Mark Shulman, Consultant Solicitor at Keystone Law

**UNFAIR DISMISSAL

**Compensation
*Should an ET have used the "substantial loss" approach to pension loss when making an unfair dismissal award? Yes, said the Court of Appeal in [Griffin v Plymouth Hospital NHS Trust]()* [2014] EWCA Civ 1240.

The Claimant won her claims of constructive unfair dismissal and disability discrimination but disputed the calculation of remedy, including the use of the "simplified approach" when assessing  pension loss, rather than the "substantial loss approach". Following an initial appeal to the EAT, the case was remitted on remedy; which approach was to be applied on pension loss needed to be revisited by the ET. The ET decided to stick with the simplified approach. The Claimant remained dissatisfied and appealed again to the EAT on various grounds. That second appeal was dismissed and she then appealed to the Court of Appeal, including a challenge to the ET's decision to use the simplified approach on pension loss.

Pension loss guidance
At the original ET hearing, both parties  had referred to the 2003 edition of the booklet Compensation for Loss of Pension Rights – Employment Tribunals prepared by a committee of ET Chairmen (as they then were) and the Government Actuary ("the Guidance"). The Guidance recommends that ETs use one of two alternative approaches to the calculation of pension loss – "the substantial loss approach" or "the simplified approach". The Claimant had contended for the use of the "substantial loss" approach whereas the Trust had contended for use of the "simplified" approach. The only pension issue before the Court was whether the ET erred in law by preferring the simplified approach to the substantial loss approach.

The simplified approach
Paragraph 4.11 of the Guidance summarises the simplified approach as follows:

"... It involves three stages – (a) in the case of a final salary scheme, the loss of the enhancement to the pension already accrued because of the increase of salary which would have occurred had the applicant not been dismissed, (b) in all cases, the loss of rights accruing up to the hearing and (c) the loss of future pension rights. These last two elements are calculated on the assumption that the contribution made by the employer to the fund during the period will equate to the value of the pension (attributable to the employer) that would have accrued. ...."

The Court pointed out that the loss in respect of the rights that would have accrued but for the dismissal (stages (b) and (c)) is measured by reference to the loss of the employer's pension contributions - that was the essential difference between the simplified approach and the substantial loss approach. However, the loss of enhancement claim (stage (a)) still had to be calculated by reference to actuarial tables (Appendix 4 to the Guidance).

The substantial loss approach
The substantial loss approach (paragraph 4.12 of the Guidance) uses actuarial tables (comparable to the Ogden Tables) to assess the current capitalised value of the pension rights which would have accrued up to retirement. There may be cases where the ET decides that a person will return to a job at a comparable salary, but will never get a comparable pension. In such cases, the substantial loss approach may be needed even where the future loss of earnings is for a short period, although the loss of pension rights may be compensated by an increase in salary in new employment.

Which approach should be used?
The Court pointed out that the Guidance acknowledged that the choice between the two approaches may make a substantial difference to the compensation recovered for loss of pension rights. How to decide which approach was appropriate in a particular case was addressed in paragraphs 4.13 - 4.14. Paragraph 4.13 states:

"Experience suggests that the simplified approach will be appropriate in most cases. Tribunals have been reluctant to embark on assessment of whole career loss because of the uncertainties of employment in modern economic conditions. In general terms the substantial loss approach may be chosen in cases where the person dismissed has been in the respondent's employment for a considerable time, where the employment was of a stable nature and unlikely to be affected by the economic cycle and where the person dismissed has reached an age where he is less likely to be looking for new pastures. The decision will, however, always depend on the particular facts of the case."

The Court explained that paragraph 4.13 of the Guidance was intended to identify the general considerations affecting the choice of approach. It identified three factors which pointed in favour of the use of the substantial loss approach:

* the length of time that the Claimant has been employed; * the "stability" of the employment; and * whether the employee "has reached an age where he is less likely to be looking for new pastures".

What these three factors have in common is that they all increase the likelihood that the employee would, but for the dismissal, still have been an active member of the scheme at retirement.

This contrasts with cases where the employee would probably have changed jobs and have left the scheme before retirement age anyway as a result of "the uncertainties of employment in modern economic conditions". In such cases, it would be more appropriate simply to award lost contributions as in the simplified approach, rather than embarking on the exercise of valuing rights on retirement which would almost certainly never have accrued and then applying a massive "finger-in-the air" discount. The question is whether the uncertainties that would have to be reflected in such a discount are so great that they undermine the point of assessing the hypothetical whole-career loss in the first place. Whether that applied in any particular case is a matter for the judgment of the ET.

The ET's reasons
The ET had ruled that:

"…the substantial loss approach may be chosen in cases where the employee has been in the respondent's employment "for a considerable time". The claimant was employed for ten years by the respondent. However, the Tribunal has understood that the expression "considerable time" denotes a time which brings an employee much closer to retirement; so, for example, in the case of the claimant who first started working for the employer when she was 24 years of age, if her employment had been brought to an end when she was nearer to 50. On that basis, the Tribunal has concluded that the appropriate approach for loss of pension rights is the simplified approach."

The Court referred to the fact that the ET's reasons for rejecting the substantial loss approach first time round, turned entirely on its interpretation of the reference in the Guidance to employment "for a considerable time". The ET had said that that factor did not apply as the Claimant was still a long way from retirement.

Had the ET asked the right questions?
No, said the Court of Appeal. The ET's initial approach failed to engage with the more general question in paragraph 4.13 of the Guidance as to whether the Claimant was likely to stay the course up to her retirement date. The ET did not identify or address that question at all. The Claimant's case was that as an employee with a specialist skill for which the principal (if not indeed the only) market was in the NHS, she was likely to remain in the NHS for the whole of her career, even though she was only 34 and that she would not, in the language of the Guidance, seek "new pastures". That was all the more so because she suffered from a medical condition that made her cautious about embarking on major change. None of that had been considered by the ET at all. Therefore the ET had misdirected itself.

However, there was a further factor. The simplified approach required the use of actuarial tables in calculating the "loss of enhancement" element in the claim. Those tables necessarily proceed on the assumption that the Claimant would have remained in the scheme until retirement and the Guidance requires ETs to apply a "withdrawal factor" to the resulting figure to reflect the uncertainties affecting that assumption (paragraph 5.15). The ET had found that:

"The respondent submits that the claimant was likely to leave the respondent's employment before retirement so this figure should be discounted by 50%. The claimant had said that she would not have left the respondent's employment. The Tribunal accepts the claimant's evidence of her intention in that her medical condition was worsening so that she was very limited geographically where she could work and was clearly limited in the work that she could do. Accordingly, the Tribunal accepts [the Claimant's] suggestion that the discount should be 20%."

The Court considered  that such a small withdrawal factor (20%) was inconsistent with the uncertainties about whether the Claimant would have stayed the course but for her dismissal and whether they were so great that the substantial loss approach was inappropriate. The similar case of Network Rail Infrastructure Ltd v Booth (unreported, 22.6.06) UKEAT/0071/06 was relevant as the Claimant had spent all her working life in a specialised industry and there was every expectation that she would have remained there but for her dismissal and the application of the substantial loss approach was upheld.

When the ET reconsidered the question the second time round, it said that the simplified loss approach was appropriate because of its finding that the Claimant would regain her pre-dismissal earnings after twelve years, which meant that there was "no ongoing loss until retirement". But, the Court of Appeal thought that such reasoning was also flawed. The fact that the Claimant would eventually regain her pre-dismissal earnings was irrelevant - what mattered was her pension rights. As pointed out in the Guidance, a Claimant may return to a job at a comparable salary but never get a comparable pension. The fact that a Claimant may in due course obtain other employment under which she enjoyed membership of a final salary scheme was not in any way inconsistent with use of the substantial loss approach.
Even if, as the ET had found, the Claimant would within four years be in employment under which her employer contributed to a pension scheme of some sort, it was not open to the ET on the evidence to find  that it would be a final salary scheme.

That was because at the ET, the expert evidence was that:

"It is unlikely that any future employer would offer a final salary scheme as most of these are now closed to new entrants, so we have had to assume that any future scheme would be a money purchase scheme."

Therefore, if there was some basis for rejecting the opinion of the pensions expert, it was incumbent on the ET to say what it was, but it did not do so.

If the ET had directed itself correctly, the only conclusion open to it was that it should have followed the substantial loss approach. The case fell squarely within para. 4.13 of the Guidance. It also fell within paragraph 4.14 - the ET had found that the Claimant would find alternative employment, but there would remain losses up to retirement in respect of pension rights.

Accordingly, the appeal was allowed as regards the award for pension loss and the case remitted to the ET to assess that loss using the substantial loss approach, although the Court very much hoped that the parties could resolve the case without a further hearing.

In another recent case, the issue arose as to whether an ET had been correct in using the substantial loss approach to pension loss. The Claimant in [Somerset County Council v Chaloner]()  UKEAT/0063/14/JOJ; UKEAT/0064/14/JOJ won her claim for unfair dismissal. Having regard to the Guidance, the ET applied paragraph 4.14 and concluded that the substantial loss approach was correct. In calculating that loss, the ET found that having regard to the Claimant's own employment history and the Respondent's financial situation, it was very unlikely that the Claimant's employment with the Respondent would have continued until her retirement aged 65 and it assessed the appropriate withdrawal factor at 60%.

The ET's approach to the question of mitigation and the limitation of her losses was such that although the Claimant had taken up an alternative role (which did not fully mitigate her losses), she had not attempted to seek further employment and on that basis did not award her further compensation from that date.

**Reasons for using the substantial loss approach
**The Claimant sought to challenge the ET's finding of a 60% withdrawal factor in respect of pension loss. The Claimant contended that the ET had failed to have sufficient regard to the circumstances in which she had taken up her position with the Respondent, particularly her uncontested evidence that she had regarded this as a long-term appointment when she took it up in her 50s and had relocated to do so. As for the Respondent's evidence as to the potential uncertain future for this part of its organisation, account also needed to be taken of the possibility of a transfer or sale of the business and the ET had apparently ignored this relevant factor.

For its part, the Respondent sought to challenge the ET's approach to the award of continuing pension loss. Whilst accepting that the Tribunal was not bound to follow the guidelines or adopt any particular approach, the Respondent made the point that the reason for the approach adopted by the ET was not explained and was inconsistent with the finding as to a break in the chain of causation in terms of remuneration. Alternatively, it was inconsistent with its finding that - from the date of taking up her new job - the Claimant had not established that she had taken reasonable steps to mitigate her loss. If there had been a break in the chain of causation, the Respondent should not continue to be held liable. If it was a question of a failure to mitigate loss, the question also arose as to why the Respondent should be held liable for a continuing pension loss award.

Opaque reasoning
Whilst the EAT accepted that the ET had not been obliged to adopt the Guidance or any particular approach and that it would not be an error of law to find pension loss continuing for longer than the loss of earnings in terms of basic pay, it remained the case that the ET's reasoning for its conclusion was "simply opaque". The EAT was not satisfied, on the reasons provided by the ET that there was a finding of a break in the chain of causation in relation to compensation.

If the ET was in reality holding that there was no break in the chain of causation in terms of future losses, but there was in fact an issue about a failure to mitigate, then the reasoning was still inadequate. This was because the ET had not asked the right questions:

* what step should have been taken by way of mitigation?; and * the date on which those steps would have produced an alternative income?

The ET should then have reduced the compensation by the amount of the alternative income.
The parties were simply left not knowing what the ET's finding was on alternative positions and therefore on the availability of any alternative income, including pension benefits. Without making those findings, it was hard to see how the ET could reach an informed view as to which approach it should adopt on the question of pension loss.

The final point that remained was the Claimant's appeal relating to the 60% withdrawal factor on the pension award. Given the view the EAT formed on the other grounds of appeal (under both appeals), it seemed that this point would go in any event. Indeed, both parties agreed that if the other substantive grounds of appeal were upheld, the case would need to be remitted to a new ET for an entirely fresh consideration on all aspects of remedy.

Both parties suggested that it would be preferable for the matter to go to an entirely fresh ET and the EAT agreed and accordingly directed that the matter should be remitted to a new ET for fresh consideration of all points on remedy.

Polkey deductions
Was an ET right to make a deduction under the principles in Polkey v AE Dayton Services [1987] IRLR 503 in the light of its reason on liability? No, said that EAT in [Hamer v Kaltz Ltd ]()UKEAT/0502/13/BA.

The Claimant was dismissed for gross misconduct after she allegedly disclosed confidential payroll information to a colleague. An ET found that the principal reason for the Claimant's dismissal was for having made a protected disclosure and therefore her dismissal was unfair. It made a basic award of £3,325 and a compensatory award of £30,616. The employer appealed the remedy award.

The matter was remitted by the EAT for the ET to consider as it had not dealt with the Polkey issue at all and had given insufficient reasons in respect of contributory fault. On remission it made no compensatory award, holding by way of a Polkey finding that it was "100% inevitable" that the Claimant would have been dismissed on the same date as she had been.  It found that there should be a 10% reduction in the basic award for conduct. The Claimant appealed and there was a cross-appeal seeking an increased finding of contributory fault.

Inconsistent findings
The Claimant submitted that the ET's conclusions on the Polkey issue could not be reconciled with its findings about the different aspects of the misconduct charges which the Claimant faced. She submitted that it was impossible to see why the ET, having held that various other allegations of misconduct relating to breaches of confidential information were not regarded as serious and having found a reduction of only 10% for contributory fault, thought that the Claimant inevitably would have been dismissed summarily.

The employer's case was that the ET had been correct on the Polkey point because there was every reason to suppose that there would have been disciplinary charges and dismissal in any event. What was in error, so it was argued, was only a 10% reduction on the basic award for contributory conduct and that its findings in this respect could not be reconciled with its Polkey decision that dismissal would inevitably have occurred.

Polkey principles
The EAT explained that Polkey was a case where the dismissal had been rendered unfair purely by a procedural failure. Whilst there had been a reference in the present case to "classic Polkey", the assessment was not limited to such cases. And whilst the ET had called the wider range of cases "causation Polkey", the EAT did not find that label useful, for the assessment is always concerned with what would have occurred but for the dismissal.

The key point established in Polkey was that the exercise is not an "all or nothing" exercise. It is one where the ET is required to take into account chances or prospects. An ET may express its view in percentage terms or even by alighting upon a date, taking into account the chances on either side by which the employment might have ended. It may conclude that the employment would still have ended on the same date as the unfair dismissal, but if it does so it is making the finding that there was no chance that the employment would have continued.

Referring to the recent case authority of [Hill v Governing Body of Great Tey Primary School ]()[2013] ICR 691, Langstaff P had said:

"A 'Polkey deduction' has these particular features. First, the assessment of it is predictive: could the employer fairly have dismissed and, if so, what were the chances that the employer would have done so? The chances may be at the extreme (certainty that it would have dismissed, or certainty it would not) though more usually will fall somewhere on a spectrum between these two extremes. This is to recognise the uncertainties. A Tribunal is not called upon to decide the question on balance. It is not answering the question what it would have done if it were the employer: it is assessing the chances of what another person (the actual employer) would have done..."

However, looking at the ET's reasons, the EAT found it impossible to understand how the ET had concluded that it was inevitable that the Respondent, if it had acted fairly, would have dismissed the Claimant on the very same day for other matters which, on the ET's own findings, it did not regard as serious. Therefore, when assessing contributory conduct, the ET's conclusion that summary dismissal would inevitably have occurred, appeared perverse.

Compensatory award
Therefore, the ET's decision to make no compensatory award at all could not stand and the issue had to be revisited. Both parties agreed that the EAT should reach a conclusion itself as to the compensatory award. There was such a power (see [Jafri v Lincoln College ]()[2014] IRLR 544 (paragraphs 47 and 48) and [Burrell v Micheldever Tyre Services ]()[2014] IRLR 630 (paragraph 20)). Inevitably, the assessment had to be a broad one, but that was infinitely preferable to the alternative of remitting the matter either to the same ET for a third time, or to a freshly constituted Tribunal five years after the event.

Although it was virtually inevitable that there would have been disciplinary proceedings in any event because the Claimant was disrespectful to a fellow director, it was by no means inevitable that the Claimant would have been dismissed. In all probability she would have been given a final written warning. Even then, there was still the need to assess the chance that she would have failed to respond to the final written warning. This too was a significant chance, given that the ET found that she was plain-speaking and had been disrespectful to directors. On the other hand, she had been regarded as generally hard working and conscientious.

Having factored all these matters into account, the EAT reached the conclusion that an appropriate Polkey reduction to the compensatory award was 40%.

The EAT decided that there was no reason to apply a different percentage to that which the ET found in relation to contribution. The assessment of 10% for the disrespect shown to a director by an otherwise honest and capable employee on a single occasion could properly be made subject to a 10% finding. Therefore the cross-appeal was rejected. It followed that, after the 40% Polkey reduction had been applied to the compensatory award, there would be a further deduction of 10% for contributory fault.

Mark Shulman is a Consultant Solicitor with Keystone Law and an accredited workplace and employment mediator. His blog on new employment legislation can be found here.