When does Custom and Practice become Contractual?

14 January 2014

Maxine Orr of Worthingtons Solicitors employment department discusses when practices become contractual within the workplace.

Case law over the years has addressed the question of when a policy or practice so long established in the workplace and widely known becomes contractually binding. The key question at the heart of this test is whether the employer in following the policy, has acted in such a way as to communicate an intention that that policy is contractual.

The Court of Appeal in England recently considered how this applied to a policy of paying enhanced redundancy benefits in the workplace. Ms Shumba and three others worked for Park Cakes Ltd.They had previously been employed by another employer and their contract of employment had transferred under the Transfer of Undertakings (Protection of Employees) Regulations 2006 in 2007.Two years later, in 2009 all four were dismissed by reason of redundancy. At the date of redundancy they claimed an entitlement to an enhanced redundancy package of double the statutory redundancy payment and without the statutory cap on the reckonable service or on a week’s pay plus a further lump sum of £600.They asserted that their previous employer had operated such a scheme over many years and had applied it whenever redundancies were made.

However Park Cakes Ltd refused to accept this as being part of their contract and stated that it had therefore not under TUPE and they had no obligation to pay this amount. Park Cakes Ltd did not dispute that the previous employer had a group wide policy of paying enhanced redundancy terms however they argued that this was simply a matter of policy and not a contractual entitlement.Shumba and three others issued proceedings in the Tribunal arguing that the enhanced redundancy benefit was contractual as it arose out of custom and practice. The Tribunal found that the written terms and conditions of employment for the employees contained no mention of enhanced redundancy payments, nor was it mentioned or referred to in the handbook.There were two collective agreements but the collective agreements were contradictory in that one referred to enhanced entitlements and the other referred to the minimum statutory entitlements.

There were two non-contractual internal company documents setting out the enhanced redundancy policy.Evidence was given by a former shop steward of the previous company, that during his tenure from 1978 to 1996 that at least 70 redundancy rounds every employee selected for redundancy received an enhanced payment. The internal policy documents were company documents which in evidence the HR person confirmed were not routinely handed out to employees and were mainly for the internal use of managers and HR personnel.Evidence was also given that since the TUPE transfer in 2007 the company had made a large number of employees voluntarily redundant on terms which did not incorporate the enhanced redundancy package. The Tribunal stated there was no entitlement to enhanced redundancy as the policy had not been drawn to the attention of the employees and the enhanced payments had not been made without exception.On appeal the Employment Appeal Tribunal held that this decision was wrong and that the former shop steward was best placed to know what had taken place therefore in the absence of any challenge to his sworn evidence, it found that the enhanced terms had been paid consistently and without exception prior to 2007.

The matter was appealed to the Court of Appeal and Lord Justice Underhill stated that the issue was “whether the circumstances in which it was made or has become known support the inference that the employers intended to become contractually bound by it”.The Judge stated that in considering what, objectively, employees should reasonably have understood about whether redundancy benefits are conferred as a right, the relevant circumstances will typically include the following: (1) on how many occasions, and over how long a period, the benefits have been paid; (2) whether the benefits are always the same – any inconsistency during the period relied on as establishing the custom is likely to be fatal; (3) the extent to which the enhanced benefits are publicised generally; (4) how the terms are described.If an employer clearly and consistently describes enhanced redundancy terms in language that makes it clear that they offered as a matter of discretion – e.g. by describing them as ex gratia – it will be hard to see how the employees or their representatives could reasonably understand them to be contractual, however regularly they may have been paid; (5) what is said in the express contract; (6) the equivocalness of the employer’s behaviour.

The Court stated that the burden of establishing that a practice has become contractual is on the employee. The lesson for employers is to be clear and ensure that any enhancement is either discretionary or non-contractual to avoid expensive and time consuming litigation.

Maxine Orr is a Partner specialising in employment law at Worthingtons Commercial Solicitors.

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