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Employee who changed his status to subcontractor for £200 was a worker and was entitled to holiday pay Bale-outs?

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The Employment Appeal Tribunal has found that a claimant who changed his status from general labourer to a labour-only subcontractor in exchange for £200 was still a “worker” under the Employment Rights Act and the Working Time Regulations and was therefore entitled to holiday pay.

Mr Holden was employed by Plastering Contractors Stanmore Ltd as a general labourer between April 1997 and February 2001. From February 2001, Mr Holden agreed to become a labour-only subcontractor for a one-off payment of £200. After this, Mr Holden was put on Stanmore’s database of labour-only subcontractors. When work was needed at a particular site, Mr Holden was asked to perform it. He worked on many sites and whilst he was there, he would be under the instruction of the site supervisor. He could be paid by price or time spent completing work (the rates for which were set by Stanmore) and he was paid under Stanmore’s scheme rather than by submitting invoices. Save for his own safety boots, the remaining equipment was provided by Stanmore. Although there was no obligation for Stanmore to offer Mr Holden work or for Mr Holden to accept it, Mr Holden worked almost exclusively for Stanmore until he decided to take up similar work with another company.

Mr Holden brought a claim against Stanmore arguing that he was a worker and Stanmore’s failure to pay him holiday pay was an unlawful deduction from his wages under the Employment Rights Act.

The EAT held that Mr Holden was a worker for the purposes of the Employment Rights Act and the Working Time Regulations. Stanmore argued that because it and Mr Holden were not obliged to offer or accept work respectively there was insufficient mutual obligation for Mr Holden to be a “worker”. The EAT held that mutuality of obligation existed during each short assignment rather than during the entire arrangement. Stanmore also argued that any individual who was allowed to appoint a substitute pointed to there being no obligation on him to render personal service and therefore Mr Holden was not a worker. The EAT held that this did not reflect the reality of the arrangement. Finally, Stanmore argued that it had no right of control over Mr Holden. The EAT found that this argument was “fanciful”. Whilst Mr Holden’s experience meant that he required very little supervision, he still had to do what he was told.

Plastering Contractors Stanmore Ltd v Holden UKEAT/0074/14

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Employer should have set out deduction to employee’s wages in payslip

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An employee whose employer had clawed back overpaid wages claimed that his employers had not complied with the Employment Rights Act, which requires employers to give written and itemised pay statements. The Employment Appeal Tribunal has held that deductions of an employee’s wages should have been properly itemised and explained on the employee’s payslip.

The claimant, Mr Ridge, worked as a Software Engineer at HM Land Registry. The Land Registry paid its employees on the last day of each month and gave its employees a payslip which set out their gross pay and any deductions. Mr Ridge began to have health problems and had long periods of sickness absence. He had exhausted his sick pay entitlements and was absent after this period, which meant that there were months when he was not entitled to his full monthly salary. Where his absences were reported and processed before the end of the month, his gross pay would be reflected correctly on his payslips, but when they were not, he would be overpaid and the amount would be recovered from the next month’s gross pay. These reductions would appear as a negative amount on his payslip but there would be no other details explaining why the adjustments were made. Mr Ridge asked the Land Registry to include an explanation on his payslips but it did not do so.

Mr Ridge brought a claim against the Land Registry arguing that it had failed to meet its obligations under the Employment Rights Act which requires employers to give written and itemised pay statements to their employees (including itemised deductions and the purposes for which they are made). The Land Registry argued that the variations made to Mr Ridge’s pay were adjustments rather than deductions and therefore the provisions of the Employment Rights Act would not apply.

The EAT held that a reduction of the following month’s pay was a deduction for the purpose of the Employment Rights Act and that Mr Ridge was entitled to have a declaration to identify the amount and purpose of the deductions made from his salary. The EAT distinguished recoveries of overpayments (which it considered were deductions under the Employment Rights Act) from adjustments to pay due to Mr Ridge’s exhausted sick pay (which were not deductions under the Employment Rights Act). However, although Mr Ridge won his case in principle and was entitled to a declaration of the deductions made, he was not entitled to damages. Mr Ridge had claimed that he was entitled to a payment up to the aggregate of the unnotified deductions which he argued could be made even where the deduction made was correct. The EAT found that in this case this award would be disproportionate, given that: (i) the deductions were apparent; (ii) Mr Ridge was alerted to them; (iii) he understood the purpose for which they had been made, and (iv) a declaration would be a sufficient remedy.

This case emphasises the importance of itemising payslips. Indeed, it is regrettable that this case was brought as the EAT itself noted the Land Registry could have easily explained the deductions by including a few abbreviated words on Mr Ridge’s payslip. Although Mr Ridge was unsuccessful in his claim for damages, employers reducing an employee’s wages to claw-back a previous overpayment could be at risk of punitive damages up to this amount if they have failed properly to identify the deduction properly, even if the employee understands the reason for the deduction and the employer is entitled to make it.

Ridge v HM Land Registry UKEAT/0098/10

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Employment Appeal Tribunal holds that pay progression clause did not allow automatic pay increments

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The Employment Appeal Tribunal has ruled that an employee’s employment contract did not entitle her to annual pay increments subject to satisfactory performance, regardless of HR’s assurance during the recruitment process that the employee’s pay would increase in this way. On review of the clause, this was not its meaning and there was also an entire agreement clause in the contract, which meant that the employee could not rely on the prior discussions with HR.

The claimant, Ms Earle, joined the Equality and Human Rights Commission in 2009. Her position was graded at level 5 on the Commission’s pay scale which had a number of pay points ranging from £43,680 to £53,093. Ms Earle was disappointed with the starting salary but was given an oral assurance by an HR officer that her salary would progress up the scale and that her salary would increase subject to satisfactory performance.

The employment contract contained a clause which said that: (i) pay would be reviewed annually until the maximum range for the grade was reached; (ii) a decision on progression would include a performance assessment; (iii) there was no obligation on the EHRC to increase salary on review; and (iv) an increase in pay one year would not create any right or entitlement in subsequent years. The employment contract also contained an entire agreement clause which meant that the contract would supersede any earlier oral or written agreement between the Commission and Ms Earle.

As a government funded body, the Commission was affected by funding constraints in the aftermath of the financial crisis and imposed a pay freeze on its staff. Given the circumstances, it considered that nothing would be gained by conducting staff pay reviews. Ms Earle brought a claim for breach of contract because she had not received the incremental pay increase to which she claimed she was entitled and the Commission had not conducted a pay review.

The EAT, having regard to the express provision of the clause, which stated that there was no obligation to increase pay, held that the decision to increase pay was discretionary and there was no entitlement to automatic salary progression in Ms Earle’s employment contract. It also held that the wording did not provide that her salary would increase subject to satisfactory performance, although performance was an important consideration. Ultimately, the decision on pay was discretionary and as such, the Commission was under a duty not to exercise its discretion irrationally or capriciously. However, the EAT held that the Commission had not acted irrationally or capriciously because the pay increments clause considered factors other than ones which were personal to Ms Earle.

In considering the effect of the assurance from HR, the EAT held that this discussion before the contract was entered into could not overrule the Commission’s contractual discretion. In any event, even if this discussion had contractual force, it had been superseded by the employment contract by virtue of the entire agreement clause. The EAT did uphold Ms Earle’s claim that she had been contractually entitled to a pay review, however, whilst the Commission was technically in breach, even if a review taken place, there was no chance that Ms Earle would have received the pay increase sought. Therefore, although successful in principle, no damages could be awarded to Ms Earle.

This case emphasises the need for clear drafting in pay increase or review clauses. Had the relevant clause referred only to employee performance, regardless of its budgetary constraints, the Commission’s decision could have been found to be unlawful.

The Equality and Human Rights Commission v Earle UKEAT/0011/14

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Buy-out payment for healthcare benefits was fully taxable

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The First Tier Tribunal has held that a payment to a retired employee to buy-out his right to participate in his former employer’s healthcare scheme did not qualify as either a payment for termination of employment (which would qualify for a £30,000 income tax exemption) or a capital gain. The payment was deemed to be a payment under an employer funded retirement benefit scheme and therefore was subject to income tax and national insurance contributions as employment income.

Mr Forsyth retired from Nestlé UK Limited in 1995. During his employment he had been entitled to participate in Nestlé’s healthcare scheme but this benefit ceased on retirement. Mr Forsyth subsequently discovered that several of his colleagues still retained this benefit on retirement from Nestlé. After some negotiation/discussion, Nestlé offered to buy-out Mr Forsyth from the scheme in exchange for a one off payment of £29,783, which was agreed by way of settlement agreement.

Nestlé made the payment to Mr Forsyth after deducting income tax. However, Mr Forsyth’s accountant considered that the sum of £29,783 paid to Mr Forsyth under the settlement agreement was either compensation for surrender of rights to medical care and should therefore be taxed as a capital gain or compensation for loss of office and tax free.

The Tribunal held that the payment should be classed as a relevant benefit under an employer-financed retirement benefits scheme, which is subject to income tax as employment income. As such, the payment was neither compensation for termination of employment under the Income Tax (Earnings and Pensions) Act nor a capital gain.

This case serves as a useful reminder that the Income Tax (Earnings and Pensions) Act is broad and that employers and employees should not just assume that the £30,000 tax exemption applicable to payments made in connection with termination will apply. If a payment is an emolument, a retirement benefit, a payment under a contract or for entering into a restrictive covenant, it will be subject to full income tax and national insurance.

Forsyth v The Commissioners for Her Majesty’s Revenue & Customs [2014] UKFTT 915

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Employment tribunal holds that an employee was not liable for PAYE under-deductions

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The employment tribunal has held that an employee was not liable for PAYE under-deductions because their employer had not taken reasonable care in complying with the PAYE Regulations. Instead the employer had delegated the matter to a payroll agent without liaising with them or making enquiries of them.

The PAYE Regulations provide that where an under-deduction is made, HMRC may, at the employer’s request, direct that the under-deductions are recovered from the employee where the employer has taken reasonable care and the under-deduction was in good faith.

In this case, under-deductions had been made from Mr Sparrey because his P45 did not state his income from his previous employer. However, Mr Sparrey had provided his employer, Adra Match, with payslips from his previous employer which had not been sent to Adra Match’s payroll agent. The payroll agent had not made an enquiry in this respect. HMRC corresponded with Adra Match and directed that the under-deductions be recovered from Mr Sparrey.

Mr Sparrey appealed against HMRC’s direction and the employment tribunal allowed his appeal. It held that it was not reasonable for Adra Match to have handed over all payroll matters to its agent without enquiring about them or liaising with them and given that Adra Match had information about Mr Sparrey’s previous pay position, its agents would have, had they enquired.

Sparrey v HMRC [2014] UKFTT 823

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High Court finds that assessment of bonus pool does involve contractual discretion

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The High Court has held that the calculation of a bonus pool by an employer bank involved an exercise of discretion and therefore the bank was under a duty, by virtue of an implied contractual term, to exercise its discretion honestly and in good faith and not arbitrarily, capriciously or irrationally.

The claimants, Brogden and Reid, were equity derivatives traders at Investec. They were both entitled to a contractual bonus based on a set percentage of the economic value added by the bank’s equity derivative business. For the bonus year 2010/11, Investec calculated the bonus pool for this bonus as nil, which the claimants disputed.

The claimants argued that when calculating their bonus pool, Investec were exercising their discretion and therefore were under an implied contractual duty to act honestly and in good faith and not arbitrarily, capriciously or irrationally. Investec argued that when calculating the bonus pool, the preparation of accounts involved questions of judgement about which reasonable people could differ and therefore it was not using its discretion and no such term could be implied.

The High Court ruled that an employer is exercising their discretion where: (i) a contract gives one party responsibility for assessing or judging a matter which materially affects the other party’s interests; (ii) the matter to be decided has ample scope for reasonable differences of opinion; and (iii) the decision will be binding upon the other party. Accordingly, the Court had a right to scrutinise the decisions the bank had taken. However, on the facts of this case, the judge held that Investec’s decision was reasonable and should stand. Therefore, the employees won the issue of principle but lost the case.

This case emphasises the need for employers to document the exercises of their discretion properly so that when it is questioned, as in this case, they can demonstrate the decisions were made rationally.

Brogden and another v Investec Bank plc [2014] EWHC 2785

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HR Consultant’s letter could bind employer to higher pay

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The Employment Appeal Tribunal held that Sheffield City Council was bound by the rates of pay erroneously set out in a letter from an HR consultant to its employees. It was held that the letter was binding on the employer because the HR consultant was held out as being authorised to make this communication.

The claimants were employed by the Council as market patrol officers. The Council sought to lower the rates of the claimants’ pay from grade 4 to grade 3. The claimants appealed this decision under the Council’s procedures. This appeal was heard in March 2011; however, the decision was not communicated to the claimants and their pay did not change.

In August 2011, the claimants issued a grievance against the Council which was investigated by an HR consultant appointed by the Council. The HR consultant had no authority to make a decision about the claimants’ pay but was authorised to communicate the outcome of the grievance to them. On 10 October 2011, the HR consultant mistakenly wrote to the claimants stating that it had been decided that they should be placed on pay grade 5 and their pay would be increased to £19,370 per annum.

The claimants’ pay did not increase. The Council realised that a mistake had been made in the HR consultant’s letter and that the claimants should actually be on pay grade 4 rather than 5 as stated by the HR consultant. The claimants then issued proceedings against the Council claiming that the letter from the HR consultant was a binding offer which they had accepted and therefore the Council had made an unlawful deduction from their pay.

The Employment Appeal Tribunal held that the Council was bound by the offer in the letter sent by the HR consultant as it was intended that the letter would set out the decision of the Council and the HR consultant had been held out by the employer as authorised to make that communication to the claimants.

Hershaw and others v Sheffield City Council UKEAT/0033/14

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Employee inadvertently works for free

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The Employment Appeal Tribunal has found that an employee who was not paid on termination of his employment for extra hours worked under a flexi-hours scheme did not suffer an unlawful deduction from wages.

Mr Paterson worked for Vision Events. He participated in a flexi-hours scheme which allowed him to take time off in lieu if he worked more than his contractual 45 hour week. In 2012, he was made redundant and sought payment from Vision for approximately 5 months worth of accrued hours of flexi time. Vision offered to pay 50% of the hours, which Mr Paterson refused. He subsequently brought an unlawful deduction from wages claim. The EAT found that:

1. in the absence of an express term in Mr Paterson’s contract for payment out of accrued flexi-hours, they were forfeited on termination of employment;
2. it was not necessary to imply a term in the contract because the term was not essential to make the contract workable;
3. it was not in the contemplation of the parties that the additional hours would be paid if the employee had not been able to take them off in lieu, therefore a term should not be implied simply to make the contract fair; and
4. the fact that Vision offered to pay 50% of the hours did not mean that such a term should be implied in the contract.

This decision is likely to be appealed, as it seems obvious that a reasonable person watching the parties make the contract would have considered it to be the parties’ intention that an employee be paid for working the additional hours if, through no fault of his own, he was unable to take time off in lieu.

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Are interns at commercial companies entitled to the minimum wage?

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[post_tags] At the other end of the pay spectrum, Chris Jarvis, an intern at Sony, successfully negotiated a £4,600 settlement for unpaid wages during his three month internship. Mr Jarvis said that instead of shadowing a Sony employee, he was working as a tester for the games department and therefore was entitled to minimum wage.. Sony unsuccessfully asked Mr Jarvis to sign a gagging order. For all employers out there, voluntary workers can only be employed AND unpaid by a charity, a voluntary organisation, a fund raising body or a statutory body. It is highly likely that where a commercial company takes on an intern, they will qualify for the national minimum wage if they work set hours and add value to the company, so that if the intern did not perform the task, someone else would have to be paid to do it. [/et_pb_text][/et_pb_column][et_pb_column type=”1_4″][et_pb_sidebar admin_label=”Sidebar” orientation=”right” area=”sidebar-1″ background_layout=”light” remove_border=”off”] [/et_pb_sidebar][/et_pb_column][/et_pb_row][/et_pb_section]

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UK launches legal challenge against cap on bankers’ bonuses

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The UK has launched a legal challenge with the European Court of Justice against the new rules capping bankers’ bonuses to the equivalent of one year’s salary or two years with shareholders’ approval.

The Government has argued that the proposals, which are designed to reduce bonuses, could actually increase basic salaries and break the current link between pay and performance. It added that it could end up forcing banks to pay higher salaries therefore making it harder to implement pay cuts when profits are falling and more difficult to claw back.

Despite lodging this challenge, the UK will implement the cap which is due to come into effect on bonuses awarded in respect of performance after 1 January 2014.

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