Limiting the risk of enhanced redundancy payments becoming a contractual term

16 June, 2014

It is common for employers to enhance redundancy payments for their employees. In some instances this may be explicitly detailed as a contractual term in the employees’ contract, a formal redundancy policy or under a collective agreement. In the majority of cases however, an employer is likely to have used its discretion to make enhanced redundancy payments.

 

In the recently appealed case of Park Cakes Ltd -v- Shamba and Others, the Claimants transferred to a new business and were subsequently made redundant. They claimed that they had been unfairly dismissed and that they were entitled to enhanced redundancy pay on the basis that enhanced payments had been made over many years before the transfer. The Court of Appeal decided that previous enhanced redundancy payments can potentially become contractually binding as a result of custom and practice and has remitted the case back to a new employment tribunal to decide on the facts of this particular case.

 

The Court of Appeal has set out some helpful guidance on whether terms are implied by custom and practice. You should consider each of the following matters:

 

  • On how many occasions, and over how long a period the benefits in question had been paid;
  • Whether the benefits are always the same;
  • The extent to which the enhanced benefits are publicised generally;
  • How the terms are described;
  • What is said in the express contract; and
  • Equivocalness, whether the payment was a matter of discretion or legal right.

 

We have provided the following guidance on how to avoid creating a legally binding custom and practice:

 

  • Make it very clear in any policy documentation what is contractual and what is non-contractual;
  • Take care when communicating the further enhanced redundancy payment, making it clear that it is a discretionary payment and using wording such as ‘ex gratia’ payment; and
  • Try to vary the terms when offering an enhanced payment and try to avoid using the same formula time and time again.

 

It is advisable to make any enhanced redundancy payment subject to a settlement agreement. This will make it easier to avoid claims that enhanced payments are contractually binding due to custom and practice. Offering an enhanced redundancy package will make it easier to agree the terms of a settlement agreement with a departing employee and employers will have peace of mind from the express waiver of all claims against the company in the settlement agreement.