Establishing a contractual right to a redundancy payment

Employees are only entitled to enhanced redundancy pay if they can point to a contractual right, either written expressly in the employment contract or incorporated into the contract.

Incorporation can be either express (where the contract refers clearly to a specific collective agreement or handbook setting out what is to be paid on a redundancy) or implied (through conduct or custom and practice).

Unless an enhanced redundancy scheme is expressly stated to be contractual, it is likely to be difficult to establish a contractual entitlement. For a term to be implied into the employment contract based on custom and practice, it must be reasonable, widely known in the workforce and clear.

It is not enough to show that something has happened in the same way for a long time. The parties’ behaviour must suggest to an outside observer that they intended their practice to have crystallised into a binding obligation, i.e. part of the employment contract. The fact that an employer enters into negotiations with a recognised trade union to try to change a practice can be good evidence that the employer believes itself to be under a legal obligation (CSC Computer Sciences Limited v McAlinden [2013] EWCA Civ 1435).

In Park Cakes Limited v Shumba [2013] EWCA Civ 934, the Court of Appeal issued fresh guidance as to when a term is likely to become incorporated into an employment contract through custom and practice. This guidance is set out on page 82 of Chapter 3. The burden is on the employee to prove that the contract term exists.

Custom and practice cannot be relied on by the employer to remove a more beneficial contractual right, such as the right to enhanced redundancy pay (Solectron Scotland Limited v Roper [2004] IRLR 4).

In Peacock Stores v Peregrine [2014] UKEAT 0315/13/2503, an employer’s consistent practice of calculating redundancy payments without applying the statutory cap on either wages or length of service converted into a binding contractual right for future redundancy exercises. This meant that failing to pay redundancy compensation on this basis was breach of contract. The employer had consistently paid redundancy pay on this basis over two decades. The tribunal ruled that a contractual term could be inferred, binding the employer’s successor after a TUPE transfer.

Where a contract refers expressly to a document containing redundancy terms, those terms will have been incorporated, creating a contractual right. The clearer the language of entitlement, the more likely a court is to find a contractual obligation. For example, in Keeley v Fosroc International Ltd [2006] EWCA Civ 1277, Mr Keeley’s statement of employment particulars referred to redundancy rights contained in a staff handbook. The section of the handbook was headed “Employee benefits and rights” and promised: “Employees with two or more years’ continuous service are entitled to receive an enhanced redundancy payment.” The Court of Appeal said that this language created a contractual entitlement to enhanced redundancy, even though the document was silent about the method of calculating the payment. The court said that a redundancy entitlement is an important part of an employee’s remuneration package, and this made the statement particularly “apt for incorporation”.

This ruling was followed by the EAT in Allen v TRW Systems [2013] UKEAT/13/0083/12. In this case, although there was a redundancy policy in the staff handbook, written in precise language of entitlement and promise, the employees’ written Statement of Employment Particulars (see Chapter 3) contained no reference to the redundancy policy. Staff were required to sign the Statement to confirm that it “accurately represents the terms of the contract of employment”. The EAT said that nevertheless, the enhanced redundancy policy was a contract term. The Statement was supposed to include the main terms of the contract but there was no rule that it had to include every contract term (see Chapter 3, page 78).

An enhanced redundancy package is especially likely to be apt for incorporation into an individual’s contract of employment, said the EAT, because it has become a widely accepted feature of an employee’s remuneration package. The EAT warned tribunals to be especially wary of employers who argue that payments intended as part of the remuneration package, once promised and communicated to employees, are merely matters of policy and discretion.

Arkley v Sea Fish Industry Authority [2010] UKEAT/0505/09/101, is another useful case where the employer was held to account. Here, the Sea Fish Authority tried to avoid paying out under a contractual redundancy policy because a change to pensions law meant that the redundancy package became very expensive. Nevertheless, the policy language was clear, promising that “compensation in accordance with the scheme will be payable”. The employer was contractually obliged to make the payment.

If payments are discretionary, so that the employer is free to decide whether or not to make them, there will be no custom and practice. For example, in Quinn v Calder Industrial Materials [1996] IRLR 126, even though an employer had previously paid enhanced redundancy, there was no custom and practice for later redundancy rounds because, on each occasion, management met to decide whether or not to make the enhanced payment.

When deciding whether or not to exercise discretion to pay enhanced redundancy, management decisions must not be “irrational or perverse” (Commerzbank v Keen [2007] IRLR 132 CA).

Employers cannot avoid paying contractual redundancy pay by deliberately choosing to dismiss an employee for another reason (Jenvey v Australian Broadcasting Corp [2002] IRLR 520).

The time limit for a claim for statutory redundancy pay is six months from the date the contract ends. However, if an individual wants to claim that the dismissal decision was unfair, the time limit is the normal three months from the dismissal date. These deadlines are rarely extended (see Chapter 1 for guidance on bringing a tribunal claim).