July 23 2007 Employment Law Enews

Welcome to the latest edition of steeles employment law e-newsletter.

When an employee leaves without giving notice

What recompense is an employer entitled to when an employee leaves without giving proper notice? This issue was considered by the Employment Appeals Tribunal (EAT) in the recent case of Davis v Pyrz, concerning a nanny and her former employer. The same principles would apply to any other employment situation.

Facts

Miss Pyrz, a nanny, left her employment without giving notice and brought claims alleging she had not been paid the national minimum wage (NMW) or holiday pay. She also claimed that her employer, Miss Davis, had made an unlawful deduction from her wages by taking four instalments of ?50 as a deposit. Miss Davis counterclaimed that, by failing to give one month's notice, Miss Pyrz was in breach of contract. She also made a number of other counterclaims, alleging that Miss Pyrz had broken her computer, stolen a CD and skirt, left an unpaid telephone bill and owed money for a travel ticket.

Held

The employment tribunal upheld Miss Pyrz's claims and also Miss Davis' counterclaim for breach of contract for leaving without giving notice. However, in the absence of any express notice period the tribunal decided the appropriate notice period was the statutory one week's notice, and awarded Miss Davis one week's pay in damages. It decided it did not have jurisdiction to hear Miss Davis' other counterclaims.

On appeal, the EAT overturned the decision on unlawful deductions and confirmed that there is nothing to prevent deductions being made in circumstances where the deduction is authorised under a provision of the contract, as it was here.

In relation to the counterclaim, the EAT upheld the tribunal's decision that where there is no express notice period the appropriate notice period to apply is the statutory one week's notice. However, in calculating damages the correct measure should have been the difference between the sums Miss Davis had incurred as a result of the Miss Pyrz's breach (ie to pay a replacement nanny) and the wages that would have been paid to her (in accordance with the NMW) had she worked her notice. The difference amounted to just ?13.85.

The EAT agreed that the counterclaim relating to the computer repair could not be dealt with by the tribunal as it did not relate to the employment contract. However, it held that the tribunal was wrong in finding that the counterclaims relating to the CD, dress, unpaid telephone bill and travel expenses could not be heard. The EAT was satisfied that there is implied duty of fidelity in any employment contract, which would apply to the CD and dress. In relation to the telephone bill and travel expenses, these could be legitimately claimed as they arose properly under a contract ancillary to the employment contract.

Comment

Whilst the EAT commented that the issues in this appeal "concerned a variety of small issues none of any general interest", it provides a useful reminder of the manner in which damages are calculated when an employer claims for an employee's breach of contract for failing to give proper notice. In practice, it is only likely to be worthwhile for an employer to pursue such a claim if the financial consequences have been substantial. The employer is under a duty to mitigate his losses, perhaps by reallocating work to existing employees temporarily. Any loss to the employer is also offset (as it was in this case) to allow for the fact no notice paid is payable to the employee. In addition, the costs of recruiting a replacement are generally not recoverable, as the employer would have incurred these costs even if the employee has given full notice.

Implying PILON clauses into contracts

There can be occasions when it is useful for an employer to be able to dismiss an employee and pay them in lieu of their notice period, rather than allowing the individual to work out their full notice. The Court of Session, (the Scottish equivalent of the Court of Appeal) has recently considered the issue of whether a payment in lieu of notice (PILON) clause can be implied into a contract of employment, where the employer has no express right to make such a payment.

Facts

The case of Morrish v NTL Group involved a financial director and company secretary, Mr Morrish, whose contract of employment provided that it could be terminated by 12 months notice by either party. The contract was silent on the issue of whether the employer could pay him in lieu of his notice period. Mr Morrish was informed by letter of 6 January 2005 that his position had been made redundant with effect from 29 December 2004. The employer had therefore failed to give him 12 months notice as required under the terms of the contract and was proposing to pay him in lieu. Mr Morrish brought a claim for breach of contract.

The remedy for a breach of contract is an award of damages of such amount as may fairly and reasonably be considered as arising naturally from the breach. The award of damages should put the employee in the same financial position that they would have been in, had the contract been performed properly. Mr Morrish claimed that by being denied the right to work his notice period, he had lost the right to various bonuses and share options that would have accrued throughout the year and he had suffered a diminution in the value of his pension rights.

Held

The employer tried to argue that there was an implied term in the contract giving them the right to terminate the contract and make a PILON, but the Court of Session disagreed. It held that to imply a PILON clause into the contract would be "manifestly contradictory to the express terms" of the contract which stated that the employee was entitled to 12 months notice in writing. The Court stated that the purpose of this express clause was to allow the parties to know where they stood for the 12 months after notice had been served. The employee, in particular would have security in knowing that he would continue to receive his salary and other emoluments flowing from the contract. The Court could not see any reason to allow for a PILON clause to implied into the contract, which would have the effect of "denying the employee the normal remedy of damages for breach of contract" leaving him in a worse financial position.

Comment

The principle highlighted in this case will also be of relevance to employers when paying an employee in lieu of their notice under a compromise agreement. Employers often make such payments without deduction of tax and NI contributions. However, notice pay can only be paid without deductions if the employee does not have a PILON clause in their contract and the employer breaches their contract by paying them in lieu of their notice. Previous cases have suggested that even where there is no express PILON clause, such a payment can still be regarded as taxable if the employer customarily pays in lieu of notice. If the employee does have a PILON clause in their contract, any PILON will be subject to tax and NI contributions. This case suggests that courts and tribunals will be reluctant to imply PILON clauses into contracts. Employers should take care when dealing with notice payments in compromise agreements and obtain tax indemnities from the employees if there is any doubt as to whether the payments are taxable.

New legislation on the horizon

The Government's draft legislative programme, announced by Gordon Brown on 11 July, proposes a number of important employment measures, the most significant of which is likely to be an Employment Simplification Bill. This Bill is intended to "simplify, clarify and build a stronger enforcement regime for key aspects of employment law" (surely a tall order for a single piece of legislation!).

It is intended that the Bill will:

• Repeal the statutory dispute resolution procedures and implement the recommendations of the Gibbons review of workplace dispute resolution, including measures to promote early dispute resolution and reform of the tribunal system
• Simplify and strengthen the enforcement regime for the National Minimum Wage, including the introduction of a straightforward penalty to be levied against all non-compliant businesses
• Amend the Trade Unions and Labour Relations (Consolidation) Act 1992 to enable trade unions to expel members on the basis of their membership of a political party
• Strengthen the enforcement of employment agency standards and clarifying the extent of investigatory powers.

It is likely that further details of the Bill will be provided at the time of the Queen's Speech at the State Opening of Parliament on 6 November. By then, we should also know the DTI's (now the Department for Business Enterprise and Regulatory Reform) response to the dispute resolution consultation which closed on 20 June.

In addition, it seems the Government's Corporate Manslaughter and Homicide Bill, introduced a year ago, is now likely to become law before the end of the current Parliamentary session. The House of Commons has conceded to an amendment allowing the new offence to apply to deaths in custody, at the insistence of the House of Lords who refused to pass the Bill unless it applied to such deaths.

The offence does not impose individual criminal liability on company directors (as was originally proposed) but will apply when the way in which the organisation's activities are managed or organised causes a person's death, and only if the way in which its activities are managed or organised by its senior management is a substantial element in the breach. Company health and safety policies and procedures will be key in deciding whether an organisation has committed an offence.

This article copyright © 2007 Steeles Law llp. All rights reserved.