The appellants had worked for the respondent since 1997. There was a downturn in business and to avoid redundancies, the respondent rescinded the appellants' terms and conditions of employment. The respondent notified the appellants that their guaranteed minimum weekly salary was to be abolished and that thenceforth they would be employed on an ad hoc basis. This meant that the respondent would engage them whenever they were required, but had no obligation to engage them at all. The new terms included a provision that if the appellants were given no work for two months, the respondent would give them P45s. The respondent gave the appellants 12 weeks' notice of these changes. The new terms effectively changed the appellants' status from employee to worker. The appellants won their claims of constructive unfair dismissal at the ET. The ET concluded that the respondent was in breach of an express term of the contract of employment and, separatim, in breach of the implied duty to maintain mutual trust and confidence in the employment relationship. The ET then concluded that, although there was a "good, sound business reason" for removing the guaranteed minimum payment there were no good, sound business reasons for changing the employment status of the claimants. The main reason for that conclusion was the fact that the change to the employment status of the claimants was unintended by the respondent and accordingly there can have been no thought behind it and no reason for doing it. On the fairness issue, the ET concluded that no other reasonable employer would, without consultation, explanation and realising the effect of their actions, have dismissed the claimants for refusing to agree a variation of their contracts of employment which had the effect of removing their guaranteed payment and changing their status from employee to that of worker. The EAT overturned the ET's decision, saying that the respondent had good business reasons for its decision and had not appreciated the change in status that it would cause. They also found that the ET's assessment of the fairness of the dismissal was flawed. The claimants appealed.

The appeal was allowed. The ET, when considering the fairness question overall, failed properly to consider whether the respondent's ignorance of the law was excusable; and, if it was, whether that was a decisive consideration or one that was outweighed by other factors. Its decision was flawed on that account. However, the EAT did not take a correct approach to its assessment of the ET's reasoning. It should have remitted the matter to the ET for further consideration of the fairness question in the light of the whole circumstances.

______________

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Drummond Young

Lord McEwan**

[2013] CSIH 72**

XA137/12

OPINION OF THE LORD PRESIDENT

in the Appeal by

DOCHERTY and JONES (Appellants)

against

S W GLOBAL RESOURCING LIMITED (Respondent)

from an Order of the Employment Appeal Tribunal dated 8 May 2012

_______________

For the appellants: Hardman; Thompsons

For the respondent: Campbell (sol adv); Brodies LLP

21 August 2013

Introduction

[1] This is an appeal against an order of the Employment Appeal Tribunal (EAT) dated 8 May 2012. The Employment Tribunal (ET) found that the appellants had been constructively and unfairly dismissed. The EAT substituted a decision that the appellants had been fairly dismissed for "some other substantial reason" in terms of section 98(1)(b) of the Employment Rights Act 1996 (the 1996 Act). That is the order appealed against.

**The facts

**

[2] The appellants were employed by the respondent from 1997. The respondent specialised in sub-contracting work for the railway and construction industry. It suffered a serious downturn in business. To avoid redundancies, reduce labour costs and offer more competitive tenders, the respondent rescinded the appellants' terms and conditions of employment. By letter dated 6 July 2010 the respondent notified the appellants that their guaranteed minimum weekly salary was to be abolished and that thenceforth they would be employed on an ad hoc basis. This meant that the respondent would engage them whenever they were required, but had no obligation to engage them at all. The new terms included a provision that if the appellants were given no work for two months, the respondent would give them P45s. The respondent gave the appellants 12 weeks' notice of these changes.

The Employment Rights Act 1996.

[3] **The Employment Rights Act 1996, as amended and so far as material, provides:

"98 - General

(1) In determining ... whether the dismissal of an employee is fair or unfair, it is for the employer to show-

(a) the reason (or, if more than one, the principal reason) for the dismissal, and

(b) that it is either a reason falling within subsection (2) or some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which the employee held.

(2) A reason falls within this subsection if it-

(a) [is that the employee was incapable or unqualified] ...

(b) [is that the employee committed misconduct] ...

(c) is that the employee was redundant, or

(d) [is that continued employment would be unlawful] ...

(4) Where the employer has fulfilled the requirements of subsection (1), the determination of the question whether the dismissal is fair or unfair (having regard to the reason shown by the employer)-

(a) depends on whether in the circumstances (including the size and administrative resources of the employer's undertaking) the employer acted reasonably or unreasonably in treating it as a sufficient reason for dismissing the employee, and

(b) shall be determined in accordance with equity and the substantial merits of the case ... "

The decision of the ET

Constructive dismissal

[4] Before the ET the appellants pled that the respondent was in breach of an express term of the contract of employment and, separatim, in breach of the implied duty to maintain mutual trust and confidence in the employment relationship. The ET upheld both cases and concluded that the appellants had been constructively dismissed.

Some other substantial reason

[5] The ET then considered whether the re-organisation of the business in order to make it profitable constituted "some other substantial reason." It found that there was a "good, sound business reason" for removing the guaranteed minimum payment (para 325). It then considered whether there was a good, sound business reason for removing the appellants' employment status. These were its conclusions:

"326 We asked whether there were good, sound business reasons for changing the employment status of the claimants. We concluded there were no good, sound business reasons for doing so. The main reason for our conclusion was the fact the respondent did not realise the consequences of offering a zero hours contract, where there was no obligation to offer work and no obligation to accept work. The change to the employment status of the claimants was unintended by the respondent and accordingly there can have been no thought behind it and no reason for doing it.

327 We should state that even if the respondent had intended the change from employee to worker and had argued there was a good, sound business reason for making the change, that was not an argument we would have accepted in the circumstances of this case where employee welders were not made aware of the effects of the change.

328 We also had regard to the fact we had decided (above) that there had been a breach of the implied duty of trust and confidence when the respondent gave notice of a unilateral variation to the contract of employment upon expiry of 12 weeks' notice, to remove the guaranteed payment and change the employment status of the claimants from employees to workers ... "

The ET therefore concluded that there was not "some other substantial reason."

Fairness

[6] The ET then had to determine whether if, contrary to its own conclusion, the dismissal was "some other substantial reason," it was fair. The ET considered that it should not focus exclusively on the reasonableness of the respondent's new terms from the appellants' perspective. The interests of the respondent and the appellants had to be balanced (St John of God (Care Services) Ltd v Brooks .

[7] The ET concluded that although there was a good business reason for the respondent's decision to remove the guaranteed payment, that had the consequence that the appellants were left with no rights (para 335). The respondent had carried out a "significant degree of consultation" on the removal of the guaranteed payment, but had not appreciated the effect of that on the appellant's status. It therefore had not consulted on that question (para 338). The respondent's other ten welders had consented to the change, but they would not have appreciated that the change would result in the loss of their employment status (para 339). Although the arrangements that the respondent introduced were common in the industry, the appellants had worked for the respondent for several years. The change would therefore cause them to lose their accrued statutory rights, such as the right to a redundancy payment (para 340).

[8] This was the ET's conclusion:

"341. We concluded that when carrying out a 'balancing process', considering the position from the point of view of both employees and the employer, the 'balancing process' leaned heavily in favour of the employees.

1. We, having taken all of the above points into account, asked ourselves whether the respondent acted reasonably in treating the business reason as a sufficient reason to dismiss the claimants. We decided that the decision of the respondent to dismiss the claimants for some other substantial reason fell outside the range of reasonable responses which a reasonable employer might adopt. We concluded that no other reasonable employer would, without consultation, explanation and realising the effect of their actions, have dismissed the claimants for refusing to agree a variation of their contracts of employment which had the effect of removing their guaranteed payment and changing their status from employee to that of worker."

The decision of the EAT

Constructive dismissal

[9] **The EAT struck out the appellants' case based on the implied duty of trust and confidence on the ground that there was no fair notice of it in the appellants' ET/1s. Nevertheless, it upheld the case of breach of an express term. It sustained the ET's conclusion that the appellants were constructively dismissed.

Some other substantial reason

[10] The EAT concluded that the ET had erred. It seemed to the EAT that the ET had wrongly assumed that the fundamental breach of contract caused by the unilateral change in conditions amounted ipso facto to a breach of the implied duty. It should have asked whether there was reasonable and proper cause for the change. Since the ET's approach to the implied duty had influenced its finding that "some other substantial reason" had not been demonstrated, that finding was unsustainable.

[11] The EAT concluded that the respondent had good business reasons for its decision and had not appreciated the change in status that it would cause. It said:

"55 ... They [the respondent] were not lawyers. There was no evidence or finding that they were experts in contract law or which pointed to them being put on notice that they were running the risk of destroying the welders' pre-existing employment status ... "

[12] The EAT concluded that the ET had erred on this point. It substituted a finding that the appellants were dismissed for "some other substantial reason." The dismissal was therefore potentially fair.

[13] The appellants no longer challenge this conclusion.

Fairness

[14] The EAT found that the ET's assessment of the fairness of the dismissal was flawed. Its reasoning was as follows:

"56 Turning then to the Tribunal's conclusions on reasonableness, they too were, we are satisfied, flawed. The Respondents had engaged in full consultation regarding the need to cut costs, particularly by removing the guaranteed payment, over a lengthy period and could not reasonably have been expected to consult on the potential of the Claimant's status changing from that of employee to that of worker when they were not aware that that would be the outcome of what they were proposing. That, however, is, essentially what the Tribunal held that they were obliged to do. We cannot see that that makes sense. Once that aspect of their reasoning is removed, all that remains is the potentially fair business reason which had commended itself to the Tribunal. There are no other circumstances in the findings in fact which could show that the dismissals were other than fair."

Grounds of appeal

Ground 1 - Fair notice

[15] The appellants challenge the decision of the EAT on the question of fair notice of the case based on the implied term. The EAT dealt with it in the context of the question whether the dismissal was for a potentially fair reason. Since the appellants do not challenge the EAT's finding on that question, the fair notice point is academic. I need not pursue it.

*Ground 2 - Fairness

*

[16] Counsel for the appellants submitted that in substituting a finding that the dismissal was fair, the EAT did not have regard to the balance of interests between the respondent and the appellants and did not consider whether the dismissal was "in accordance with equity" (1996 Act, s 98(4); Garside and Laycock Ltd v Booth . Furthermore the EAT erred in taking account of the employer's lack of awareness that its actions would terminate the contract. In effect it concluded that if the respondent thought that it was doing nothing wrong, it could not be said to have acted unreasonably.

[17] The solicitor advocate for the respondent submitted that the ET had contradicted itself by finding that there were sound business reasons for removing the guaranteed payment, but not for changing the appellants' employment status. The latter was the inevitable effect of the former. The ET had wrongly found that the respondent, being unaware that its decision would cause a change in status, could have had no good reason for it. That was a non sequitur. The reason for the removal of the payment provided the reason for the change in status.

[18] To judge the fairness of the dismissal required a balancing of the interests of both sides. The detriment to the employee should not be focused on exclusively (Catamaran Cruisers Ltd v Williams, supra). There were sound business reasons for removing the guaranteed payment. There was extensive discussion and consultation before that step was taken. The fact that the appellants were the only employees to complain indicated that the respondent's approach was reasonable. The only countervailing factor identified by the ET was the respondent's omission to consult on the change in status, by reason of its ignorance of that matter. Once the EAT upset that finding, the ultimate conclusion of the ET became unsustainable.

**Conclusions

**

[19] This appeal turns on the question of fairness as it was dealt with by the ET and by the EAT. Reading the ET's reasoning on this point, I consider that what the ET may have meant was that the respondent should have known that its action constituted a termination of the employer/employee relationship and should therefore have consulted on that point. An employer can, in several contexts, rely on its mistaken understanding as to the law. Deliberate conduct constituting a material breach of contract, if prompted by a mistaken belief as to the meaning of a contract, will amount to a repudiation of it (Cantour Fitzgerald Ltd v Callaghan . However, a dismissal may be fair if, for example, it is based on the mistaken belief that the employee's conduct constituted a breach of contract (Farrant v Woodroffe School [1998] ICR 184); or that the employee's intimation of an intention to leave amounted in law to a resignation (Ely v V K K Fasteners (UK) Ltd [1994] ICR 164); or that the continued employment of the employee was prohibited by immigration legislation (Bouchaala v Trusthouse Forte Hotels Ltd. [1980] ICR 721; Klusova v London Borough of Hounslow . I think that it follows that a repudiation of the contract can in some cases be regarded as fair, and that when the fairness of it is being judged, the fact that it was prompted by a mistaken or incomplete view of the law can be a relevant consideration. In [Eversheds Legal Services Ltd v De Belin ]()([2011] ICR 1137) the President of the EAT (Underhill J) raised the point in the following way:

" ... it does not seem to us obvious that the same result should follow in every case where the employer has in his own deliberations taken a view, which has turned out to be wrong, of the extent of his legal obligations: is it reasonable, having regard to equity and the substantial merits of the case, that the employee should bear the consequences of the employer having got the law wrong, even if the mistake could not be characterised as unreasonable? " (para [38]).

It was unnecessary to answer the question in that case since the respondent's mistaken view of the law was found to be unreasonable.

[20] In the current state of the law on the point, I think that it can be said with reasonable certainty that if an employer takes action against an employee which amounts to a dismissal, and does so without having considered the legal consequences, or does so on a mistaken view of what those consequences would be, the dismissal may nonetheless be held to be fair; but the fact that the employer took the action in such circumstances will not ipso facto make the dismissal fair.

[21] In this case the relevance of the respondent's ignorance of the legal implications of its actions would depend, at least in part, on the question whether it should have taken professional advice. That might depend on a multiplicity of factors; for example, the size and the administrative resources of the respondent (1996 Act, s 94(4)(a)). On the other hand, the radical nature of the change might be held, in itself, to have put the respondent on notice of the possibility of there being a legal problem. These are the sort of questions that were pre-eminently for the ET to decide.

[22] In my view the ET, when considering fairness question overall, failed properly to consider whether the respondent's ignorance of the law was excusable; and, if it was, whether that was a decisive consideration or one that was outweighed by other factors. Its decision was flawed on that account.

[23] The next question is whether the EAT took a correct approach to its assessment of the ET's reasoning. In my view, it did not. When it considered whether there was some other substantial reason for the dismissal, it regarded it as a material factor that the respondent was not a lawyer and that there was no finding that the respondent was put on notice that it might be destroying the appellants' status as employees. When it came to review the question of fairness, it appears to have considered that if the ET's reasoning on the point was flawed, the only possible outcome was to substitute a finding that the dismissal was fair. That was plainly wrong. The ET's task was to reach a view on the fairness issue on a consideration of the whole facts and circumstances having regard to equity and the substantial merits of the case (1996 Act, s 98(4)(b)). That involved an assessment of both parties' interests (Catamaran Cruisers Ltd v Williams, supra). The respondent's lack of awareness of the legal consequences of its action was only one element in that process. The ET also drew attention to the substantive fairness of the respondent's changes. Its central concern was the destructive effect that the change had on the appellants' statutory rights in circumstances where they had been employees of the respondent for several years and therefore stood to lose their accrued statutory rights such as the right to a payment on redundancy. The EAT did not consider that aspect of the case. A further aspect of the case, in my view, might be a relevant consideration in the assessment of fairness; namely that even if the respondent had been right in thinking that the appellants would retain their status as employees, they would still have faced the possibility of having to keep themselves available for work for up to two months, without receiving either work or pay, and then being dismissed. For these reasons I conclude that the EAT was not entitled to substitute its own view on this highly fact-sensitive issue. It should have remitted the matter to the ET for further consideration of the fairness question in the light of the whole circumstances.

Disposal

[24] I propose to your Lordships that we should refuse the first ground of appeal, sustain the second ground and allow the appeal. We should then recall the order of the EAT and remit these cases to the ET to determine whether the dismissals were fair.

[25] I agree with the opinion of your Lordship in the chair and with the disposal proposed by your Lordship. I have nothing to add.

[26] I have read the Opinion of your Lordship in the chair and concur in the result and disposal for the reasons given by your Lordship.