March 21 2005 Employment Law Enews

In this edition of Enews we consider an unfair dismissal case, the enforceability of restrictive covenants and holiday pay.

EMPLOYMENT TRIBUNAL CAN LIMIT COMPENSATION WHERE LACK OF CONSULTATION MERELY DELAYED BUT WOULD NOT HAVE PREVENTED REDUNDANCY

In the case of Lambe v 186 k Ltd the Tribunal considered whether there had been a genuine redundancy situation, whether there had been reasonable consultation and if not, whether the compensation should be limited to the period during which the consultation should have taken place.

Mr Lambe was told that he would have to move into the financial control department from his corporate finance manager's position. Mr Lambe considered the job and decided it was unsuitable. He opted for redundancy.

The Tribunal held that on the facts of the case there had been a redundancy situation but that the employee was only entitled to compensation for seven weeks, after which he would have been made redundant in any event.

On appeal the Employment Appeal Tribunal decided that the Tribunal had been entitled to conclude that while the process of selection for redundancy and the absence of consultation were unfair, the Claimant would still have left the employment at the end of the extended period of consultation and accordingly compensation was limited to that period.

The appeal was allowed in part because the Tribunal had failed to identify or address the claim over loss of pension rights. The case was sent back to the Tribunal.

RESTRICTIVE COVENANT UPHELD: PREVENTS EMPLOYEE WORKING FOR NAMED COMPETITORS FOR 6 MONTHS AFTER TERMINATION

In this case the High Court decided that a restrictive covenant preventing an ex-employee from working for named major competitors for 6 months was reasonable and enforceable. The employer was exposed to a real risk that this senior former employee would use her knowledge of confidential information for the benefit of the new employer. This risk far outweighed any of the problems that the covenant's enforcement created for the employee.

A restrictive covenant in a contract may prevent the disclosure of confidential information to a competitor after the employment has ended. Such a covenant will only be enforceable if it is reasonable. For a covenant to be reasonable it must not interfere with an employee's freedom to work for others over and above what is necessary to adequately protect the employer's legitimate business interests.

The issue as to whether a restrictive covenant is enforceable may not be straightforward. The cases are decided on their particular facts and circumstances. In this case it was apparent that the employee would suffer a set back in her career and perhaps a small financial loss compared to the potential cost for the employer.

The court decided that the covenant was reasonable and enforceable. However, the court declined to grant injunctive relief because there were only 5 days remaining of the 6-month period.

HOLIDAY PAY MUST BE TRUE ADDITION TO CONTRACTUAL RATE OF PAY

Five appeals were heard by the Employment Appeal Tribunal in the cases of Smith v AJ Morrisroes & Sons Ltd, JJ Cafferty & Co Ltd v Byrne and Wiggins v North Yorkshire County Council concerning the calculation of holiday pay pursuant to the Working Time Regulations 1988.

In the EAT's Marshalls Clay decision in 2003 guidelines were set out:

1. Holiday pay must be clearly addressed in the employment contract and must be expressly agreed between the employer and the employee;

2. The allocation of the percentage or amount of holiday pay must be clearly identified in the contract and preferably in the wage slip;

3. It must amount to a true addition to the contractual rate of pay;

4. Records of holidays taken must always be kept;

5. Reasonably practicable steps must be taken to require workers to take their holidays before the expiry of the relevant holiday year.

The Marshalls Clay case is still awaiting the decision of the European Court of Justice ("ECJ") and we will report on the decision when it is published. The Employment Appeal Tribunal hopes that when new guidelines under Marshalls Clay are written that the issue of holiday pay will be easier to understand and will be clearer to operate.

In the case of Smith v AJ Morrisroes & Sons Ltd Mr Smith worked as a subcontractor. His contract stated that he was not entitled to any holiday pay.

Mr Smith was asked to then sign a new contract giving him 20 days' paid leave a year. However a reduction would be made when he took annual leave.

Mr Smith refused to sign the new contract and made a claim for unlawful deduction from wages. The tribunal found that there had been no agreement relating to the holidays representing a ' true addition" to the contractual pay. The Employment Appeal Tribunal allowed the appeal.

In JJ Cafferkey & Co Ltd v Byrne, Mr Byrne joined the company on a contract that eventually lasted for 48 weeks. At the start of his employment he was asked to sign a form, which stated that an additional 8% was to be added to his total daily rate of £140.00.

Mr Byrne complained that the holiday pay did not represent a' true addition' to the daily rate. The tribunal stated that the additional percentage being added did not satisfy what was intended by the legislation and once again the holiday pay was not a true addition to the contractual pay.

This case emphasises the need for evidence of holiday pay as being a genuine addition. In two of the appeals the employer failed to establish a genuine payment for holidays representing a true addition to the contractual rate of pay. Instead the holiday pay elements were simply diversions of normal pay into a rolling holiday fund.

The issue of holiday pay pursuant to the Working Time Regulations continues to confuse. The ECJ judgment in Marshalls Clay may well affect the guidance in this case. Watch this space.

This article copyright © 2005 Steeles Law llp. All rights reserved.