Tag Archive: Employment contracts

Important Court of Appeal garden leave decision

Tim Marshall a Partner in our London office, comments: The Court of Appeal has today handed down judgment in an important case on garden leave. The decision in Sunrise Brokers LLp v Rodgers extends the impact of the decision of the Supreme Court in Société Generale v Geys and could have implications for how employers deal with the resignation of a key employee to join a competitor.

Facts

Sunrise Brokers LLP (Sunrise) is an inter-dealer brokers. Mr Rodgers worked as a derivatives broker under a contract signed in September 2011 for a three year fixed term, terminable by him by twelve months’ written notice given on or after the expiry of the fixed term. The contract contained a garden leave provision enabling Sunrise to place him on garden leave during any period of notice, and six month post-termination restraints. There was provision for any period of garden leave to be ‘set-off’ against the post-termination restraints. In March 2014, he signed an agreement with one of Sunrise’s principal competitors, EOX Holdings Ltd (EOX) to commence working for them in New York in January 2015. On 27 March he informed a director of Sunrise that he was leaving and wanted to leave immediately. He was asked to return to work but refused, left the office and did not return. On 9 April Sunrise’s general counsel told him he should come back to work with a view to agreeing a sensible termination plan, which he again refused. He emailed the company saying that he was relocating to New York and would not start work elsewhere until September 2014, and would agree to remain on garden leave. In light of his continuing absence from work, Sunrise did not pay him in May. Sunrise’s lawyers wrote to Mr Rodgers saying that as he had not given notice in accordance with his contract he remained employed, not in a period of notice and fully bound by his employment contract. Mr Rodgers’ solicitors contended that he had resigned with immediate effect on 27 March. Sunrise indicated that they would be prepared to agree a reduced period of notice terminating on 16 October 2014.

In May 2014 Sunrise commenced High Court proceedings for a declaration that Mr Rodgers remained their employee until 16 October 2014, together with injunctions enforcing his obligations regarding working for a competitor until that date and then until 16 April 2015. The judge allowed the claim, although he declined to enforce the post-termination restrictions beyond 27 January 2015. Mr Rodgers appealed to the Court of Appeal.

Decision

The Court of Appeal upheld the High Court decision. As confirmed by the decision in Société Generale v Geys, Sunrise were entitled to choose whether to accept Mr Rodgers’ repudiation of the contract in purportedly resigning, or to affirm it and keep it alive. They had chosen to affirm. Mr Rodgers did not become entitled to terminate the contract due to the non-payment of salary in May as his entitlement to be paid depended on being ready and willing to work, which he was not. Sunrise was not obliged to pay Mr Rodgers up to the termination of his employment on 16 October 2014 as he had not been placed on garden leave, he had simply absented himself from work. Although an injunction should not be granted where the effect would be to compel the employee to continue to work for the employer, there was no rule requiring employers to give an undertaking as to pay which goes beyond their contractual obligation in order to obtain an injunction. The Court relied on a number of factors in upholding the injunction; the fact that Mr Rodgers was only not being paid because he was unwilling to attend work, the fact that it was clearly contemplated when he entered into the agreement with EOX that he might not be able to start until January, and his offer not to work until September. The Court concluded that this was not a case in which the granting of the injunction without the employer paying remuneration would mean that the employee was compelled to work for the employer.

The Court declined to offset the period during which Mr Rodgers remained employed against the period of post-termination restriction. It was common ground that Mr Rodgers could not have objected to a six-month post-termination restriction during which he would not have been paid. The fact that he was subjected to an additional four months unpaid was a consequence of his refusal to return to work; if he had done so, Sunrise would almost certainly have placed him on garden leave, and he would have been entitled to remuneration in addition to set-off of the garden leave against the restraint.

Implications

The facts of this case were fairly unusual; as the Court noted, the issue of payment only arose because Sunrise had not invoked the garden leave clause, which will not often be a safe course of action for the employer to take. However, the case does illustrate that when a key employee resigns without giving the appropriate notice, employers should not necessarily rush to invoke the garden leave provision without first considering whether there are alternative options.

The Court noted the unanswered questions which remain following the decision in Geys; whether, in a situation where it is the employee rather than the employer who has affirmed the contract rather than accept a repudiatory breach, the employee can sue for his salary. The decision in this case would seem to suggest that he can, but crucially only where he remains ready and willing to work.

Permanent link to this article: http://www.dlapiperbeaware.co.uk/important-court-of-appeal-garden-leave-decision/

Zero hours contracts: new consultation launched

Alan Chalmers, a Partner in our Manchester office, comments: Regulation of the labour market is always a political issue, and in the protracted run-up to the 2015 General Election the regulation of zero hours contracts seems set to be a particular focus for all the main political parties. In June, the Government announced that it would be taking action to ban the use of exclusivity clauses in zero hours contracts. The proposed ban forms part of the Small Business, Enterprise and Employment Bill and it is intended to protect zero hours contract workers against the situation where they may be contracted to work for one employer, receive no or very little work in any given period but be prohibited from seeking other employment to supplement or provide an income. It is thought that the ban on exclusivity will benefit around 125,000 zero hours contract workers who are estimated to be tied into such exclusivity clauses. The proposed ban comes following a period of widespread concern over the prevalence and misuse of zero hours contracts. Several types of further regulation have been mooted but are not included in the draft Bill, including requiring more transparency from employers about the nature of zero hours roles, a non-binding Code of Practice on the use of zero hours contracts, protection from detriment similar to the protection for fixed term employees and part time workers, entitlement to be notified of a permanent role and prohibitions on the circumstances in which an employer can reduce hours. There is particular concern that some employers may be using reductions in hours as a form of disciplinary sanction, or in order to reduce redundancy costs.

The difficulty with any potential restrictions on zero hours contracts, including the exclusivity ban, is how to ensure enforceability without unduly restricting the labour market.  Any attempt to restrict abuse runs the risk of being either too easily circumvented or so restrictive that it interferes with legitimate use.

 As drafted, the proposed ban on exclusivity will apply to any contract under which there is no certainty that any work will be made available to the worker. This could easily be circumvented by employers offering one hour fixed contracts with additional flexible hours, or by simply failing to provide further work to a zero hours worker who undertakes work for another employer. The Government has now issued a consultation paper seeking views on how to tackle the potential for such avoidance. The consultation paper suggests that this might include imposing financial penalties on employers if employees are treated detrimentally as a result of taking another job.

The abuse of zero hours contracts is a real problem. However, what the draft legislation and consultation paper highlight is that it is very difficult to do anything meaningful about ‘bad’ zero hours contracts without undermining the valuable flexibility provided by ‘good’ zero hours contracts. Zero hours contracts have a valuable role in the labour market, offering significant benefits for both employers and employees when used properly. Employers benefit from a bank of trained staff to respond to fluctuations in demand, and many employees find zero hours contracts useful in helping them to balance work with other commitments such as family or study. There are undoubtedly circumstances in which use of exclusivity clauses where there is no corresponding duty on the employer to provide work causes significant unfairness and hardship to employees. Conversely, however, some employers have good reasons for exclusivity clauses. Workers on zero hours contracts may be highly skilled or trained for a job which has specialist requirements and employers need to ensure that they will be available when needed.

Further regulation of zero hours contracts seems likely given the high political profile which they currently enjoy. Ahead of whatever approach this or any subsequent government decides to take, there are sensible voluntary steps which employers could take to ensure responsible use of zero hours contracts, such as ensuring there are sufficient safeguards in place to prevent managers capriciously changing hours and being clear as to the terms and effect of what a zero hours contract means for the employee before he or she signs up to an arrangement. Employers who take steps to pre-emptively adopt some of these measures may find themselves in a position of being best placed to attract and retain skilled workers who are happy with the flexibility of a zero hours arrangement.

Permanent link to this article: http://www.dlapiperbeaware.co.uk/zero-hours-contracts-new-consultation-launched/

Holiday pay must include commission, ECJ rules

 Kate Hodgkiss, Partner in the Edinburgh office, comments: The European Court of Justice (ECJ) has today handed down judgment in a case which could mean that employers face huge liabilities for claims for holiday pay. The issue arises because of an apparent conflict between UK and European law as to how holiday pay should be calculated and in particular whether elements of remuneration such as overtime and commission must be included.

The Working Time Directive (Directive) entitles workers to 4 weeks’ leave but does not specify how pay should be calculated.  The Directive is implemented in the UK by the Working Time Regulations 1998 (WTR). Under the WTR workers are entitled to 5.6 weeks’ leave and must be paid at the rate of a week’s pay for a week’s leave. The Employment Rights Act 1996 (ERA) sets out how to calculate a week’s pay; the calculation depends on a number of factors including whether or not a worker has normal working hours. The effect of the week’s pay provisions is that many common elements of remuneration, such as overtime, commission and bonus are excluded from statutory holiday pay.

However, in cases interpreting the WTD the ECJ has stressed the need for normal remuneration to be maintained during the period of annual leave.  In a 2011 case (Williams v British Airways) the ECJ ruled that (1) workers on annual leave should receive their normal remuneration and (2) normal remuneration entitled a worker to any payment which is intrinsically linked to the performance of the tasks which he is required to carry out under his contract of employment . The ECJ held that it is then left to the national court to assess the intrinsic link between the various components making up the total remuneration of the worker and the performance of the task he is required to carry out under his contract of employment.

Following Williams it has been argued in several claims in the UK tribunals that the WTR and ERA provisions conflict with EU law and that certain payments, such as commission or overtime payments, should properly be considered normal remuneration and be included in holiday pay calculations. 

The ECJ today handed down judgment in a reference in one such case, Lock v British Gas Trading and others and has restated the principle that holiday pay must correspond to normal remuneration. Lock receives a basic salary plus commission on the sales that he achieves.  The sales commission is paid several weeks or months after a sale is concluded and makes up approximately 60% of his total remuneration. While on annual leave, he was paid his basic salary plus the commission from previous sales that fell due during the period. However, Lock then suffered a reduced income in the months following his return to work because he had not secured sales, and therefore did not generate commission, while he was on annual leave.  Lock brought a claim for unpaid holiday pay and the tribunal asked the ECJ whether commission should be included in holiday pay.

The ECJ said that commission must be included as otherwise the financial disadvantage suffered might deter workers paid on a commission basis from taking leave. Commission will, of course, vary over time; the ECJ said that it was up to the national courts to decide how to calculate how much commission should be paid during any period of annual leave on the basis of a representative reference period.

Implications

This is not good news for UK employers, but is unsurprising given the ECJ’s earlier ruling in Williams. The recent trend in case law strongly suggests that UK employers may have to include in holiday pay calculations any remuneration intrinsically linked to the performance of the contract, including overtime and commission payments – at least so far as the 4 weeks’ WTD holiday is concerned.  Most employers will, at the moment, be calculating holiday pay on the basis of basic remuneration only.  These employers may therefore face significant liabilities for underpaid holiday in the event of claims.  The key question is how these ECJ decisions are applied in a series of appeals due to come before the EAT this summer.  The EAT is due to hear an appeal in the joined cases of Neal v Freightliner Limited and Fulton v Bear Scotland on 30 and 31 July. At least two more cases are now on appeal to the EAT and may also be joined with Neal. All these claims relate to overtime.  If the EAT rules that the UK law can be read to give effect to the ECJ decisions, while individual underpayments may be relatively small, they may accumulate to a significant liability when multiplied across a large workforce.  Failure to make the correct holiday payment is an unauthorised deduction from wages and claims may be brought at any time within 3 months of the last in a series of deductions.  This means that workers can potentially bring claims in respect of holiday pay going back many years (potentially back to 1998 if the underpayment has gone on that long although there are arguments for a limitation of 6 years), provided they bring the claim within 3 months of the last incorrect holiday payment. Alternatively, the EAT may decide that UK law is simply incompatible with the WTD in which case private sector workers would have claims against the Government rather than their employer, but public sector workers would be able to rely directly on the WTD to bring tribunal claims.

Employers may have some options to reduce their potential exposure to claims, or limit their liability in the future, but these will depend on the profile of the workforce, the elements of remuneration and the nature of the employer’s business. For the majority, the most sensible option may be to wait and see how the EAT deals with the appeals. Employers will face a tense wait for the EAT’s decision.

Permanent link to this article: http://www.dlapiperbeaware.co.uk/holiday-pay-must-include-commission-ecj-rules/

Hearing date set for important holiday pay calculation cases

Kate Hodgkiss, Partner in our Edinburgh office, comments: The EAT has now listed the cases of Bear Scotland Ltd v Fulton and Neal v Freightliner Ltd to be heard on 30 and 31 July 2014. The EAT’s findings will determine whether payments in respect of non-guaranteed overtime have to be included in the calculation of holiday pay.  This issue is deemed to be of such importance to employers that BIS has been granted leave to intervene in the proceedings.

Until recently, the legal position seemed to be clear. In 2004, a Court of Appeal case, Bamsey v Albon Engineering & Manufacturing PLC, held that only guaranteed (ie obligatory) overtime needed to be included in holiday pay calculations.  However, in  2011, the ECJ indicated in British Airways Plc v Williams, that all payments which are intrinsically linked to the performance of the contract must be included in holiday pay calculations.  This led the employment tribunals in Fulton and Neal to find that regular overtime should be included in the respective employers’ holiday pay calculations, even if that overtime was not obligatory.

The outcome of these cases has potentially significant ramifications for employers who are currently only including basic remuneration in their holiday pay calculations. Employees may seek to claim any holiday pay underpayments, potentially going back a number of years, and this could result in significant costs liabilities for employers.  Employers therefore need to make an important decision now as to whether to sit tight and await the outcome of the EAT’s decision or to take steps at this stage to minimise any potential liabilities. We will continue to report any future developments in Be Aware.

Permanent link to this article: http://www.dlapiperbeaware.co.uk/hearing-date-set-for-important-holiday-pay-calculation-cases/

Zero hours contracts: Are they really such bad news?

Adam Hartley, a Partner, in our London office comments:

Zero hours contracts have hardly been out of the news in recent weeks.  The overwhelming majority of the media coverage has been negative, suggesting that zero hours contracts are exploitative of workers and should be outlawed.  The pressure gauge has risen to such an extent that, in September, the Business Secretary, Vince Cable, announced that there would be a consultation process to tackle any abuse discovered.  In addition to this, the Labour Party has also announced it will be conducting its own review.

But why all this sudden interest? Zero hours contracts are not a new phenomenon… and, on the face of it, they provide employers with the type of flexibility which the Government has been so keen to introduce over past months through a wide range of other employment reforms.  In short, they allow employers to maintain a flexible workforce, capable of meeting short-term staffing needs, potentially without taking on many of the obligations which arise under contracts of employment.  Arguably, therefore, these types of contracts actually benefit employers more than any other legal proposal in the Government’s programme of reform.

However, it appears the issue has come into sharp focus after research published by the CIPD in August indicated that there are around 1 million people in the United Kingdom working under zero hours contracts, far more than had previously been thought to be the case.  This has led to heightened scrutiny of what these contracts are and what impact they have on workers.

In a nutshell, zero hours contracts do not guarantee workers a minimum number of hours of work;  there is no obligation for the employer to provide any work and, as a consequence,  any remuneration.  Importantly, although they can be structured as traditional employment contracts they can, and often are, structured in such a way that the individual does not have ’employee’ status.  Individuals who do not have ’employee’ status have very limited employment rights.

It is therefore easy to deduce that the characteristics of a zero hours contract are favourable to employers, and they are commonly used in the retail, hospitality and leisure sectors where employers may struggle to predict how many staff they will need in work at any given time.  However, zero hours contracts have also become increasingly popular in sectors outside of these sectors including sectors such as health, education and IT.

Zero hours contracts are not without merit for workers, however. They have the potential to benefit workers who welcome the flexibility that zero hours contracts offer, perhaps because of family commitments, or because they are studying or are otherwise retired, or who only require occasional earnings.

However, in light of the recent negative publicity, employers who use, or wish to start using, zero hours contracts, would be well advised to carry out a careful balancing act between the needs of the business and those of its workers.  If zero hours contracts are taken forward, a number of practical points should be taken into account when preparing the contracts and discussing the terms with individuals who will be engaged under them:

  • The employer should ensure that it has explained the flexible nature of the work to the individual so they are aware of the financial uncertainty involved;
  • The employer should consider how working hours should be organised in practice i.e. whether weekly or monthly rosters should be prepared.  Consideration should be given as to whether employers can prepare monthly rosters in order to give individuals as much notice as possible so they can accept alternative work if it is available or make necessary childcare arrangements;
  • Thought should be given as to how employers will determine who is given the work if there is only enough available for some of the individuals employed under zero hours contracts.  To ensure fairness, this should ideally be determined based on which individuals have been provided with work recently – the employer should try and divide the work evenly and fairly;
  • The employer should decide whether a cancellation fee should be payable if the working hours available are cancelled at short notice;
  • The employer should also consider how sick pay and holidays will accrue and how holiday and sick pay will be calculated.  Potential difficulties arise under the Working Time Regulations as it is impossible to know at the outset of a zero hours contract how much holiday and pay an individual will be entitled to.  
  • The employer should consider whether the terms of the contract could result in employment status for the individual, potentially causing other employment liabilities to arise.

It will be interesting to see what proposals the Government makes in its consultation paper.  Despite the bad press, it seems unlikely that the Government will actually go as far as advocating zero tolerance of zero hours contracts. However, it may make suggestions for regulation which will have the potential to impact significantly on the flexibility employers have with their workforces going forward.

adam.hartley@dlapiper.com
+44 20 7796 6326

Permanent link to this article: http://www.dlapiperbeaware.co.uk/zero-hours-contracts-are-they-really-such-bad-news/