The claimants were suspended pending an investigation into alleged gross misconduct. During their suspension, other employees were paid a bonus under the previous year's bonus scheme and also a bonus for the current year. The claimants were dismissed shortly afterwards. After their dismissal, the respondent did not pay either bonus to the claimants, their case being that the claimants were not entitled to them according to the provisions set out in the bonus scheme. A provision in the earlier bonus scheme specified that no bonus shall be payable where a member of staff leaves the company as a result of gross misconduct. Therefore, according to the respondent, there had been no unlawful deduction from wages. The Employment Tribunal agreed, saying that the bonuses did not fall within 'the total amount of wages properly payable by' the respondent.

The EAT upheld the decision of the ET for 3 reasons: 1) a decision to pay or not to pay a bonus does not constitute 'a deduction from wages' so as to engage the consent provisions in s13(1) of the ERA 1996; 2) for there to be a deduction for the purposes of s13(3) of the ERA, there has to be a sum to which an employee has some legal but not necessarily contractual entitlement from which the deduction could be made and 3) there is therefore an exercise which has to be completed before s13(1) and (2) could apply with the preliminary stage being considering whether there is a sum legally payable in accordance with s13(3) and it is only if the answer is in the affirmative that there has to be a consideration as to whether there is a deduction from that sum so as to invoke sub-sections (1) and (2) of s13.

__________________

Appeal No. UKEAT/0084/11/CEA

EMPLOYMENT APPEAL TRIBUNAL

58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

At the Tribunal

On 14 July 2011

Judgment handed down on 25 July 2011

Before

THE HONOURABLE MR JUSTICE SILBER (SITTING ALONE)

(1) MRS R HELLEWELL; (2) MR J McARDLE (APPELLANTS)

(1) AXA SERVICES LTD; (2) AXA SUN LIFE SERVICES PLC (RESPONDENTS)

Transcript of Proceedings

JUDGMENT

For the Appellants
MR PAUL DRAYCOTT (of Counsel)

Instructed by:
Messrs Thompsons Solicitors
Arundel House
1 Furnival Square
Sheffield
S1 4QL

For the Respondents
MISS HOLLY STOUT (of Counsel)

Instructed by:
Messrs Pinsent Masons LLP
City Point
One Ropemaker Street
London
EC2Y 9AH

UNLAWFUL DEDUCTION FROM WAGES

The Claimants made claims against their employer for an unlawful deduction from their wages contrary to the provisions of section 13 of the Employment Rights Act 1996, in respect of money due under its bonus scheme for the years 2009 and 2010. The Claimants had been dismissed by reason of gross misconduct by the end of April 2010. The Employment Tribunal held that because the Claimants had been dismissed by reason of gross misconduct they were not entitled to receive their bonuses.

The Claimants appealed.

Held:

Dismissing the appeal because: -

1. A decision to pay or not to pay a bonus does not constitute "a deduction from wages" so as to engage the consent provisions in section 13 (1) of the Employment Rights Act 1996 ("ERA");

1. For there to be a deduction for the purposes of section 13 (3) of the ERA, there has to be a sum to which an employee has some legal but not necessarily contractual entitlement from which the deduction could be made;

1. There is therefore an exercise which has to be completed before section 13(1) and (2) could apply with the preliminary stage being considering whether there is a sum legally payable in accordance with section 13(3) and it is only if the answer is in the affirmative that there has to be a consideration as to whether there is a deduction from that sum so as to invoke sub-sections (1) and (2) of section 13;

1. The defendant's bonus schemes for 2009 and 2010 did not amount to a variation of contract so as to engage section 13(5) ERA; and

1. The Claimants were not entitled to their bonuses for 2009 and 2010 and there had been no deduction of their wages.

1. Mrs Ruth Hellewell and Mr Jon McArdle ("the Claimants") appeal against a decision of Employment Judge Rostant at the Sheffield Employment Tribunal and sent to the parties on 26 November 2010 by which he rejected claims by the Claimants that their employer Axa Services Limited and Axa Sun Life Services plc (collectively referred to as "the Respondent") had made an unlawful deduction from their wages contrary to the provisions of section 13 of the Employment Rights Act 1996 ("ERA").

1. The background to this claim is that both the Claimants were employed in financial services, and by reason of transfers they became employed by the Respondent in the early part of 2009.

1. The Respondent instituted a bonus scheme for the year 2009 and a success bonus scheme was notified to the employees in March 2010. At the end of February 2010, all employees entitled to a bonus under the 2009 scheme were paid that bonus. At that stage the Claimants were both under suspension pending an investigation into alleged gross misconduct on their part. By or at the end of April 2010, both Claimants had been dismissed by reason of gross misconduct. It is not contended that their dismissals were either wrongful or unfair.

1. To understand the issues on this appeal, it is necessary to set out the relevant statutory provisions which are set out in section 13 of the ERA and which state that: -

"13 Right not to suffer unauthorised deductions.

(1) An employer shall not make a deduction from wages of a worker employed by him unless—

(a)the deduction is required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker's contract, or

(b)the worker has previously signified in writing his agreement or consent to the making of the deduction.

(2) In this section "relevant provision", in relation to a worker's contract, means a provision of the contract comprised—

(a)in one or more written terms of the contract of which the employer has given the worker a copy on an occasion prior to the employer making the deduction in question, or

(b)in one or more terms of the contract (whether express or implied and, if express, whether oral or in writing) the existence and effect, or combined effect, of which in relation to the worker the employer has notified to the worker in writing on such an occasion.

(3) Where the total amount of wages paid on any occasion by an employer to a worker employed by him is less than the total amount of the wages properly payable by him to the worker on that occasion (after deductions), the amount of the deficiency shall be treated for the purposes of this Part as a deduction made by the employer from the worker's wages on that occasion.

(4) …

(5) For the purposes of this section a relevant provision of a worker's contract having effect by virtue of a variation of the contract does not operate to authorise the making of a deduction on account of any conduct of the worker, or any other event occurring, before the variation took effect…"

1. It will be seen that section 13(3) ERA has to be the starting point in determining what is "the total amount of the wages properly payable by" an employer to a claimant employee. The other provisions set out above deal with the way in which deductions can lawfully be made from that amount.

1. The Employment Tribunal held that the Claimants were not entitled to the bonuses for 2009 and 2010 and they did not fall within "the total amount of the wages properly payable by" the Respondent employer to the Claimant employees. Therefore the Claimants' 2009 and 2010 bonuses were not sums against which deductions could be made. Thus the claims were dismissed.

1. The Claimants have now appealed contending that the bonuses were wrongly deducted and are now payable. Their main grounds, which I will explain in greater detail below, are that the Employment Tribunal: -

(a) Misapplied section 13(3) ERA because it required (but did not receive from the Employment Tribunal) consideration of whether there had been an unlawful deduction from the Claimants' wages at the particular respective moments of time at which the 2009 and 2010 bonuses were "properly payable". The Employment Tribunal should have decided that the deductions arose because the bonuses were not paid by the Respondent. It is said by the Claimants that the deductions were unlawful because first on 26 February 2010, which was the date that the 2009 bonuses were paid to other employees, the Claimants had not yet been dismissed for gross misconduct, and second on 27 March 2010, which was the date when the 2010 bonuses were paid to other employees, the terms of the 2010 scheme were according to the Claimants "not even in existence";

(b) Should have decided that the withholding of the Claimants' 2009 and 2010 bonuses breached the requirements in section 13(1) and (2) ERA, as they were deductions which could only be made if (which is not the case) they had been authorised by a contractual term for which the employee had received prior notice in writing; and

(c) Ought to have concluded in respect of the 2010 bonuses that the requirements of section 13(5) ERA had not been complied with because they constituted a "a variation of the [Claimants' contractual rights]", which had not become operative.

1. The Respondents dispute each of these contentions and their case is that as the Claimants were not entitled to the bonuses for either 2009 or for 2010, there has never been an unlawful deduction.

(i) Introduction

1. The statutory provisions in section 13 were, prior to consolidation of the ERA, contained in the Wages Act 1986 which has as its long title:-

"An Act to Make Fresh Provision with Respect to the Protection of Workers in Relation to the Payment of Wages… and for Connected Purposes."

1. The relevant provisions in the 2009 scheme are that:-

1. "The 2009 scheme is an annual scheme with the facility to take monthly draw down. You must be employed within the Axa Group on 28 Jan 2010 to be entitled to any payment within the scheme. ("The First Provision"); and that

2. Where a member of sales staff leaves the company as a result of gross misconduct or poor performance, no bonus shall be payable." ("The Second Provision")

1. The conclusion of the Employment Tribunal was that "the clear intention… of that clause is to make not being dismissed by reason of gross misconduct a condition of entitlement to the bonus in the first place". In consequence, it held that there had been no entitlement by the Claimants to the bonuses and so section 13(1) and (2) ERA were not relevant as there had been no deduction.

1. Mr Paul Draycott, counsel for the Claimants, contends that this reasoning is wrong because the Respondent is seeking to make deductions for which it had to satisfy section 13(1) and (2) ERA, but that it cannot do so as the requisite adequate notice was not given to satisfy those provisions. The case for the Claimants is that the Employment Tribunal erred by failing to ask itself whether at the point (or, using the statutory language the "occasion") when the 2009 bonuses were paid to their staff, there was a contractual term permitting the Respondent to withhold payment of it to the Claimants.

1. Mr Draycott submits that if, as it should have done, the Employment Tribunal had asked itself this question in respect of the 2009 bonus, the answer would have to have been that the Claimants' right to payment crystallised on 28 January 2010 because at that point they had met the defined contractual criterion first of having remained in the employment of the Respondent and second of having generated sufficient sales or commission credit during the previous year and the requisite number of "customer fact finds" that had been deemed to meet the required level of accuracy. That the Claimants satisfied this second requirement is not the issue now in dispute.

1. It is said by Mr Draycott that although the 2009 scheme did not refer to a date when the bonus had to be paid, the scheme had to be considered in the light of the existing obligation of the Respondent to pay to staff their contractual remuneration as part of their pay round at the end of each month, which would have made the sums due under the 2009 bonus scheme payable on about 26 February 2010.

1. Mr Draycott contends that the Employment Tribunal erred in taking into account the fact that the Claimants were later dismissed for gross misconduct and regarding that as justifying the Respondent's case that no bonus was payable to either Claimant. In particular, it is contended by him that the second provision relied upon by the Tribunal and set out in paragraph 10 above was inapplicable, because on 26 February 2010, when the relevant deduction occurred both the Claimants had not been dismissed as they both remained in the employment of the Respondent. Mr Draycott submits that the second provision applied to people who were dismissed between 28 January 2010 and 26 February 2010 when they should have been paid or those who have taken the monthly draw-down as permitted under the scheme with the ensuing obligation to repay it. He contends that the consequence is that the Claimants should have been paid their bonuses and that the Respondent could have sued to recover it.

(ii) The circumstances when section 13(1) and (2) ERA apply

1. At the heart of the dispute between the parties is the meaning of the words "the wages properly payable by him to the worker" in section 13(3) of the ERA. It is not disputed that the term "wages" can encompass a bonus (s 27(1) (a) ERA), but there is a dispute as to what is meant by the following words "properly payable".

1. Ms Holly Stout, counsel for the Respondent, contends that those words apply to any sum, which the Respondent employer is obliged as a matter of law or contract to pay to the Claimant employees. This is disputed by Mr Draycott, who stresses that if this were the case, there would be no point served by section 13(1) and (2) ERA because the entire analysis of entitlement and deductions would have taken place under section 13(3) ERA.

1. I am unable to agree with Mr Draycott because the words "properly payable" in section 13 (3) ERA refer to a legal, but not necessarily a contractual, entitlement on the part of the employee to the payment (which in this case was the bonuses for 2009 and 2010), while the provisions in section 13(1) and (2) ERA relate to provisions, which diminish a legal entitlement which had so arisen. Indeed in New Century Cleaning Co Ltd v Church [2000] IRLR 27, Morritt LJ explained that:-

"43…the provisions of s.27 (1) and (3) confirm that 'the wages properly payable by him [sc.the employer] to the worker' are sums to which the employee has some legal, but not necessarily contractual, entitlement."

1. Beldam LJ stated in the same case that:-

"62. For wages to be 'properly payable' by an employer, he must be rendered liable to pay, either under the contract of employment or in some other way…"

1. In that case, the Court of Appeal held by a majority that there was no unauthorised deduction under section 13(1) ERA when the employer failed to make a payment which it had no legal obligation to make. In other words, there has to be a legal obligation to make a payment before the requirements in section 13(1) and (2) ERA have to be considered.

1. This conclusion is supported by the use of the word "deduction" in section 13(1) and (3) ERA as this indicates a reduction of sums otherwise payable pursuant to the legal entitlement of the employee in question. Thus, Nicholls LJ explained in Delaney v Staples [1991] ICR 331 in a judgment with which Lord Donaldson MR and Ralph Gibson LJ agreed in relation to the predecessor section to section 13 ERA (with my emphasis added) that:-

"Non-payment of the amount properly payable is to be treated as a deduction" (page339H); and

**

"If, come his 'pay day', a worker is in law entitled to a particular amount as wages and he receives nothing then, whatever be the reason for non-payment (excepting only errors of computation), that amount is to be treated as a deduction made from wages on that occasion." (page340 F)

1. The use of the word "deduction" indicates that there is a sum, which would otherwise be payable pursuant to a legal obligation, and that sum would be the entitlement in section 13(3) ERA. The word "deduction" entails a reduction of another sum. It is difficult to see what other meaning could be attributed to sections 13(1) and (2) ERA.

1. So sections 13 (1) and (2) ERA only operate in relation to a sum, which in a particular case would be payable as a legal obligation and the question of whether a sum is so payable will depend on contractual or legal considerations in each case. There is therefore an exercise which has to be completed before section 13(1) and (2) ERA could apply with that preliminary stage being to consider whether there is a sum legally payable in accordance with section 13(3) ERA and it is only if the answer is in the affirmative, that there has to be a consideration as to whether there is a deduction from that sum so as to invoke sub-sections (1) and (2) of section 13 ERA.

1. Examples of where sub-sections (1) and (2) of section 13 ERA might apply would be if an employee was entitled to wages, but he or she also had an obligation to reimburse his or her employer for damage done to the employer's property, or for a loan for a season ticket, or for the value of accommodation provided by an employer. These are all examples of "a deduction from wages". In each case, they constitute a claim against sums which would otherwise have been payable in the form of a set-off and so would fall within the ambit of section 13(1) and (2) ERA.

(ii) Has either Claimant had any right to a bonus payment under the 2009 scheme?

1. The case for the Claimants is that they satisfy the conditions required for them to be paid the 2009 bonus as first they were employed by the Respondents on 28 January 2011 as specified in the first provision set out in paragraph 9 above and second they had not been guilty of any "gross misconduct or poor performance" as specified in the second provision.

1. The correct approach in my opinion was suggested by Miss Stout, who pointed out that the provision that "you must be employed within the Axa Group from 28 January 2010 to be entitled to any payment within the scheme" merely sets out a qualification which has to be satisfied, but significantly it does not impose or constitute an obligation on the part of the Respondent to make a payment of the bonus to everybody who falls within that category.

1. It therefore follows that the contention that everybody employed by the Respondent on 28 January 2010 and who satisfies the performance requirements was thereby entitled to the 2009 bonus must be rejected. Mr Draycott then contends that the payment of the bonus should have taken place on the next payday after 28 January 2010, which was 26 February 2010 because the Claimants' salaries were paid 28 days in arrears and that this was the date when the bonus was contractually due. I am unable to accept this point as no finding was made by the Employment Tribunal to the effect that the Respondent was obliged to pay the 2009 bonus on 26 February 2010 or on any particular day and no request was made by or on behalf of the Claimants for such a finding.

1. Indeed no evidence was adduced on this issue other than the fact that the contract of employment of one or both Claimants refers to the date on which their wages are due to be paid, but crucially nothing is said about when the 2009 bonus should be paid either in the Claimants' contracts or in the 2009 bonus document. No implied term has been established for the date of payment of employees of the Respondent who were as the Employment Tribunal found in paragraph 3.4 of its Reasons "under suspension pending an investigation into alleged gross misconduct". My view is that any implied term would be that the bonus would not be payable until the gross misconduct allegations were dismissed or abandoned. The mere fact that other employees received their bonus on that date does not show that either Claimant had a legal entitlement to receive it on that date. So I am unable to accept that the bonus should have been paid by 26 February 2010 or indeed by any particular date before the Claimants were dismissed.

1. The second relevant requirement about the 2009 bonus scheme is that as a result of the second condition which I quoted in paragraph 9 above, no bonus would be payable to a person who leaves the company as a result of misconduct or poor performance. Thus by the time when in April 2010 the Claimants left the employment of the Respondent because of gross misconduct, the 2009 bonus was not paid to either of them and the Respondents were not under a legal obligation to pay it by that time. In those circumstances, neither of the Claimants is able to show that they had a legal entitlement to the 2009 bonus and so there can be no question of there being any "deduction" in their cases.

1. For the purpose of completeness, I should add that I disagree with the contention that the Claimants had a right to receive the bonus, subject to a separate claim that might be brought by the Respondent against to recover it. No grounds for suggesting any right to such recovery on the part of the Respondent have been put forward which is not surprising, because the claim could not be for money paid under a mistake of fact. Indeed Mr Draycott has been unable to suggest any cause of action, which would be available to the Respondent to recover such sums. In any event, this argument does not assist the Claimants because it implicitly accepts that the Claimants are not entitled to their bonus for 2009. For the reasons which I have sought to explain that is indeed the case and it is for this reason that there cannot be any deduction in relation to the bonus.

1. It follows therefore that the decision not to pay the 2009 bonus to either Claimant does not constitute a "deduction" so that sub-sections (1) and (2) of section 13 ERA are applicable, because at the earlier stage of the legal analysis it had been shown that the bonuses were not payable pursuant to a legal obligation and so were not in the words of section 13(3) ERA "properly payable". Therefore, I have to reject the contention that sections 13(1) or (2) ERA have any relevance to the 2009 bonus. It is therefore unnecessary to consider in any detail Miss Stout's alternative submission, which is that there was an implied term of the 2009 scheme that if an employer was suspended pending an investigation into gross misconduct allegations, no bonus would be paid during the period of suspension, but my preliminary view is there is much force in this point.

1. The relevant terms in the 2010 scheme were that:-

A.

"Where a member of the sales staff leaves the company as a result of gross misconduct or poor performance, the sales incentive will only be paid up to the date of dismissal"; and

**

B.

"Where a member of staff has been notified of/is pending a sales practice investigatory/disciplinary proceedings [the respondent] will withhold some or all the payments under the Incentive Scheme pending completion of its investigations. At that time any calculated bonus payments will be released/lost as deemed appropriate."

1. The Claimants were suspended before 27 March 2010, which was the date of payment of the first 2010 bonuses and so they had no legal entitlement to that bonus because of the provisions of paragraph B in the last paragraph. So the precondition for a deduction, namely a legal entitlement on the part of either Claimant to the 2010 bonus, does not exist with the result that sections 13(1) and (2) of the ERA are not applicable.

1. I should add that Mr McArdle had notice of the terms of the 2010 bonus scheme while Mrs Hellewell did not but that does not matter because for the reasons set out above, her bonus was not in the words of section 13(3) ERA "wages properly payable" to her as she had no legal entitlement to them and so sections 13 (1) and (2) ERA do not come into play.

1. In reaching the conclusion that Mr McArdle also had no entitlement to the 2010 bonus and so the provisions in section 13(1) and (2) did not apply, I have not overlooked the contention made by Mr Draycott that Mr McArdle can rely on section 13(5) ERA which I have set out in paragraph 4 above, on the basis that the 2010 Scheme constitutes "a variation of the contract" of employment which he had. Mr Draycott also relies upon paragraph 5 of the contract of employment of Mr McArdle which states that:-

"The company operates several discretionary Bonus and Incentive Arrangements. Details of the Bonus or Incentive Arrangements which apply within your business unit and in which you may be eligible to participate will be provided to you by your line-manager."

1. The custom of the Respondent was to have different self-contained bonus arrangements each year, so the 2010 bonus scheme did not constitute a variation of previous conditions. Indeed the 2009 conditions was a self-contained discrete scheme just lasting for and solely applicable for that year as its title and terms show, as was that of 2010. This simply was not a case of variation and so there was no need for the Respondent to comply with the provisions of section 13(5) ERA.

1. I therefore conclude that as in the case of the 2009 bonus neither Claimant was entitled to a bonus and so the claims for an unlawful deduction must be rejected. I should add that in those circumstances it is unnecessary to consider the many other submissions of Mr Draycott, as they cannot succeed in the light of my conclusions, which I have sought to explain.

1. In the light of these findings and notwithstanding Mr Draycott's careful and wide-ranging submissions, the appeals of both Claimants must be dismissed.