Employment Law Review – July 2020
Welcome to our July 2020 Employment Law Review
Is it just us, or is anyone else starting to get a touch of furlough-update fatigue? It has been another very busy month for employers, with numerous changes to the furlough arrangements, whilst also trying to get to grips with all of the relevant government and industry guidance for a safe return to work. In a welcome break from all things COVID-19, this month’s bulletin focuses on three recent employment cases. These discuss the impact of TUPE on changes to terms and conditions of employment, fairness during redundancy exercises and the use of competitive interview processes for selection, and the effect of garden leave on restrictive covenants. We have also included a couple of noteworthy news items, including the possibility that changes are afoot for employment tribunal hearings.
Save in certain limited circumstances, TUPE prohibits changes to transferring employees’ contracts if the reason for the change is the transfer itself. In this case, the EAT considered whether this restriction also applies if the changes are beneficial to the employees.
In Ferguson & Others v Astrea Asset Management Ltd, the four Claimants were directors of Lancer, an estate management company, and beneficial owners of its holding company. Lancer’s only business was managing one estate, which it did under a management agreement. The estate owners gave 12 months’ notice to terminate the agreement, and appointed a new company instead (Astrea), resulting in a service provision change to which TUPE applied.
Shortly before the transfer, the Claimants decided to substantially improve their contracts, awarding themselves a guaranteed bonus payment and generous new termination payments. On the back of this, two of the Claimants were dismissed by Astrea around the time of the transfer. Astrea also refused to accept that the other two claimants had transferred to them.
The Claimants brought various claims based on TUPE against Astrea for unfair dismissal and the termination payments they had awarded themselves. The Tribunal found that the new contractual terms were invalid both as an abuse of law and under Regulation 4(4) of TUPE which prohibits changes made “by reason of” the anticipated transfer. This was clearly the case here as the changes had no legitimate purpose, but were intended to take advantage of TUPE.
Appeal to the EAT
Dismissing the Claimants’ appeal, the Employment Appeal Tribunal (EAT) re-iterated that Regulation 4(4) renders void any contractual changes made because of a transfer, and not just those disadvantageous to the employee (which was the position argued by the Claimants). Even if that interpretation was wrong, the Claimants could not rely on the new terms as they were an abuse of law. The Acquired Rights Directive (from which TUPE is derived) is intended to safeguard employee rights in the event of a transfer, not to improve them and it was clear that the Claimants’ essential aim was to obtain an improper advantage by artificially obtaining variations to their contracts, under the guise of TUPE.
The EAT helpfully clarified that Regulation 4(4) does not apply to changes which are not connected to a transfer and where there is another “proper” reason for the change, for example a reasonable salary increase as part of an annual review and to reflect performance or promotion. This provides some comfort in the possible circumstance that a transferring employee might genuinely be disadvantaged by Regulation 4(4) if it invalidates all contractual variations, even those which the employee considers beneficial.
What does this mean for employers?
This case clarifies that the restriction on making changes by reason of TUPE applies regardless of the impact of the changes on the employee. This means that any changes, beneficial or not, at or around the time of a TUPE transfer will need to have a clear economic and commercial basis. This will obviously not be established in cases where there is an abuse of law. However, employers should carefully consider and document the reasons for any contractual changes, given the increased likelihood of scrutiny as to the timing and nature of any changes in commercial transactions resulting in a transfer.
The full decision can be found here.
The case of Gwynedd Council v Barratt & Other provides a helpful summary of the key issues to be considered in relation to the fairness of redundancy dismissals. It also clarifies when to use a forward-looking interview process to select employees for redundancy and alternative positions, rather than the more common approach of pooling and scoring.
The Claimants were teachers employed by the local authority to work at a secondary school. In 2015, the Council decided to re-organise primary and secondary provision. This involved the permanent closure of the Claimants’ school, together with a number of others, and replacing them with a new community school on the same site that the Claimants had previously worked.
Between 2015 and 2017, the Council kept the schools updated on the progress of the re-organisation, telling affected staff that all existing contracts of employment would be terminated on 31 August 2017. Staff were also informed that staffing arrangements for the new school would be decided by an application and interview process, with unsuccessful candidates also being made redundant on 31 August 2017, unless they secured an alternative role. The Claimants applied for their jobs at the new school (which were effectively their old jobs). They were unsuccessful in their applications and their employment was terminated on the grounds of redundancy.
The Claimants brought unfair dismissal claims in the Employment Tribunal. The Tribunal commented that the Council’s approach was unusual, providing no opportunity for meaningful or effective consultation – instead, all the Council did was communicate its decisions.
The Tribunal found the process, and the Claimant’s dismissals, unfair. This was on the basis that the Claimants had not been consulted over the Council’s proposals nor offered a right of appeal against their dismissals, coupled with the manner in which the Claimants were required to “apply for their own jobs”, which had not changed in any material way.
Appeal to the EAT
The Council appealed the decision to the EAT, in particular that the Tribunal applied the requirements for fairness too rigidly (essentially, they argued that the above issues were not sufficient to render the dismissals unfair).
The EAT dismissed the Council’s appeal, upholding the Tribunal’s decision on the basis that the Council had proceeded without any consultation (there had merely been a communication), the absence of an appeal, and the approach to selection for positions at the new school. The Tribunal had applied the correct tests and made a reasonable finding.
What does this mean for employers?
There is nothing groundbreaking in this case (and some of the arguments advanced are education-sector specific) but it serves as a useful reminder for employers that the critical issue in any claim for unfair dismissal is whether an employer has acted reasonably and fairly. It also clarifies that, whilst there is no hard and fast rule, in most cases, a pooling and selection process is the correct approach to identify staff for redundancy where the remaining roles are substantially the same. A forward-looking application and recruitment process is likely to be more suited to the scenario where an employer has to appoint to newly created roles.
The EAT also confirmed that whilst failing to offer an employee a right of appeal will not render a dismissal unfair in every case, it may affect fairness depending on the facts. Whilst not legally required in redundancy cases, employers should consider offering an appeal each time, especially where there are any concerns regarding the consultation process undertaken (there is little disadvantage in doing so). It also gives an opportunity to check an employer has done the right thing and an opportunity to put it right if not.
The judgment can be found here.
Restrictive covenants (particularly non-compete provisions, which prevent a former employee from working in any capacity for a competing business) are notoriously difficult to enforce. It has become relatively common to include a provision in restrictions offsetting any period of garden leave against the duration of the covenants. The High Court’s recent decision in Square Global Ltd v Leonard clarifies that in some circumstances this may not be necessary.
Mr Leonard had been employed by Square Global Limited (Square Global) for a number of years as a specialist broker. In November 2019, he resigned without giving notice, having been in discussion about joining a competing financial services business for over 7 months. In response, Square Global informed Mr Leonard that it was treating his resignation as an intention to terminate his employment in 6 months’ time, in accordance with the notice period contained in his contract.
Square Global sued Mr Leonard in the High Court on the basis that he had breached various terms of his contract, including the obligation to give six months’ notice in writing. Square Global asked the court for:
- a declaration that Mr Leonard remained their employee for the duration of his 6 month contractual notice period;
- an order preventing him from working for any other business during this time; and
- an injunction to enforce a non-compete restriction for a period of 6 months after the end of his notice period (effectively preventing him from working in a competing business for 12 months in total).
Mr Leonard’s position was that Square Global’s conduct over several years (including alleged bullying) had fundamentally breached the implied term of trust and confidence under his contract, entitling him to resign in response. This would render the contract invalid, removing the requirement for him to give notice, and the restrictive covenants (which he claimed were unenforceable anyway) would fall away.
High Court judgment
The High Court found no evidence that Square Global’s alleged actions against Mr Leonard amounted to a repudiatory breach of contract. It was therefore reasonable for Square Global to affirm and rely on the contract in light of Mr Leonard’s resignation. Under that contract Square Global remained entitled to require Mr Leonard not to work for another business until the expiry of his 6 month notice period. The Court also held that Square Global was entitled to enforce the Non-Compete clause, on the basis that:
- it had legitimate protectable interests – Mr Leonard’s role involved developing and capitalising on customer connections;
- Square Global’s brokers gained highly valuable, confidential information in the course of their employment, given the specialist nature of their work; and
- the non-compete provision went no further than necessary to protect those interests.
Mr Leonard tried to argue that any period of garden leave should be deducted from the duration of the non-compete provision, effectively reducing this to nil. Mr Leonard contended that Square Global’s evidence was that it would not have put Mr Leonard on garden leave during his notice period and so it had effectively conceded it only needed 6 months’ protection from the date he left the market. The Court again disagreed – Mr Leonard’s argument relied on the relationship between him and Square Global being sufficiently cordial to enable him to work out his notice period. This was clearly not the case given his actions. The Court also accepted Square Global’s submission that its garden leave provision was intended to apply to other scenarios, including where the employer has concerns about an employee’s conduct (for example, removing confidential information or acting in a deceptive manner). In such cases, it was reasonable to enforce the full period of the restrictive covenants.
What does this mean for employers?
This decision is a useful reminder of the issues to be considered by the courts in relation to the enforceability of restrictive covenants. It also confirms that a garden-leave set-off provision is not necessarily required and that in some cases, it may be reasonable for a non-compete provision to be enforced even after the employee has been out of the market on garden leave.
That said, post-termination restrictions will always be subject to the overriding requirement that they go no further than is necessary to protect the employer’s legitimate business interests. This may be exceeded by consecutive periods of garden leave and restrictions. Interestingly, the Court specifically noted that Mr Leonard had actively negotiated his contract with Square Global, and that the contracts he signed with both his former and new employers contained 6 month non-compete covenants, suggesting not only that this was common practice in the market but also accepted and agreed by Mr Leonard. This will therefore be relevant to employers’ considerations when determining the scope and length of restrictions. Where appropriate to the circumstance and level of employee, it can also be beneficial to state in the contract that both parties have taken legal advice on the restrictions.
The judgment can be found here.
Acas guidance on disciplinary and grievance procedures during the coronavirus pandemic
You didn’t think you’d get away without any mention at all of coronavirus did you? Acas has very helpfully produced some guidance for employers who are dealing with disciplinary and grievance procedures during the pandemic. This can be found on the Acas website. Much of the advice is common sense but the following key points are particularly important:
- furloughed employees are able to take part in disciplinary and grievance investigations or hearings as long as HMRC’s guidance on the Coronavirus Job Retention Scheme is followed;
- employers must give particular thought to the health and wellbeing of employees when deciding whether and how to proceed (the strong indication here is that there may well be situations where it is not appropriate to carry on in the current circumstances); and
- any such processes must be carried out in accordance with current public health guidelines.
The guidance also sets out some practical considerations which should be considered in detail if you are dealing with these issues at the moment.
Law Commission Report on Employment Law Hearing Structures
You may have seen reference to the recent Law Commission Report on Employment Law Hearing Structures, which could have far reaching implications for employers. The full report (which can be found here) is very detailed – some 212 pages – and sets out the Law Commission’s proposals for reform following a lengthy consultation. It contains numerous recommendations, but the following will be of particular interest to employers:
- a new 6 month time limit for all employment tribunal claims (doubling the current time limit for most claims, which is 3 months), with the ability for tribunal judges to extend this where they consider it just and equitable;
- allowing employment tribunals to hear breach of contract claims brought by employees and counter-claims by employers, even where employment has not terminated; and
- increasing the current £25,000 cap on compensation for contractual claims which are heard in the employment tribunal, to £100,000.
It will be interesting to see which of these changes are adopted and how quickly – we will keep you posted.
Coronavirus – updates for employers
Last but not least, and as we mentioned at the start, arrangements for furlough and the return work are regularly changing. Our “Coronavirus Hub” is regularly updated to reflect this and it is worth keeping an eye on our FAQs for employers. These answer the most common pandemic-related questions we see and have been updated most recently to reflect the announcements on 22 and 23 June that the “lockdown”, shielding and social distancing rules will be relaxed.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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