant to do.”

So, employers, where you are making a payment in lieu of notice, make sure you set out in writing how the payment is worked out no later than the point at which you want employment to end – otherwise you may find you have not, in fact, ended the contract.

Your employer sends you a new contract to sign – maybe you’ve been promoted, maybe a new management team are shaking things up. There are some new benefits – a a pension, health insurance – but there are some post termination restrictions in there , and you don’t like the look of them. You take a glance and tuck it away at the back of a drawer to deal with later, or decide not to sign it, so hang on to it.  Fast forward a few years– now you’re leaving, or have left to work for a competitor  Can your old company enforce those post termination restrictions, even though the you never actually signed and returned them? According to the High Court, it’s possible.

In FW Farnsworth Ltd and another v Lacy and others [2012] EWHC 2830 an employee given a new contract after he had been promoted didn’t sign or return it, but did apply for health insurance for himself and his family – which was one of the new benefits set out in the new contract. Later, when he went to work for a competitor, the High Court held that this was evidence enough that he had accepted all the terms , and so the restrictive covenants were part and parcel of his contract.

Had the employee not applied for any of the new benefits, the outcome might have been different; merely continuing to work does not mean that an employee can be taken to have accepted new terms which do not immediately impinge on the employee – see Solectron Scotland Ltd v Roper & ors EAT 2004 IRLR .

So what should you do in this situation? You have a number of options:

  • Get some advice – the clause might not be enforceable anyway. An employment specialist can tell you whether you have anything to worry about, and help you to negotiate something more acceptable.
  • Send the contact back with a note or email saying you agree it all – apart from the restrictive covenants. How will your employer react to that? If you’re lucky no-one will actually look too carefully. Make sure you keep a copy!
  • Leave it in a dark corner somewhere, give up on claiming any of those nice shiny perks, and hope for the best.

Much to the relief of many law firms, the Court of Appeal have overturned an EAT decision that a partner of a law firm was a “worker” within the Employment Rights Act 1996 and so entitled to whistleblowers’ protection in Clyde & Co LLP v Bates van Winkelhof.

Clyde & Co offered Ms Bates van Winkelhof (“W”) equity partnership when they acquired part of the business of the law firm she worked for, which had a joint venture agreement with a Tanzanian law firm, Ako Law (“Ako”) . W was paid in part by variable profit share but was also guaranteed a certain level of remuneration.

Subsequently, W reported the managing partner of Ako for money laundering and accepting bribes. Ako dismissed her and after an investigation, Clyde & Co expelled her from the partnership.

W brought a whistleblowing complaint against Clyde & Co. To make such a claim she had to establish that she was “an individual who works under an employment contract or any other contract whereby he undertakes to do work or services for another party to the contract who is not, by virtue of that contract, a client or customer” and therefore a worker for the purposes of section 230 ERA.

The Court of Appeal found that the relationship between an LLP partner and an LLP does not reflect the subordination and hierarchy that is implied by the statutory definition of a worker.

This week I’ve been reading some interesting blog posts about Boris Johnson’s ideas on strike ballots – for example requiring a 50% turnout (thanks @FlipChartRick and @DazNewman inter alia for alerting me to the  story) – which have got me thinking. The basic tenor of the criticisms has been that there is absolutely need for such reforms. It’s pretty hard to comply with the rules to call a lawful strike. There are rules to prevent intimidatory picketing. There is nothing to compel employees to strike if they don’t want to, even if they are union members, and unions cannot discipline members for not striking.It’s easy for employees to opt out of paying union dues and the closed shop is a thing of the past. All of those were covered the legal changes  in the 1980’s.

So why is Boris taking such a hard line? Maybe because by generally making it hard for sacked workers to make claims – by measures like introducing fees for employment tribunals, cutting back awards, and increasing qualifying periods the government are doing everything they can to help the unions’ to recruit members and regain power and/or  influence. At the moment most employees see no need to join a union. This may change when they see their individual rights eroded. Just a thought.

What experience and history teach is this – that people and governments never have learned anything from history, or acted on principles deduced from it” – Hegel


The Court of Appeal’s decision in Cavenagh v William Evans Ltd [2012] EWCA Civ 697, clarifies that where an employee’s employment is terminated pursuant to a contractual provision for pay in lieu of notice (a PILON clause) an employer cannot depend on  Boston Deep Sea Fishing and Ice Co v Ansell [1888] 39 ChD 399, and that in such cases employers cannot rely on misconduct, however heinous, discovered after dismissal to withhold payment in lieu.

This is frustrating news for employers, as indeed it was for Mr Cavenagh’s own employers, who discovered that he had diverted £10,000 of company money into his pension after the termination of his employment under a PILON clause.

It must be correct that Boston Deep Sea Fishing cannot be applied where an employee is dismissed pursuant to an express payment in lieu clause. When notice is not paid in such a case, the employee’s claim is for a debt due under the contract and not for damages for wrongful dismissal. The Revenue has similarly adopted a different approach to payments in lieu of notice pursuant to express contractual clauses and to compensation for breach of contract when applying the £30,000 tax exemption. What is puzzling is why, in this case, William Evans Ltd did not simply include a counterclaim against its fraudulent former managing director.

So what should employers be doing now to prevent such a situation? At the risk of making payment in lieu clauses even more unwieldy than they sometimes already are, provision could be included to ensure that where gross misconduct is discovered after dismissal, the employer reserves the right to withhold notice monies or to seek their recovery. If a compromise agreement is to be entered into similar wording can be incorporated to protect against such a risk.

Certainly, this case should not be interpreted as a reason not to include PILON clauses. These are generally regarded as affording more benefit to the employer than not, particularly where there are valuable restrictive covenants that the employer may wish to rely on; without a PILON clause, the employer is likely to have trouble enforcing them. Even if Boston Deep Sea Fishing cannot be relied on to withhold a payment in lieu of notice when misconduct is discovered after dismissal, there are other means of recovering monies which have been unlawfully obtained. More problematic will be cases where the misconduct does not have a monetary value, for example, a physical assault or harassment.


As part of the Government’s programme of reforms to grow business BIS has called for evidence on the controversial compensated ‘no fault dismissal’ for small (10 employees or fewer) businesses. BIS noted that small businesses have the highest rate of turnover and that minimal employee protection tends to result in more hiring and firing. It is this phenomenon that the Government fervently hopes will kickstart some economic growth at the smaller end of business. At the same time, the Enterprise and Regulatory Reform Bill has been published, proposing a mandatory conciliation process before claims are brought and a power to vary (upwards or downwards) the maximum compensatory award for unfair dismissal.

Adrian Beecroft’s report (prepared last year but recently publicly released and covered in our last blog) emphatically endorsed the approach of no fault dismissal and the BIS research studied relevant procedures introduced in Germany, Australia and Spain, each of which exempt small businesses from certain aspects of unfair dismissal regulation.

It is, we think, fair to say that the surveys are neither conclusive nor are they easily referable to our legal system in the UK. Germany and Australia have tinkered with reforms that have left them with exemptions for small employers with fewer than 10 and 15 employees respectively and Spain’s employee dismissal exemption is not targeted just at small businesses but all employers.

The rationale behind the reforms in Spain was to rebalance power towards employers and reduce the numbers of temporary workers. Spanish employers can dismiss and pay statutory dismissal compensation (for a dismissal based on ‘economic’ reasons) within 48 hours of a dismissal letter. The result has been a significant increase in the number of compensated dismissals.

It seems to us that therein lies the rub. There appears to be no persuasive data that indicates that economic growth results from the introduction of compensated no fault dismissals. What has happened is that the new option becomes the habitual means of dismissing staff. As the BIS research itself notes, in Spain ‘unfair dismissal [became] the norm rather than the exception’. Further, the BIS report was unable to identify growth in employment and productivity in Germany and Australia.

Is this the kind of work culture that we would welcome for the UK? A combination of a lack of employee confidence and no guarantees for growth seems to be a dangerous path to follow. The existing system in the UK for unfair dismissal may be imperfect but a system that encourages the ‘buying off’ of employees’ rights seems a commoditisation too far. Together with the ability of the Secretary of State (subject to the ERR Bill being passed) to order a downward variation of the unfair dismissal compensatory award cap, it would appear that job insecurity and a lack of employee confidence will be the most likely outcomes should these proposals come to fruition.


I write this as one who for most of her career has acted for employers – small, medium and large – and has often admired BIS (and before that, DTI) reports for their thorough review of existing employment law and reasoned, evidenced recommendations. So I was interested to read this. I won’t pretend this is a comprehensive review of the 24-odd pages of the report, let alone the vast swathe of law it considers. But here are a few quotes, with some of my thoughts – imagine them scribbled on the back of an envelope.

“The rules (sic) both make it more difficult to prove someone deserves to be dismissed, and demand a process for doing so which is so lengthy that it is hard to implement”

I think what must be meant by “the rules” is the part of the ERA which says that an employer has a right not to be unfairly dismissed by his employer. What is fair or unfair, depends on whether the reason for dismissal is for one of a number of specified reasons (including conduct and capability) plus any other substantial reason for dismissal (so, any good reason, then…) and further depends on whether “in the circumstances (including the size and administrative resources of the employer’s undertaking) (my emphasis) the employer acted reasonably or unreasonably in treating it (the reason) as a sufficient reason for dismissing the employee”.

This is what makes this country one of the top 3 easiest countries in the world to sack someone. A dismissal can be for pretty much any reason (apart from unlawful discrimination and a strictly defined list of other reasons including being pregnant, or a trade union member, or having asserted your right to be paid minimum wage), and will be fair if the employer goes about the dismissal in a reasonable way, taking into account whether the employer is a small employer or a large one, and what administrative resources he has. All the rest is just guidance, advice,  HR practice and mythology.

The essential parts of these various sources of guidance is that employers should not dismiss employees  without first talking to them about the reason they are considering dismissal, and listening to what the employees have to say. The report doesn’t really seem to argue with that: “The employee should be given a chance to argue his or her case” (a bit like a disciplinary hearing, really), and “A brief consultation period seems reasonable”.

One area where I think help could be given to small businesses is to make it clear in the ACAS code of practice how they can comply with the ERA given their small size and lack of administrative resources – for example practical guidance on how to conduct a reasonable dismissal in a one manager business (employers often worry about how to be impartial, and how to handle appeals) – a bit like the section of the report on TUPE, where it calls for some authoritative guidance on what amounts to a potentially fair TUPE dismissal. There is help out there, but it does tend to get a bit buried in a lot of technical discussion.

After proposing a system whereby an employer can dismiss an employee without giving a reason, (subject to the points above about listening to the employee and consulting with him or her) the report goes on to say:

“The downside of the proposal is that some people would be dismissed simply because their employer did not like them. Whilst this is sad I believe it is a price worth paying….”

The section on third party harassment is curious. Firstly it looks as if harassment of one employee by another is regarded as a form of third party harassment, ignoring well established principles applying the law of vicarious liability to harassment cases. I’d strongly suggest the author of the report have a look at the facts of some of the well- known cases, before deciding that employers should bear no responsibility for what goes on under their management.  The report also seems to ignore the fact that that good management – such as making it clear that you will discipline anyone caught racially or sexually harassing a fellow worker – is a perfectly good defence for an employer. I’d grant that third party discrimination cases are more problematic – but there the employer is only liable if they know about the harassment and do nothing to stop it being repeated. And I really wonder where the evidence is for this statement:

“The legislation clearly creates a temptation for employees to conspire with each other or with customers to create a harassment situation which might result in substantial financial compensation”

I’ve seen a few weak cases in my time, but generally the problem is an exaggerated view of the pot of gold to be had from a tribunal, (which  is encouraged by press reporting of cases  where compensation is based on breach of contract and not  unfair dismissal ) rather there being no foundation whatsoever for the claim. I don’t think I’ve ever run across a conspiracy to extract compensation from an employer either in practice or in years of reading and writing case reports …

One of the areas where the lack of reference to evidence undermines the credibility of the report is in relation to the charging of fees for tribunals and levels of compensation. I’d be much more convinced by the suggestion that the estimated remission of fees charged could come down to 10% of cases if claimants’ “wealth” is taken into account if some evidence were quoted. If an employee is dismissed unfairly, he or she loses his or income, and under current rules gets no benefits to help with paying the mortgage for at least 13 weeks. The form of “wealth” most people have is their house, and by the time they get to a tribunal hearing they are likely to have been without an income for several months and will be behind on their mortgage. Okay, I’m not citing evidence, but I’d interested into know where the 10% figure comes from.

Likewise on levels of compensation, there is a wealth of evidence available , including details of the levels of “Polkey “ deductions “(reductions in compensation to reflect the possibility that a dismissal would have taken place anyway, had a fair procedure been followed). So why not quote it, if it supports the proposition put forward?

There‘s a lot more I could say about the holes in the arguments put forward – but a birthday tea beckons, so I’ll just round off with a last quotation:

“Quantifying the loss of jobs from the burden of regulation, and the economic values of those jobs, is an impossible task.”

So why not stick a finger in the air and try a few things to see if they help? I was recently reminded that the whole concept of unfair dismissal was introduced in the ‘60’s  to reduce the number of strikes over dismissals. And it worked, too, which may be one of the reasons that the legislation has survived through many changes of government.  Perhaps some reflection on the law of unintended consequences is called for.


So, we now have a ruling from the EAT on the employment status of lapdancers… Miss Nadine Quashie’s case is being appealed by Stringfellows to the Court of Appeal so we should not get too exercised yet as to the extent of the mutuality of obligation between the club and Miss Quashie which swayed the court to overturn the tribunal’s findings and decide in her favour.

However, this decision could certainly open the doors to a raft of employment claims from dancers and similar performers who are not treated as employees in any formal legal or tax sense but who are obligated to the organisation that uses their services.

Miss Quashie worked as a lapdancer for Stringfellows who did not pay her. She received vouchers (called ‘Heavenly Money’) from customers, which would be tucked inside her garter. She would later produce these to the club, which would redeem the vouchers for cash, after making certain deductions. In this way, Miss Quashie would typically earn around £200,000 a year.

It all came to grief when Miss Quashie was dismissed for alleged drug taking, a charge she disputed. Miss Quashie wanted to claim unfair dismissal but to do so, had to prove she was an employee.

We are all familiar with the elusive tests that assist the courts in determining whether an employment relationship exists. The court noted that the supply of dancing services was personal and could not be assigned or sub contracted. Fines were imposed for being late or missing a dance.

On the question of ‘mutuality of obligation’ the EAT found that it was clear that there was a contract on each night Miss Quashie was engaged. There were obligations on both sides. The question that flowed from that was whether there was sufficient control by Stringfellows to connote a contract of employment. The EAT criticized the tribunal judge’s narrow focus on the wage/work bargain. The point was that she had to perform at the direction of Stringfellow’s management. On the nights she attended, the club was obliged to provide her with the opportunity to dance and she was obliged to work as directed. She would be fined if she did not stick to the contract in terms of performance. The EAT found that not only was there a contract of employment on each occasion she worked but there also existed an umbrella contract ensuring continuity of service.

A point little highlighted in the media and other reporting of this case is of course the complication that Miss Quashie had not been declaring tax as an employee. She had further made misrepresentations to the Revenue as to her earnings (which she blamed upon her accountant). The EAT opted to remit the question as to whether this rendered the entire contract illegal to a fresh tribunal which would carry out a proper analysis of the figures and facts.

This could ultimately leave Miss Quashie in an unpleasant situation. If the finding that she is an employee is upheld but she fails to persuade a tribunal that she has been unfairly dismissed even if the contract is held to be legal she has exposed her status and earnings to HMRC to whom it is open to carry out an investigation into how much back tax it may be owed. In any event, a tribunal may find that the contract is illegal because of her dealings with the Revenue and she is again left without any unfair dismissal claim to fall back on.

For other dancers, they may receive employment protection in a notoriously fickle industry but the price may be the proper tax regulation of what can be, as in Miss Quashie’s case, significant earnings. This could be a double edged sword.
As always, each of these cases rests on its facts and there may be clubs that exercise less control over their dancers. This decision by no means makes it clear for such performers whether they are employees or not. Arguably, in some instances, it could make the position worse. We await the Court of Appeal hearing with interest. Miss Quashie may simply have won a bittersweet skirmish in a bigger battle.


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