When generosity becomes a right

We take a look at the recent case Peacock Stores v Peregrine [2014] and the issue of implied terms.

Key documents in the employment relationship are:

  1. A contract of employment setting out the legally binding rights and obligations of the parties. Unless the employer reserves the right to make a particular type of change (e.g. of place of work) such changes will normally have to be agreed by the employee. There is a way to make changes without employee agreement by termination and reengagement but that is not straightforward
  2. A non-contractual set of policies, procedures, rules – these can be changed and updated from time to time without any need for employee agreement.

On the face of it straightforward but there is a glitch – what is the position where an employer as a matter of course accords employees a benefit that is not mentioned anywhere in the contract or the policies? The Employment Appeal Tribunal (EAT) recently considered this scenario in the case of Peacock.

Calculation of statutory redundancy payment

As readers will be aware statutory redundancy payments are calculated by reference to three elements; length of service, weekly pay and an age factor. There are caps on length of service (20 years) and weekly pay (£464 from 6 April 2014). In this case there was nothing in either the contract of employment or any other document to suggest that redundancy pay would be calculated other than in accordance with the statutory formula. However, there was evidence that over an extended period (at least between 1971 and 2002 and probably until 2006) Peacocks had consistently paid redundancy without reference to the caps i.e. on the basis of the full number of years of service and actual wage. The position after 2006, which is when the claimants in this case were made redundant, was less clear.

The three claimants, all of whom had long service (between 14 and 27 years) were paid statutory redundancy and brought claims for the enhanced payments. They won their case in the Tribunal, Peacocks appealed and were unsuccessful.

Quoting a previous case decided last year in the Court of Appeal “the essential question must be whether, by his conduct in making available a particular benefit to employees over a period, in the context of all the surrounding circumstances, the employer has evinced to the relevant employees an intention that they should enjoy that benefit as of right”. The focus is therefore on what the employer has communicated to the employees whether in writing, orally or by its conduct. It is not what the employer subjectively intended that counts but rather what can be objectively understood from the words and deeds.

In this case the EAT was satisfied that by at the latest 2006 the claimants had the benefit of an implied contractual term that their redundancy pay would be calculated without the statutory caps. The significance of this is that once that term was in place it would continue to apply unless and until it was varied by agreement or otherwise. In the absence of any variation failure to accord the employee the benefit amounts to a breach of contract.

Preventing similar situations for the future

Whilst there is limited scope for employers to take action about implied terms that have arisen already, as in this case, it is possible to prevent similar situations for the future. Employers should think very carefully before giving employee additional benefits particularly over extended periods. If additional benefits are provided it is crucial to keep these under review. By way of example are there particular reasons why the benefit is being given at a specific time? If so record the reasons to show this is not designed to be a blanket entitlement.

As in many other situations prevention is better and cheaper than cure.

If you have any questions or would like more information please contact Mark Hammerton, Head of Employment.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.