Establishing an obligation to pay enhanced redundancy based on custom and practice

Sometimes, a contract is silent on the payment of enhanced redundancy, and other documentation, if any, such as staff handbooks or internal memos, is unclear, so the parties look to custom or practice to establish their agreed terms. A custom or established practice of paying enhanced redundancy, applied often and regularly enough, can eventually become the source of an implied contractual term. This happens when the point is reached at which a court can infer from the regularity of the practice that both parties, judged by their behaviour, must be taken to have accepted that their practice has crystallised into contractual rights and obligations. This is often difficult to prove, but the testimony of long-serving employees and negotiators can be very helpful, especially where the employer has changed hands and managers have limited first-hand knowledge of past practice.

In practice, it is vital, on any transfer of employment, to ensure that contractual rights to enhanced redundancy payments — especially if based on custom and practice — are acknowledged by both the outgoing and the incoming employer and carefully documented before the transfer takes place. Any redundancy payments to be made by the incoming employer following the transfer will usually have been accounted for in the business purchase price or through warranties.

Important changes to the law governing the effect of TUPE on collectively agreed contract terms, such as the right to enhanced redundancy pay, are expected to become law when TUPE is changed in early 2014. For more information see.

For a term to be implied into the employment contract based on custom and practice, it must be “reasonable, notorious and certain” (Devonald v Rosser & Sons 1906(2) KB 728). “Notoriety” simply means that there must be “widespread knowledge and understanding” of the term (Garratt v Mirror Group Newspapers Limited [2011] ICR 880).

It is not enough to show that something has happened for a particular length of time. The parties’ actions must enable an outside observer to infer that they must have intended their practice to be part of the contract. For example, in North Lanarkshire Council v McDonald [2006] UKEATS/0036/06, the fact that workers worked half an hour of overtime every day for a year did not make the extra hours a contractual right.

As always, what matters is not the subjective beliefs of either the employer or the employees or their reps, but instead, how their actions look to an objective outside observer, taking into account the industrial context.

Employees who join an organisation can be bound by, and take advantage of, an established customary term — such as a right to enhanced redundancy, even if they do not know of it at the time of recruitment (Sagar v Ridehalgh & Son [1931] 1 Ch 310).

In Park Cakes Limited v Shumba [2013] EWCA Civ 934, a claim for enhanced redundancy payments supported by the Bakers Food and Allied Workers Union, the Court of Appeal issued fresh guidance as to when a term becomes incorporated into the employment contract through custom and practice. Here it is:

• How often and over how long a period have the benefits been paid? The more often and longer benefits have been paid, the more likely it is that employees will reasonably regard them as a contractual right;

• Were the benefits always the same? If payments have always been the same, this supports a contractual right. By contrast, if an employer always makes enhanced redundancy payments but varies the amount or terms of payment, this is likely to be inconsistent with a legal obligation to pay. “Any inconsistency during the period relied on in establishing the custom is likely to be fatal”. Even so, an employer could bind itself through custom and practice to pay a minimum level of redundancy pay, while at the same time reserving a discretion to pay more generously from time to time;

• How have the benefits been publicised? Publicising the availability of enhanced benefits generally to the workforce suggests that the employer acknowledges a legal obligation. Publication can take many forms. Depending on the facts, publication to a trade union or a large group of employees may amount to publication to the workforce as a whole. Tribunals must judge, based on “industrial reality”, whether the employer’s actions have created “widespread knowledge and understanding” by employees that they are legally entitled to enhanced benefits;

• How are the terms described? If an employer uses clear language of discretion, for example, describing a payment as “ex-gratia”, employees cannot reasonably regard payments as contractual, no matter how regularly they are paid. The language of “policy” may also, depending on context, suggest the lack of a contract term. By contrast, the language of entitlement points to a legal obligation;

• What does the contract say? No term should be implied, whether by custom or otherwise, that is inconsistent with the express contract terms, unless the parties’ behaviour supports an intention to vary the contract;

• Is the presence of a contract term the only sensible explanation? The burden of proving that a practice has become contractual is on the employee, who will not be able to discharge it if the employer’s actions, looked at objectively, are equally consistent with a discretion rather than a legal obligation.