Enhanced Redundancy Payments in the UK - Beware of Custom and Practice

by Dechert LLP
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Many employers make enhanced redundancy payments to staff in excess of the basic statutory entitlement as a matter of routine. The employer may be contractually committed - and entirely happy - to make these payments, where they are provided for explicitly under employees’ contracts, the employer’s formal and publicised redundancy policy or under a collective agreement.

However, problems may arise where the employer wishes to change or discontinue its approach especially if its practice has not been publicised or recorded as a formal commitment. Disputes may arise about whether the employer’s approach of making enhanced payments over a period of time has become contractual as a legally binding custom and practice and therefore whether the employer is entitled to discontinue or vary its position. 

Shumba & Others v Park Cakes Ltd is a recent Employment Appeal Tribunal (EAT) case that serves as a good reminder, not only that disputes over custom and practice do arise but also the legal test which is applied in determining whether the employer should be bound contractually by its past conduct.

The EAT made it clear that the issue of whether a pattern or practice of payment of enhanced redundancy packages becomes a contractually binding custom and practice is fact sensitive and therefore always depends on the precise circumstances. However, it summarised the factors that may be relevant in applying the test of what objectively the employees in question should reasonably have understood about whether an enhanced redundancy package is available as of right.

The factors to be considered include:

  • duration and frequency of payment - the more often enhanced benefits have been paid, and the longer the period over which they have been paid, the more likely it is that employees will reasonably understand them to be being paid as of right.
  • consistency of payment - if payments are variable over time, it is less likely that they will be contractual than where the employer applies the same approach consistently - for example, by applying a specific formula.
  • communication and awareness - if the enhancements benefits are publicised generally, this may be an indicator of contractual status on the basis of "widespread knowledge and understanding" on the part of employees that they are legally entitled to the enhanced benefits. However, if an employer clearly and consistently describes its enhanced redundancy terms in language that makes clear that they are offered as a matter of discretion e.g. by describing them as ex gratia – the EAT considered that it would be hard to see how the employees or their representatives could reasonably understand them to be contractual, however regularly they may be paid. Similarly to state that payments are made as a matter of "policy" may also count against contractual status.
  • the express terms of the employment contract - these may be relevant either to exclude or allow for the possibility of enhanced payments.
  • "equivocalness" - what the EAT meant by this is that the burden of establishing that a practice has become contractual is on the employee, and an individual will not be able to do so if the employer's practice is, viewed objectively, equally explicable on the basis that it is pursued as a matter of discretion rather than legal obligation.

The Shumba decision serves as a useful reminder of the need for employers who wish to avoid creating a legally binding custom and practice in relation to their approach to enhanced redundancy payments or to give themselves flexibility in future:

  • carefully to control the discussion and communication of the enhancements they make.
  • to ensure that any policy documents that are issued include appropriate wording with regard to the contractual or non-contractual status of the policy and the employer's ability to terminate it or vary its terms.
  • to consider whether the guidance given in the Shumba case should influence how enhancements are determined and applied and potentially varied to suit the employer's circumstances and objectives over time.
  • to consider whether, if they do not do so already, they should make the payment of an enhanced redundancy package conditional on execution of a settlement/compromise agreement. The offer of an enhancement may make it easier to secure the execution of a settlement agreement waiving all claims.

The concerns flagged by the Shumba this decision echo the Court of Appeal case earlier this year of Attrill v Dresdner Kleinwort Benson. In that case, to cut through a lot of legal argument, an employer was held to be contractually bound to establish a specific bonus pool based mainly on an announcement made orally at a "town hall" meeting. Employers need to be aware of the risk of giving legally enforceable commitments as a result of communications with staff as well as by way of adopting what becomes a legally binding custom and practice.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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