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Managing Redundancies: Beware of Implied Terms

As the furlough scheme winds down and the coronavirus pandemic continues to bite into the UK economy, redundancies are increasingly in the headlines.  According to recently published research by the Chartered Institute of Personnel and Development and Adecco1, one in three UK organisations expect to make redundancies in the third quarter of 2020, reflecting a 50% increase in the number of organisations expecting to cut jobs compared to the previous quarter.

As we enter this era of redundancies and restructuring, it is vital that employers understand not only what their express procedural obligations are in this context (for example, to individually and collectively consult), but also the (far lesser discussed) potential applicability of implied terms which is the focus of this article. 

Mutual trust and confidence

Every contract of employment contains an implied duty that neither employer nor employee will conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence or trust that exists between them, without reasonable or proper cause. The general terms in which this duty is framed means it can be applied to almost any situation – except, notably, to a dismissal or the manner of dismissal (known as the ‘Johnson exclusion zone’). This does not, however, render it irrelevant in a redundancy context, as it is perfectly possible that the duty may be breached (and an employee may acquire a cause of action) prior to the dismissal, for example during the redundancy process. This was confirmed in the case of Gebremariam v Ethiopian Airlines in which the employer’s conduct in the redundancy process was in breach of the implied term of mutual trust and confidence.

One tenet of of the implied duty of trust and confidence is that employers should treat employees fairly and equally in matters of remuneration unless there is a reason for this not being done which is neither capricious nor arbitrary. In the redundancy context, this was highlighted in the (now, relatively old) case of Transco plc v O’Brien, in which Transco’s failure to offer O’Brien (a temporary worker) the same enhanced redundancy terms as his colleagues (all permanent workers) was held to be a breach of this duty by the employer. Whilst employers are likely to be alert to the risks of treating individuals with protected characteristics under the Equality Act less favourably than others (both in a redundancy context and more broadly), they may be less familiar with the operation of the duty of trust and confidence which, as this case illustrates, can also provide protection from unfair or unequal treatment to individuals who do not have one of the nine legally recognised protected characteristics.

The practical effect of an employer’s breach of the implied duty of trust and confidence is that it will automatically follow that there has been a repudiatory breach of the employment contract, entitling the employee to resign and claim constructive and unfair dismissal and to treat themselves as discharged from post termination restrictive covenants.

Terms implied by custom and practice

UK employers should also consider whether any terms related to the redundancy procedure or pay have been implied by custom and practice. For example, if the employer has a past consistent practice of calculating redundancy payments without the statutory caps, this can convert into a contractual right for future practice (Peacock Stores v Peregrine & Ors). Whether or not a past practice of paying enhanced redundancy pay has become an implied term is a question of fact, with the key question being: when viewed objectively, can the employer’s conduct  reasonably be understood by employees as indicating that there is an automatic entitlement to enhanced redundancy pay? It follows that if an employer wants to avoid inadvertently creating a legally binding custom and practice in relation to enhanced redundancy pay, it should take steps including making it very clear that it is non-contractual and discretionary, using words such as ‘ex gratia’ and avoiding using the same formulation for the enhanced payment time and time again.

In summary, employers making redundancies should not assume because they have ticked off the legal procedural steps that they are free of risk, and should always consider the potential application and impact of implied terms (including those discussed in this article) at the early planning stages of redundancies, to avoid the risk of claims for breach of contract (as well as unfair dismissal and discrimination).

We are experienced in advising on redundancy processes and procedures and can support you in order to minimise your risk and protect your business. If you would like to discuss these issues further, please contact Partner Merrill April or Associate Harriet Riddick, both of whom specialise in employment and partnership law issues for multi-national employers, senior executives, firms and partners.

[1] Labour Market Outlook: Summer 2020