Unfair dismissal - Case Round-Up: August 2017

In this month's round-up, Mark Shulman, consultant solicitor with Keystone Law, looks at recent cases on qualifying service, adding a new unfair dismissal claim, a week’s pay for compensation purposes and the implication of a contractual term by custom and practice.

Mark Shulman, Consultant Solicitor at Keystone Law

Qualifying service
Did a solicitor have sufficient qualifying service to bring a claim of unfair dismissal? No, said the EAT in [Dugdale v DDE Law Ltd ]()UKEAT/0169/16/LA.

The Claimant was a solicitor with DDE Law Limited ("DDE"), a private limited company. The Claimant, together with two other solicitors, were shareholders and directors of the company since incorporation in 2008. There were no express employment contracts and no written shareholder's agreement. Nothing had been agreed about holidays or hours of work. In 2014 the Claimant sold her shares and resigned her directorship and became an employee of the company. Then, in 2015 she was dismissed and she brought a claim of unfair dismissal.

Did the Claimant have a contract of employment whilst working as a director and shareholder? The EJ thought not. He found that there was no express oral or written contract of employment.

Was there an implied contract arising from the conduct of the parties? No, said the EJ – an employee would not be paid a "notional" salary in one month only for tax purposes or receive regular monthly loans from the company which were later converted into dividends as far as the level of profit allowed. The way in which the Claimant received payment was similar to the way in which a partner in a firm would receive money with monthly drawings pending the determination of profit at the end of the year. Although a payslip was prepared in the name of the Claimant for only one month, this was a device to use up the personal allowances of the directors during each tax year. Although they were directors, they acted like partners would have done in a traditional partnership, but running their practice through the medium of a limited company.

In terms of the element of control (an essential aspect of any employment relationship), prior to November 2014 the Claimant described herself as "the senior partner" and did not appear "to have been controlled by anyone but herself".

Overall, the EJ concluded that the Claimant was not an employee with sufficient qualifying service to bring an unfair dismissal claim.

Director and employee?
The EAT agreed. A person could be both a director and an employee (Secretary of State for Business, Enterprise and Regulatory Reform v Neufeld & Howe . Whether there was an employment contract between a shareholder/director and the company was to be decided by the application of ordinary principles.

It was relevant for the EJ to take into account that the parties, though adopting a corporate structure, were modelling themselves on a partnership structure, "acting like partners would have done in a traditional partnership". Such a partnership can and does operate without any contract of employment between the partnership and the individual partner; it is common for partners to draw against available funds by means of loan accounts until profits are calculated.

As Rimer LJ had said in Neufeld, the payment of salary will point towards employment and payment of director's fees will point away from it. The EAT in the present appeal thought payment of dividends also pointed away from it. This was because entitlement to a dividend derived from the shareholding; it was not dependent on the existence of a contract of employment. The dividend did not depend on the work of the individual shareholder; it depended on the profitability of the company as a whole. The EJ had been entitled to find that the factors which he mentioned pointed away from the existence of a contract of employment. Whilst it was true that the amount of pay could vary under a contract of employment, it was not a normal feature that payment is taken by means of loans in variable amounts, repaid by dividends at the end of the year.

In terms of the element of control, that included "the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant" (Ready Mixed Concrete v Minister of Pensions and National Insurance [1968] 2 QB 497). The Claimant had for many years prior to 2014 held herself out as effectively the senior partner, taking orders from no-one. The fact that she gave up her directorship and shareholding at the time when she was expressly given the status of an employee tended to show that there was a real change at this time.

The EJ had therefore not fallen into legal error and the Claimant's appeal was dismissed.

This case rather underlines the need to ensure that appropriate documentation is put in place by the parties prior to the commencement of any employment arrangements.*

Adding a new claim
In another case where the Claimant had less than 2 years' service, the Claimant brought claims of unfair dismissal by reason of disability and disability discrimination. She then sought to add a new claim, alleging unfair dismissal for whistleblowing. Although the claim was made in time, the addition of the new claim was refused by the EJ. Was the ET right to reject the application? No, said the EAT in [Gillett v Bridge 86 Ltd ]()UKEAT/0051/17/DM.

The Claimant advanced various arguments at the EAT.

Firstly, it was said that the amendment was not an entirely new cause of action but was a relabelling of an extant unfair dismissal claim. The EAT disagreed. Whilst it included a claim of the same type (i.e. unfair dismissal), it depended on critical new facts as to the protected disclosures alleged by the Claimant.

Secondly, it was submitted that the merits of the proposed claim should not have been taken into account in circumstances where the EJ had not found that new claim to be hopeless or to have no reasonable prospect of success. The EAT did not accept that contention either. ETs must be entitled to consider whether the proposed claim had reasonable prospects of success. It would be inconsistent and anomalous if an application to amend could not be refused on that basis, but a claim that had been otherwise presented (i.e. a fresh application), could be struck out where it had no reasonable prospects of success. A pessimistic view on merits (but falling short of "no reasonable prospects of success") could not support a refusal of an amendment application that has been brought in time. If the Claimant had taken the alternative course of issuing a fresh claim within the relevant time limit, the ET would not be entitled to strike out the claim and at most there could be a Deposit Order. If the practice on amendment were otherwise, a Claimant would have to issue a fresh claim and apply to have it managed and heard with the existing claim (both inconvenient and costly for the parties and the ET);

The third point of appeal contended that the hardship/injustice test had been wrongly evaluated in all the circumstances. The EAT thought this had merit. Although the EJ had concluded that the Respondent would suffer some hardship and injustice if required to deal with the new claim, it would have been in just the same position if the Claimant had taken the alternative course of issuing a fresh claim. And the fact that the Claimant could pursue her other unfair dismissal claims was not a reason to conclude that there was no significant hardship or injustice if she were to be prevented from pursuing the distinct whistleblowing claims. The consequence of that would be to place her in a worse position than if she had taken the alternative course of issuing a fresh claim.

The EJ had therefore been wrong in refusing the amendment and the circumstances compelled the conclusion that permission to amend should have been granted.

Section 221 of the ERA 1996 provides that:

(2) Subject to section 222, if the employee's remuneration for employment in normal working hours (whether by the hour or week or other period) does not vary with the amount of work done in the period, the amount of a week's pay is the amount which is payable by the employer under the contract of employment in force on the calculation date if the employee works throughout his normal working hours in a week."

The appeal in [University of Sunderland v Drossou ]()UKEAT/0341/16/RN included consideration as to whether the employer's pension contributions should, for unfair dismissal compensation purposes, have been taken into account in determining the Claimant's weekly pay under section 221, which in turn would determine the statutory cap on the compensatory award (capped at the lower of 52 weeks' pay or (at that time) £78,962 (the relevant statutory cap in force at the EDT).

The ET concluded that the employer pension contributions should be included in the calculation of a week's pay since the term "remuneration" set out in the definition of a week's pay in section 221 meant a reward in return for services, whether or not the sums payable were given to the employee directly or to a pension scheme. Pension contributions were no less a reward for service than basic pay and section 221 did not refer to sums payable "to the employee" (in contrast to section 27 of ERA 1996 which does refer to "any sums payable to the worker in connection with his employment" (emphasis added).

The Respondent appealed against this calculation, but lost at the EAT.

The EAT agreed with the ET's conclusion which was "correct and unassailable". The use of the words "sums paid to the worker" in section 27 (definition of wages) and their absence from section 221 in referring to a week's pay, was conclusive against construing a week's pay in that latter provision as requiring payment to the employee. The legislature has shown by the wording of section 27 that where it has intended remuneration to be restricted to amounts paid directly to the employee the words "to the employee" have been inserted.

Accordingly, in section 221 "remuneration" applied to the employer's contributions to a pension scheme in respect of the employee for his or her work.

The week's pay calculation is of importance only for an employee earning less than the statutory cap. An illustrative example of the difference in compensatory award if employer pension contributions are/are not included in the calculation of a week's pay, is as follows:-*

*Gross weekly pay: £500
Weekly employer pension contributions: £50*

Cap on compensatory award if pension contributions are not included in the definition of a week's pay = 52 x 500 = £26,000.

Even if the Claimant were to claim under a separate head of loss for lost pension of £2,600, this sum is part and parcel of the compensatory award and so the award would still be capped at £26,000.

Cap on compensatory award if pension contributions are included in the definition of a week's pay = 52 x 550 = £28,600

Therefore, Claimants and their representatives should ensure that in any Schedule of Loss, the gross weekly pay figure includes weekly employer pension contributions if their compensatory award does not exceed the statutory cap.

Constructive dismissal
Could the non-payment of bonus on due dates constitute a constructive dismissal? Yes, said the EAT in [Ghiglieri v Systech Group Employee Ltd ]()UKEAT/0310/16/BA, it could - remitting the issues for the ET to decide in the light of the ET's judgment.

The Claimant resigned after the Respondent did not pay his quarterly bonus on what he contended were the due dates. Although the entitlement to and the amount of the bonus due was not in dispute, he claimed that the failure to pay on time was in breach of contract or a breach of the terms of trust and confidence in him.

The ET disagreed and dismissed his claim of unfair constructive dismissal. It decided that a term could not be implied on the basis of custom and practice because such a term must be notorious and widely known by employees. As the Claimant's evidence focused on his own position rather than any wider policy applied by the employer, the ET could not be satisfied that the test for terms implied by custom and practice had been met. Accordingly, the employer could not be in breach of contract in failing to make quarterly payments.

The EAT allowed the Claimant's appeal. Both parties agreed that the case concerned a bonus negotiated and paid to an individual on an individual basis (rather than a situation where a bonus was applied generally to a group of employees) and so the observations of the EJ and the basis upon which she reached her adverse decision were errors of law.

Was there an issue in terms of implying a term which would be inconsistent with an express term? The EAT thought not. The contract was silent on the due date for payment of any bonus. Given the absence of express contractual terms as to the interval for payment of bonus, an implied term for quarterly payment of annual bonus would not be contrary to any express terms of the contract. Was there any evidence before the ET which was capable of justifying a custom and practice claim of paying quarterly? Yes, said the EAT: arguing to the contrary was "not sustainable" in light of the documentation which showed that regular quarterly payments of bonus had been made and the employer had written an apologetic letter for not paying quarterly. Accordingly, the EJ had erred in law and the ET's Decision on this point set aside.

The claims of constructive dismissal and for unpaid bonus were then remitted to the ET to determine (i) whether the Claimant actually had a contractual entitlement to be paid his annual bonus on a quarterly basis, and (ii) whether the employer was in breach of the implied term of trust and confidence by not paying a bonus on a quarterly basis (if it was contractually obliged to do so).


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.

Published: 14/08/2017 12:01

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