Once an employer makes its restrictive covenant bed, it must lie in it

avatar Posted on August 27th, 2014 by William Hampshire

Restrictive covenants can provide employers with valuable protection, but in order for them to be enforceable in an employment contract, they must go no further than is reasonably necessary to protect the employer’s legitimate interests.  Each case will be judged on its own facts, and there can be considerable judicial variability when it comes to enforcing a restrictive covenant.   But generally, the courts have adopted an “employer friendly” approach in recent years to their enforcement.  However, the Court of Appeal’s judgment in Prophet plc v. Huggett serves as a useful reminder of the need for careful drafting.

In Prophet plc v. Huggett, the Court of Appeal overturned a High Court decision to read words into a non-compete covenant where the literal interpretation of the clause gave rise to an absurdity. Although the purpose of covenant was no doubt directed at protecting the employer’s business interests by restricting the employee’s post-employment competitive activities, the literal reading of the wording offered the company no such protection.

The clause in question contained a very long first sentence, drafted widely, which both parties agreed on its own would have been unenforceable, and a succeeding proviso which limited the restriction to products the employee was involved with whilst in employment with the company.

The employer provided computer software for the fresh food sector and the employee was a sales manager who had been involved in the fresh produce industry. During his employment, the only company products the employee was involved in were called Pr2 and Pr3. It was accepted by both parties that no competitor of the company provided Pr2 or Pr3 software meaning the proviso limiting the restriction to only products the employee had been involved with whilst in employment with the company rendered the covenant pointless.

The High Court Judge was prepared to add words into the covenant to produce a commercially sensible result. In his view “something had gone wrong” in the drafting and the literal interpretation of the clause could not have been its true meaning, since it would not prevent the employee from working for a competitor of the company in the provision of software systems to the fresh produce industry.

The Court of Appeal acknowledged that where there is a clear choice between an interpretation that gives rise to an apparent absurdity and one that achieves a commercially sensible result, a court will ordinarily favour the latter interpretation.

However, the Court of Appeal found that the meaning of the proviso here was clear and there was no basis for interpreting it differently; the evident purpose of the proviso was to impose a limit on the unreasonably wide terms of the preceding sentence so as to achieve overall a covenant that was no wider than was reasonably necessary for the protection of the employer’s commercial interests. It was a “carefully drawn piece of legal prose” in which the draftsman chose his words deliberately.

The covenant did not contain an error of drafting, but an error of thought; the draftsman did not think through the practical consequences of the proviso as drafted. The Court of Appeal concluded that it was not for a court to re-make the parties’ bargain; the company had made its bed, and now it had to lie upon it.

The case serves as a useful reminder that restrictive covenants must be well thought through and carefully worded as a court will not rewrite a covenant that does not achieve the desired outcome, however absurd the result.

For further advice on the drafting of restrictions relevant to your business and on their enforcement in the event of a breach, please do not hesitate to contact any member of the team.

 

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A review of the taxation of travel and subsistence expenses

avatar Posted on August 19th, 2014 by Olivia Baxendale

On 31 July 2014, the Government launched a consultation on the tax treatment of travel and subsistence expenses. The consultation is prompted by an OTS (Office of Tax Simplification) report on the taxation of employee benefits and expenses. The report highlighted that the current taxation system for travel and subsistence expenses could be simplified and improved. The OTS also suggested that the system does not properly reflect the way people work today, for instance, the rise in home working. It noted confusion about what expenses can be paid free of tax/NICs where home is a workplace or what can be claimed where employees regularly or irregularly attend more than one company office or site. Following consultation, the Government intends to produce a new set of rules that are simpler to understand and use and which reflect 21st century working practices.

The consultation will be a two stage process. During the first stage, which closes in October 2014, the Government invites views on various matters including:

  • the commercial realities of travel and subsistence expenses;
  • the circumstances in which employers pay such expenses;
  • how tax influences those decisions; and
  • what sort of payments should qualify for tax relief, who they need to be paid by, to whom and in what manner.

The second stage of the consultation will start in Winter 2014 and close in Spring 2015. During that stage, a working group will assist with producing a set of principles for a new tax regime based on the findings from the first stage of the consultation process. The Government has pointed out that this is a long term piece of work and it has no plans to legislate or make any changes to the present regime in the current parliament.

If you would like to take part in the consultation, you can find out more information by clicking here.

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Age discrimination and enhanced redundancy

avatar Posted on August 18th, 2014 by James Warren

This month the Employment Appeal Tribunal decision of Palmer v The Royal Bank of Scotland Plc has highlighted the complex issues involved when an employee’s redundancy entitlement is linked to their age.

As a recap, statutory redundancy payments which are directly calculated by reference to age do not constitute unlawful age discrimination, and nor do enhanced redundancy schemes which “mirror” the statutory scheme. However, many enhanced redundancy schemes, often agreed with trade unions, provide a different basis for calculating payments which is dependent on employee age. These will be unlawful unless the scheme can be objectively justified.

The Court of Appeal has confirmed that schemes which provide greater benefits to older employees may be justified where there is evidence that older people are less easily able to react to loss of employment and to find alternative employment. However, while case law has adopted an approach which is open to accepting that such schemes may be justified, the decisions also emphasise the uncertainty and difficulties that arise in practice when applying age-linked rules, particularly for those employees who are about to move from one age band to another.

In one case, refusing to extend a redundant employee’s notice period in order to prevent him acquiring early retirement rights was held discriminatory when there was genuine work available for him to perform at that time, albeit of a temporary nature. By way of contrast, in separate proceedings it was held to be a legitimate employer aim to seek to dismiss early without proper redundancy consultation in order to avoid an employee qualifying for enhanced pension payments.

Mrs Palmer was a 49 year old employee placed at risk of redundancy who took up an offer of voluntary redundancy, rather than being placed in a redeployment pool. RBS had previously indicated that only employees aged 55 or over would be eligible for early retirement, but then adjusted its policy to allow at risk employees aged between 50 and 55 an opportunity to reconsider their position, offering voluntary early retirement to them also. However, Mrs Palmer was not offered any opportunity to reconsider her position, which she argued was unfair. Although she was not yet 50, she felt sure that if she applied for redeployment she would then face a potential redundancy dismissal when she was aged 50 (therefore qualifying for early retirement).

The Employment Appeal Tribunal was not sympathetic to her argument, pointing to the statutory rule providing a cut-off age for offering early retirement of 50. On this basis Mrs Palmer could not legitimately suggest that those aged 50 or over were appropriate comparators for a discrimination claim. There seems some possible unfairness in this approach, as employees in Mrs Palmer’s position may well have been persuaded to take a different approach to the redundancy situation once aware that there was the possibility they might later qualify for early retirement. Having said that, the Bank’s policy adjustment was a temporary change limited to the particular redundancy exercise, so it was much more able to argue that its change in position had a very narrow impact, confined to those already aged 50 or over.

Recognising the potential for appeal, the Employment Appeal Tribunal went on to examine the question of whether or not preventing Mrs Palmer from reconsidering her position was justified as a proportionate means of achieving a legitimate aim – if, in fact, it was age discriminatory. It indicated that Mrs Palmer would have succeeded on this point, albeit that would simply mean that an Employment Tribunal would have to reassess whether such justification in fact existed.

While RBS has been successful in defending Mrs Palmer’s claim to this point, the costs and risks arising when operating enhanced redundancy schemes connected to early retirement terms are amply demonstrated. The Courts have recognised that such schemes have a place and many employers support them. However, the utmost care and caution is needed to avoid claims of unlawful age discrimination.

Please contact a member of our team should you wish to discuss these issues in more detail or if indeed you are operating a non-statutory enhanced redundancy scheme which has age or service linked benefits.

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Retail administrations, collective redundancies and protective awards

avatar Posted on August 15th, 2014 by Nicholas Thorpe

As many of you know, the Woolies decision which removed the requirement for proposed collective redundancies to be “at one establishment” has been referred to the European Court of Justice (ECJ), leaving retailers (and UK employers more generally) uncertain as to the current position in the UK.

The case has yet to go before the ECJ and it is likely to be some time before it does so. But time stands still for no man. Over the Summer months, we have seen a number of retailers go into administration, with La Senza and Jane Norman both going into administration for the second time in the UK. We have also seen a number of protective award claims being made in favour of redundant staff, most notably in relation to the Comet liquidation (which resulted in the loss of 7,000 jobs) and more recently, in relation to the Barratts administration.

The Comet decision is worth considering, not least because it runs to 92 pages long. As in the Woolies case, the Tribunal was very critical of the collective redundancy process that the administrators followed. At best it found that Comet was going through the motions of consultation, but that Comet was not complying with its legal duty to consult properly or effectively, or at all. If anything, the judgment serves as an abject lesson as to how not to conduct a multi-site, collective redundancy exercise. As a consequence of Comet’s many and serious breaches, the maximum award of 90 days was made for store based staff, with Head Office and support functions receiving a 70 day award as the Tribunal accepted that time was too short to allow effective consultation in relation to the redundancy programme at Head Office.

It is estimated that the costs to the taxpayer of the Comet liquidation could be up to £70 million pounds – with the redundancy payments costing the Insolvency Service £18 million, the National Insurance Fund having to pick up the tab for the protective award claims of up to £26 million, and unpaid PAYE and VAT at the time of the liquidation being in the region of £26 million.

Given the additional costs that the taxpayer is having to pick up as a result of the administrators’ failure to consult the employee representatives regarding the proposed redundancies, it is perhaps understandable why the Business Secretary Vince Cable has expressed his concern and referred the administrators of Comet to their regulatory body for consideration as to whether disciplinary action should be taken.

The referral itself relates to a potential conflict of interest but appears to be driven by the concern that the administrators failed to consult employees properly.

In a strongly worded statement, Vince Cable said “The taxpayer now faces a multi-million pound compensation bill as a result of the failure to consult employees. There can be no excuse for failing to comply with the law which is very clear in this area. It is vital that the regulator establishes why this happened and whether disciplinary action against the administrators is appropriate”.

While one might take issue with the suggestion that the law is this area is “very clear” following the Woolies decision, the message could not be clearer; employers will be given short shrift if they fail to comply with their collective redundancy obligations and do not consult employee representatives properly.

A number of large employers have decided to adopt a cautious approach pending the outcome of the Woolies case. However, it is important that all employers are mindful of the implications of the Woolies decision if they are proposing to make 20 or more employees redundant over a 90 day period, either at one site or across various sites, particularly given the increased awareness of staff (and their representatives) of the possibility to bring protective award claims if very little is done to consult properly or effectively, in time, or at all.

For more details on the Comet decision, and more generally on how to conduct an effective multi-site collective redundancy exercise, please do not hesitate to contact any member of the team, who would be very happy to advise and share their experiences on how best to conduct such an exercise and avoid costly protective award claims.

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Termination payments – should the current £30,000 tax exemption be scrapped?

avatar Posted on August 13th, 2014 by Nicholas Thorpe

The Office of Tax Simplification (OTS) has recommended fundamental change to the current tax system on termination payments. In its final report on employee benefits and expenses, the OTS has recommended that the current £30,000 tax exemption on termination payments should be scrapped and replaced with a new income tax relief which would only be available in circumstances where an employee qualifies for a statutory redundancy payment.

The new relief would apply to all payments linked to the employee’s termination – regardless of the nature of the payment – subject to a multiple of the statutory redundancy payment to which the individual is entitled or alternatively, a flat amount. The relief would therefore extend to contractual payments in lieu of notice (PILONs) and “auto-PILONs” for those made redundant.

On the face of it, the OTS’ proposal would simplify the tax treatment of payments made to employees in a redundancy situation, particularly in circumstances where they are not required to work their notice period and receive a PILON. However, it would also deprive a large number of employees the benefit of a valuable exemption in circumstances where their employment is terminated for reason other than redundancy, and could potentially make settlements more costly.

It would also potentially increase the level of awards made for wrongful and unfair dismissal, discrimination and protective awards as such awards may no longer qualify for tax relief.

This could, therefore, be a very significant and costly change for employers, who would ultimately end up footing the tax bill.

There was a suggestion in the OTS’ interim report that the current £30,000 tax exemption should be increased (as it has been fixed at this level since 1988), but the OTS ruled out this possibility in its final report. Indeed, it went further and suggested that if a blanket exemption is retained and extended to cover all payments made in relation to the termination of employment, then the exemption may need to be set at a much lower level and, as a consequence, be of limited benefit.

So, will the £30,000 tax exemption be scrapped any time soon?

The OTS recognised in its final report that its recommendation on the taxation of termination payments would involve a fundamental change to the current system and would require extensive consultation, and with a General Election coming next year, it is unlikely to see the light of day for some time.

But the current exemption’s days may well be numbered.

The OTS final report, at 88 pages long, makes for some light Summer holiday reading. For those of you who are about to go on holiday and may be interested in reading more, here is a link to the report.

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Neal v Freightliner may have settled, but EAT to consider remaining holiday pay claims this week

avatar Posted on July 28th, 2014 by Nicholas Thorpe

So, it appears the rumours are true. Neal v. Freightliner Limited (the voluntary overtime holiday pay case) would appear to have settled as it does not appear in this week’s Employment Appeal Tribunal (EAT) cause list. However, the Employment Appeal Tribunal will still be hearing the co-joined appeals of Bear Scotland Limited v. Fulton & Baxter, Hertel (UK) Limited v. Wood & Others and Amec Group v. Law & Others.

The co-joined appeals are listed for a 3 day hearing before the EAT President, the Honourable Mr Justice Langstaff, commencing this Wednesday, 30 July.

In Bear Scotland v Futon, the Tribunal went further than the decision in Neal v. Freightliner by deciding that voluntary overtime must be included in the calculation of holiday pay for the entire 5.6 weeks of holiday provided under the Working Time Regulations 1998, and not the four weeks required by the Directive. In Hertel (UK) Limited and Amec Group, the Tribunal also decided that voluntary overtime should be included but limited its decision to the four weeks required by the Directive.

Both decisions were reached by the Tribunals treating the employees as having no normal working hours. This potentially creates knock-on issues beyond the calculation of holiday pay and in Hertel (UK) Limited and Amec Group required the Tribunal to read in additional wording to avoid the inclusion of unintended amounts being included in the calculation of holiday pay. In so doing, it created added complexity to an already overly complicated point.

While the arguments raised this week in the EAT are likely to be highly technical, the outcome of these appeals is important as it could have significant implications on a large number of employers who offer but do not guarantee overtime. Given the current uncertainties created by the Tribunal decisions mentioned above, it is only hoped that the Honourable Mr Justice Langstaff will give employers much needed guidance on this issue, particularly for those employers who are still adopting a “wait and see” approach.

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“Morbid” obesity may amount to a disability, says Advocate General

avatar Posted on July 17th, 2014 by Nicholas Thorpe

Advocate General Jääskinen has today confirmed, in the case of Karsten Kaltoft v. Municipality of Billund, that morbid obesity may amount to a disability for the purposes of the Equal Treatment in Employment Directive.

The Directive sets the framework for equal treatment in employment across Europe and is implemented in the UK by way of the Equality Act 2010. This case (which concerns a Danish childminder who claims his employment was terminated due to his obesity) is therefore relevant to all UK employers.

The Advocate General accepted that there may be cases of extreme, severe or morbid obesity, where an individual has a BMI of over 40, which could create serious limitations on that individual’s ability to participate in the workplace, such as problems with mobility, endurance and mood, which could amount to a “disability” for the purposes of the Directive. However, the Advocate General rejected any suggestion that there is a general, stand-alone prohibition on discrimination on the grounds of obesity in EU law. The matter will now go before the European Court of Justice (ECJ) to consider, with judgment to be given at a later date.

In his written opinion, the Advocate General did not consider “mere” obesity (i.e. individuals with a BMI count of less than 40) was likely to amount to a disability. However, if the individual’s obesity has reached such a degree that it hinders their full and effective participation in the workplace, then he accepted that it could be a disability.

The Advocate General also added that the question of disability does not depend on whether it is “self-inflicted”. The cause of an individual’s obesity is irrelevant; it may be due to excessive eating, a psychological or metabolic problem, or as a side-effect of medication. The key question is whether their obesity (whatever its cause) hinders their full participation in the workplace – or, using the language of the Equality Act 2010, from carrying out normal day to day activities.

The Advocate General’s opinion is consistent with the approach currently adopted in the UK under the Equality Act, which protects individuals who suffer from physical and mental conditions that result from obesity, to the extent that they meet specified criteria in terms of their nature, effect and duration. If today’s opinion is followed by the ECJ, then this case is unlikely to change the approach taken by Employment Tribunals; but it does serve as a useful reminder of the considerations that an employer must give when dealing with individuals with severe weight problems, particularly if the Equality Act is engaged.

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Launch of Enhanced Code of Conduct for Executive Search Firms

avatar Posted on July 9th, 2014 by Joanne White

In September 2013, we reported that due to a lack of female representation at Board level in FTSE companies, Business Secretary Vince Cable was planning to review the efficacy of the Standard Voluntary Code of Conduct (“SVCC”) originally launched in 2011. The SVCC was developed following the Davies Review, which recommended that executive search firms addressed gender diversity on corporate boards and best practice for the related search processes. Over 70 firms signed up to the original SVCC.

A review of the SVCC and a further independent review in February 2014, has resulted in the development of an Enhanced Voluntary Code of Conduct (“EVCC”), created by executive search firms themselves, in order to raise the standards of professionalism and conduct in the recruitment of women to the boards of FTSE 350 companies. The new EVCC gives recognition to those firms who have been most successful in appointing women to FTSE boards.

Although voluntary, it is hoped that executive search firms will show their commitment to gender diversity by embracing the more rigid requirements of the EVCC. To encourage this, firms can gain accreditation under the EVCC by demonstrating to the Davies Steering Group (who has responsibility for determining which firms are deemed to have met the criteria) that they have, amongst other things:-

  • supported the appointment of at least 4 women to the boards of FTSE 350 companies over the last year;
  • achieved a proportion of at least 33% female appointments in their FTSE 350 board work (across both Executive and Non-Executive Director roles);
  • a proven record of helping women to achieve their first FTSE 350 board appointment;
  • visibly signalled their commitment to supporting gender diversity clearly on their websites, in marketing literature and in discussions with clients and candidates;
  • published relevant summary data on their track record and case studies on their website as appropriate.
  • provided internal training and awareness programmes to share and embed best practices within their firms and to ensure that full adherence to the Code is effectively monitored.

The accreditation criteria is re-assessed annually.

The launch of the EVCC is the latest milestone in a bid to meet the target of 25% women on FTSE 100 boards by 2015. Whilst it is widely considered to be a step in the right direction in terms of achieving gender equality in boardrooms, it is unlikely that the EVCC is the final chapter in this story with an update expected from the Davis Steering Group in September 2014.

We will keep you updated.

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Zero hour contracts – the Government’s response

avatar Posted on June 26th, 2014 by Nicholas Thorpe

Yesterday, the Government announced its long awaited response to its consultation on the use of zero hour contracts. Draft legislation was also put before Parliament setting out the proposed new rules.

The Government has confirmed that it will ban the use of exclusivity terms, preventing zero hour workers working for another employer even when no work is guaranteed. In its brief statement on the consultation’s outcome, the Government also indicated that it was committed to increasing the availability of information for employees on zero hour contracts and would work with unions and businesses to develop a best practice code of conduct aimed at employers who wish to use zero-hour contracts.

The draft legislation for the first time provides a statutory definition for the term “zero hour contract”.

A “zero hour contract” is defined as:

“… a contract of employment or other worker’s contract under which:

(a)     the undertaking to do or perform work or services is an undertaking to do so conditionally on the employer making work or services available to the worker, and

(b)     there is no certainty that any such work or services will be made available to the worker.”   

The definition would appear to exclude workers who are guaranteed a certain number of hours work, no matter how few; for example, a one hour fixed contract, with a commitment to work such additional hours as and when required, would appear to fall outside the definition. This has prompted some to say that the proposed ban on exclusivity terms could, on the face of it, be easily circumvented. However, the Government has indicated that it will issue a further consultation on how to prevent ‘rogue employers’ evading the exclusivity ban.

The Government’s response stops short of some of the proposals put forward by Ed Miliband in April (see earlier blog). However, the draft legislation includes reserved powers for the Secretary of State to introduce additional legislation to modify zero hour contracts, impose financial penalties on employers, require employers to pay compensation to zero hour workers, and confer additional rights on zero hour workers. Further restrictions may therefore be proposed following further consultation and the development of a code of practice on the fair use of zero-hour contracts, which is due by the end of 2014.   

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Criminal record checks and the right to private and family life

avatar Posted on June 18th, 2014 by Angharad Schell

The Supreme Court has today determined that the UK’s current process for criminal records checks is incompatible with the right to respect for their private and family life.  This confirms the Court of Appeal’s earlier decision, reported in our blog.

Disclosing convictions, cautions, warnings and reprimands

Other than in the case of extremely serious criminal offences, most convictions are ‘spent’ after a specified period of time (in the case of cautions, warnings and reprimands, they are spent immediately after being given). Spent convictions do not need to be disclosed to employers and, where an employer is aware of a spent conviction, they are not entitled to make any decisions (such as to deny employment) on the basis of a spent conviction or a failure to disclose.

However, in cases where the individual is seeking to work with children or other at risk groups, then employers are entitled to take account of spent convictions and there is also a disclosure obligation on the individual.

Convention Rights

The European Convention for the Protection of Human Rights guarantees the right to private and family life. This is a limited right and can only be infringed where the interference is: (1) in accordance with the law; (2) necessary in a democratic society for certain prescribed reasons, including public safety and the prevention of crime.

The current case

In the case before the Supreme Court, T had received a warning when he was 11 in connection with the theft of a bicycle. This warning was disclosed twice as part of a CRB (now DBS) check: first when T was 17 and again when he was 19. In each case the spent warning was disclosed on the basis that the activity might bring T into contact with children.

JB was issued with a caution (as an adult) in connection with the theft of a pack of fake nails (which was claimed to be accidental). Eight years later, JB completed a training course intended to later find her placement within the care sector but, when the spent caution was disclosed, was denied the opportunity to be put forward for work in the care sector.

T and JB claimed that the disclosure of the spent warnings and cautions breached their Convention rights.

The Supreme Court agreed.  Interference with Convention rights had to be in accordance with the law. As UK law required all spent convictions to be disclosed indiscriminately, the interference with the right to private life was not in accordance with the law and was disproportionate. Further, the interference with the right was not necessary in a democratic society. The Court particularly focused on the fact that the legislation was not rational in the means it was choosing to meet its ends: for example, requiring T to disclose a childhood misdemeanour could not sensibly achieve the required end, to protect children. The impact on requiring JB to disclose an incident showing minor dishonesty years later also had a disproportionate impact on JB compared to the intended aim of protecting those in need of care.

As such, the declaration of incompatibility put into place by the Court of Appeal was maintained by the Supreme Court. The criminal record check regime was reviewed following the Court of Appeal Judgment and more limited rules were introduced in June 2013 regarding the disclosure of spent convictions. The Supreme Court noted the change in law but refrained from commenting on whether they considered the revised legislation to also now be compatible with Convention rights.

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