Establishing a contractual right to a redundancy payment

Employees are only entitled to enhanced (i.e. contractual) redundancy pay if they can point to a contractual right, either written into the employment contract or incorporated into the contract from some other source, such as a handbook, redundancy policy or collective agreement.

Like any other contract term, the right to contractual redundancy pay will transfer under TUPE (Lansing Linde Severnside v Spiers [2002] UK EAT/1490/01). The protection of collectively agreed contract terms has been complicated by changes to TUPE by the last government (see Chapter 12). In case of doubt, advice from trade union solicitors should be sought as early as possible.

Incorporation of a contractual right to enhanced redundancy pay can be either express (where the contract refers clearly to a collective agreement or handbook setting out what is to be paid on a redundancy), or implied (through past behaviour or custom and practice).

Unless an enhanced redundancy scheme is clearly identified in the employment documentation as contractual, it can be very difficult to establish a contractual entitlement. For a term to be implied based on custom and practice, it must be reasonable, widely known in the workforce and clear (see page 68).

It is not enough that something happened in the same way for a long time. Instead the parties’ behaviour must strongly suggest to an informed onlooker that they intended their practice of paying enhanced redundancy pay to have developed into a binding contractual obligation.

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. The guidance suggests, in particular, that:

• the more often and the longer enhanced redundancy payments have been regularly paid, the more likely they are to be contractual;

• regularly publicising the availability of enhanced redundancy pay to the workforce — either directly or through a union — without qualification suggests that the employer acknowledges a legal duty to pay;

• language of entitlement such as “shall” or “must” points to a contractual obligation to pay. Discretionary language such as “should”, “ex-gratia” or “policy” points in the opposite direction;

• a promise to pay enhanced redundancy payments cannot be implied — whether by custom or otherwise — where this would be inconsistent with the express (i.e. clearly agreed) contract terms, unless there is evidence that the parties intended to vary their express agreement;

• if the employer’s behaviour can be explained just as well as an exercise of discretion, a tribunal is unlikely to find an implied obligation to pay based on custom and practice.

Employees will not lose an express contractual right to enhanced redundancy pay just because the employer has breached the employment contract in past redundancy exercises by failing to pay enhanced redundancy (Solectron Scotland Limited v Roper [2004] IRLR 4).

In Peacock Stores v Peregrine [2014] UKEAT 0315/13/2503, the employer operated a practice of always calculating redundancy pay over two decades without applying the statutory cap on either wages or length of service. This created a contractual obligation based on custom and practice to pay redundancy on this basis, which bound the employer’s successor after a TUPE transfer.

Where an employment contract names a document, such as a staff handbook or redundancy policy, containing redundancy terms, those terms will normally be incorporated into the contract. For example:

Keeley was followed in this case:

In Allen, the EAT commented that an enhanced redundancy package is especially likely to be apt for incorporation into the contract of employment because it has become a widely accepted feature of an employee’s remuneration package. Tribunals need to be especially wary, said the EAT, of employers who try to suggest that payments intended as part of the remuneration package, once promised and communicated to employees, are merely matters of policy and discretion.

Here is another good example:

If payments are discretionary, meaning that the employer is genuinely free to decide whether or not to make them, there can 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 there was evidence that on each occasion, management met to decide whether or not to make the enhanced payment.

When deciding whether 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 of dismissal. However, if an individual wants to claim unfair dismissal, the claim must be brought within the normal three month time limit. The deadline for a claim for contractual redundancy pay in the employment tribunal is three months from the dismissal date. Acas Early Conciliation applies to claims in the employment tribunal. In the civil courts the equivalent deadline is six years. Deadlines are rarely extended. See Chapter 13 for information about Acas Early Conciliation and about bringing a claim in the employment tribunal.