Enhanced redundancy payments – When do they become contractual?

26 Sep 2013

It would be difficult to find too many organisations which have avoided making redundancies since the start of the economic downturn.

Many employers will have offered their employees an enhanced redundancy payment in return for entering into a compromise agreement (or settlement agreement, as we now must get used to calling them).  A common problem faced by employers is whether routinely offering an enhanced redundancy payment gives rise to the argument that all employees have developed a contractual entitlement to such a payment.

The argument made by employees in such a case is that the entitlement to an enhanced payment has become implied into their contracts of employment as it has become the normal "custom and practice" of the employer.

Accidentally giving employees a contractual entitlement to an enhanced redundancy payment can have huge financial consequences for employers and can also affect a subsequent sale of the business, as the entitlement would transfer under TUPE.

In the recent case of Park Cakes Ltd v Shumba & Ors the Court of Appeal set down the following helpful guidelines to use in considering whether employees have gained the contractual entitlement to an enhanced redundancy payment.

  1. "On how many occasions, and over how long a period, the benefits in question have been paid":  As a general rule, the more often that enhanced payments are made and the longer that this has been the practice, the more likely it is that they could become contractual.
  2. "Whether the benefits are always the same":  If an employer consistently calculates an enhanced redundancy payment in the same way, it is more likely that an employee will be able to argue it is contractual.  If the employer can argue that the calculation is discretionary and varies on a case by case basis, they will be in a much stronger position.
  3. "The extent to which the enhanced benefits are publicised generally":  If the workforce has a "widespread knowledge and understanding" that they will receive an enhanced redundancy payment and the amount of that payment, the employer will face an uphill struggle to show it has not become contractual.
  4. "How the terms are described":  If an employer clearly and consistently describes the enhanced redundancy payments in a way that makes it clear there is no legal entitlement to the payment, they will find themselves in a much stronger position.  Wording such as "discretionary" and "ex gratia" will really help employers.
  5. "What is said in the express contract":  Whilst it seems obvious, it is of course the case that the first and most important defence an employer can point to is a clause in the employment contract making it clear that there is no entitlement to an enhanced redundancy payment.
  6. "Equivocalness":  An employee has to be able to show that the entitlement is contractual, rather than that it might be.  The more arguments an employer has to show that there is another explanation for making the payment (e.g. that it is exercising its discretion), the harder it will be for the employee to succeed.

Our view:

Although the Court of Appeal's guidelines are not intended to be comprehensive and a Tribunal will always have to consider all of the circumstances of the case, the guidelines are nevertheless a handy checklist for employers to consider whether the enhanced redundancy payments they offer have or could become contractual.