Employment Law Update: U.K.

By Alex Denny, Victoria FitzGerald, Emma Vennesson Dec 3, 2013

Clawback Clause was Enforceable

In Cleeve Link Ltd v Bryla UKEAT/0440/12, the Employment Appeal Tribunal (EAT) considered whether a clawback clause entitling an employer to deduct certain amounts from an employee’s wages was enforceable.

Bryla was recruited by an agency in Poland to work for Cleeve Link Ltd as a live-in caregiver. Cleeve Link had paid a fee to the agency and for Bryla’s flights to the United Kingdom. These costs amounted to around £1,000. Her employment contract contained a clawback clause giving Cleeve Link the right to deduct this amount in full from her wages if she resigned or was dismissed for gross misconduct in the first six months of her employment, after which the deductions would be made on a sliding scale. Bryla was dismissed for gross misconduct after three months. Cleeve Link, relying on the clawback clause, deducted the full amount from her unpaid wages and as a result she received no final salary payment. The Employment Tribunal held the clause was unenforceable and upheld Bryla’s claim for unlawful deductions from wages.

The EAT disagreed and held that the clause was enforceable because the amount deducted was a genuine pre-estimate of loss that could be incurred by Cleeve Link in the event of a breach of contract. Accordingly, the deductions were lawful. The EAT also provided the following useful guidelines on determining the enforceability of clawback clauses:

  • The contract should be considered at the time it was entered into.
  • The clause should be examined objectively.
  • If the purpose of the clause is to deter one party from breaching the contract it is likely to be unenforceable, but if it is a genuine pre-estimate of loss it is likely to be enforceable.
  • It is likely to be unenforceable if there is a vast gulf between the maximum amount of loss that could be incurred and the amount payable, or if the same amount is payable on the occurrence of a number of events giving rise to different levels of loss.

This decision will be welcomed by employers but it does highlight the level of scrutiny imposed by the courts on such clawback clauses. Employers should bear in mind this useful guidance when introducing clawback provisions to increase the likelihood that they are enforceable.

High Court Enforces 12-Month Garden Leave Period

In JM Finn & Co Ltd v Thomas Brook Holliday [2013] EWHC 3450 (QB), the High Court granted an injunction to keep an employee on garden leave for the whole of his 12-month notice period.

Holliday was employed by JM Finn & Co Ltd as a stockbroker. Since joining the firm in 1999 he had developed very strong connections with many of the firm’s clients. His employment contract contained a mutual 12-month notice period and a clause giving the firm the right to place him on garden leave for the duration of the notice period. In July 2013, Holliday resigned after receiving a job offer from one of the firm’s competitors. The firm relied on its contractual right to place him on garden leave with immediate effect for the duration of his notice period. Shortly afterwards, Holliday alleged that the firm was in fundamental breach of contract in failing to send him briefing notes he had requested. He informed the firm that he was therefore no longer bound by his employment contract and would start working for the competitor in August 2013. He also expressed his intention to try to persuade the firm’s clients who he had previously dealt with to transfer their business to the competitor.

The High Court granted the firm an injunction to keep Holliday on garden leave for the remainder of his notice period, i.e., until July 2014, thereby preventing him from joining the competitor until then. The Court found that the firm had proved that this was no more than was reasonably necessary to protect its legitimate business interest of maintaining a connection with its clients who had previously dealt with Holliday. The Court found there was a strong risk that Holliday would be able to “charm” many of the firm’s clients if he was allowed access to them in the near future, in particular as he had actively tried to divert a business opportunity from the firm to the competitor in the lead-up to the trial. The Court also took into account the fact that Holliday had agreed to the 12-month notice period and had sought legal advice on it.

This is encouraging for employers (given that, until now, it has been considered difficult to enforce garden leave for more than six months) but it should be remembered that cases dealing with employee restrictions on termination (e.g., garden leave or restrictive covenants) will always be fact and context specific. What may be reasonable in one case may not necessarily be in another.

Failure to Pay for Private Medical Treatment Amounted to Disability Discrimination

The Employment Appeal Tribunal (EAT) held in Croft Vets Ltd v Butcher [2013] UKEAT 0430 that an employer had discriminated against a disabled employee when it failed to pay for the private medical treatment of her work-related stress and depression.

Butcher was a finance and receptionist manager at Croft Vets Ltd. She was on long-term sick leave with work-related stress and depression, and was disabled for the purposes of U.K. discrimination legislation. Croft referred her to a consultant psychiatrist, Dr. Parry, who recommended that Croft should fund psychiatric sessions and counseling for Butcher. He believed this would assist, although not guarantee, her return to work. Croft failed to follow either recommendation, without explanation or consultation with Butcher. The EAT upheld the Employment Tribunal’s findings of disability discrimination and constructive dismissal. By not implementing Parry’s recommendations, Croft had failed to make reasonable adjustments to assist her to return to work and this amounted to both disability discrimination and a fundamental breach of contract. The EAT made clear that it was not imposing an obligation on employers to fund private medical treatment in general, but that employers should pay for specific forms of medical support where this would assist disabled employees to return to work.

This decision will be of concern to employers as it highlights the need to follow recommendations regarding medical treatment, even where this may be costly and may not guarantee the employee’s return to work. Failure to do so could expose employers to disability discrimination and constructive dismissal claims.

Stopping Permanent Health Insurance Benefits at Age 55 was Discriminatory

In Witham v Capita Insurance Services Ltd ET/2505448/12, an Employment Tribunal considered whether stopping permanent health insurance (PHI) benefits once an employee turned 55 amounted to age discrimination.

Witham, an employee of Capita Insurance Services Ltd, had been on long-term sick leave and receiving PHI benefits through a third-party insurance provider for several years. He stopped receiving the benefits when he turned 55, in accordance with the terms of the insurance policy. During his sick leave, Capita had arranged a new PHI scheme under which he would have received benefits until the age of 65 but Witham had been refused membership because it required employees to be “actively at work” when joining.

The Tribunal held that this was both direct and indirect age discrimination. It was direct discrimination because, if it had not been for his age (i.e., if he had been younger), Witham would have continued to receive the benefits. It was also indirect discrimination because the new scheme’s requirement for employees to be actively at work when joining placed employees over 45 at a particular disadvantage compared with those under 45 (as over 45s are more likely to receive PHI benefits than under 45s). In addition, neither the direct nor indirect discrimination could be objectively justified.

This is only a first instance decision but the finding of direct discrimination will be particularly worrying to employers as it means that any cut-off age (whether 55 or older) for ceasing benefits could potentially be found to be discriminatory. Employers should therefore consider offering all employees the same benefits (PHI or otherwise) regardless of their age.

Resignations with Immediate Effect

In Secretary of State for Justice v Hibbert [2013] UKEAT 0289, the Employment Appeal Tribunal (EAT) considered what the effective date of termination should be where an employee told her employer “I have no alternative but to resign.”

Following a number of problems at work, Hibbert brought a grievance against her employer, HM Prison Wakefield. Wakefield rejected both her grievance and her appeal. Shortly afterwards, on June 29, 2012, she handed Wakefield a letter written by her lawyers which stated: “I have no alternative but to resign.” Wakefield allowed her a five-day cooling-off period to reconsider; she did not. On July 11, Wakefield informed her that it accepted her resignation, that she was required to give four weeks’ notice and that her last working day would therefore be July 27. She was paid until that date. She then brought a constructive dismissal claim based on her understanding that her effective date of termination was July 27. Wakefield argued that it was June 29, which would mean her claim was out of time. Overturning the Employment Tribunal’s decision, the EAT held that Hibbert’s words had been unambiguous and had the same effect as if she had said “I am resigning now.” The fact that Wakefield had stated that her last working day would be July 27 and that she was paid up until that date had no legal effect: she had resigned on June 29 and that was the effective date of termination. Her claim was therefore out of time.

This case gives welcome clarity to employers but it is important to note that the EAT gave much weight to the fact that Hibbert had been given a cooling-off period and had received legal advice. The outcome may not be as straightforward where an employee resigns in the “heat of the moment.”

Alex Denny is a partner, Victoria FitzGerald an associate and Emma Vennesson an associate in Faegre Baker Daniels’ London office.

Copyright 2013 © Faegre Baker Daniels LLP. All rights reserved.

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