Contracts and Redundancy

In order to claim a redundancy payment an employee must first establish that he has been dismissed and second that the dismissal is for reasons of redundancy. This will encompass all aspects of the decision, therefore it brings in contractual issues in relation to the dismissal as well as in relation to the definition of redundancy.

In Saunders v Earnest A Neale Ltd (1974) the employees conducted a work to rule and eventually the factory closed down. It was held that the dismissals were not for reasons of redundancy but due to the ‘work to rule´ which had led to a loss of production which in turn had led to the closure. There is a statutory presumption in s163(2) that if an employee is dismissed and claims a redundancy payment his dismissal is for reasons of redundancy and the employer must rebut the presumption to escape liability at common law.

The starting point for the employee, therefore, is to establish that he has been dismissed. Dismissal is defined in s136 as termination by the employer, with or without notice; a fixed-term contract expiring without being renewed or an employee resigning in circumstances in which he is entitled to do so by the employer's conduct.

In addition, by s136(5), if the employment is terminated by the death, dissolution or liquidation of the employer, or the appointment of a receiver, there is a dismissal for reasons of redundancy.

The majority of these situations do not raise contractual issues, but in respect of an employee resigning, contractual issues are vitally important in establishing whether the resignation constitutes a constructive dismissal.

The key part of the definition of constructive dismissal is that the employee must have been entitled to leave. There are two possible interpretations of the word entitled. One, it could mean that the employer acted so unreasonably that the employee could not be expected to stay. Or, two, that the employer's conduct amounted to a repudiatory breach which the employee accepted as ending the contract.

After a period of uncertainty, the Court of Appeal in Western (ECC) Ltd v Sharp (1978) decided that the contractual approach was the correct one, Lord Denning stating that conduct which entitled the employee to leave and claim dismissal had to be conduct on the part of the employer which was 'a significant breach going to the root of the contract of employment'. (It is worth mentioning that this decision was not delivered by a full bench, and has not yet been tested).

Whereas a breach of an important express term will be the basis of a claim, this test is much wider and a breach of an implied term can lead to a constructive dismissal. It´s a presumption alone to guess what Lord Denning assumed as his ‘root´. Thus it is important for a tribunal to establish all the terms of the contract to discover if a repudiatory breach has occurred.

While the contractual test may appear to be narrow, the development of the implied duty of mutual trust and respect has, in fact, opened up the area so that unreasonable ...

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While the contractual test may appear to be narrow, the development of the implied duty of mutual trust and respect has, in fact, opened up the area so that unreasonable conduct on the part of the employer may, in fact, be a breach of the implied duty and thus a repudiatory breach (Bliss v South East Thames Regional Health Authority (1987)). (SAQ 43 16/3/2000)

The contractual approach, however, can create problems.

First, if the breach is a unilateral change of terms, the employee must decide within a relatively short period of time to resign, otherwise he risks his conduct being seen as acceptance of the variation as in Scott and Electromotors Ltd (1977)).

Second, if the breach is anticipatory, and the employer rectifies the breach before the employee resigns, there is no constructive dismissal as the employer is no longer in breach (Holst Group Administration Ltd v Harrison (1985)).

Third, there can be no repudiatory breach if the employer feels he is exercising his contractual rights, even if he is mistaken as to the precise nature of the contract (Frank Wright and Co (Holdings) Ltd v Punch (1980)). This indicates that where there is a genuine dispute as to the terms, the intention of the employer is very relevant.

Should the employee establish that he has been dismissed, in order to claim a redundancy payment he must further establish that the dismissal is for reasons of redundancy. Should the employer attempt to rebut the presumption in s163(2), the employee must show his dismissal was for one of the reasons in s139(l). In other words, he must show that his employer has ceased to trade, that he has moved his business or that his requirements for the particular kind of work the employee is required to do have ceased or diminished or expected to do so.

While the employer ceasing to trade will normally not raise contractual issues, three points should be mentioned.

First, the protection in s136(5), which states that the death or liquidation of the employer constitutes a dismissal for redundancy purposes.

Second, if the employer is taken over in circumstances where s218 of the ERA applies, if the business is taken over as a going concern, the employee cannot claim redundancy from the old employer, even though there has been a fundamental change in the contract. On the other hand, if merely the assets are transferred, then the employee must claim redundancy from his old employer, otherwise he will lose his employment protection rights as a new continuity period begins with the new employment (Woodhouse v Peter Brotherhood Ltd (1972)).

Third, if the employer is taken over in circumstances where the TUPE Regulations apply, then despite the change in terms there is no breach and no redundancy, although the employee has the right by reg 5(4)(A) to object to the transfer and not move.
If he does this, however, he falls into legal limbo, because the change of employer is not a dismissal and thus he will not be able to claim a redundancy payment.

In relation to the second part of the definition, the employer moving place of business, the question for the tribunal is whether there is a mobility clause in the employee's contract. If there is not, his place of work contractually is where he physically works, and thus if his employer moves he will be redundant, unless the move is a short distance away and has no real effect on the employee (Holborn Ltd v Hohne (1977). If the employee has a mobility clause in his contract, however, his place of work will be within the content of the clause and so there is no redundancy.

Such a clause may be express or implied. If express, this will cause few problems for the tribunal. If such a term is implied, however, it will be a question of fact, looking at all the circumstances of the case.

In O'Brien v Associated Fire Alarms (1969) two electricians worked for a company in Liverpool and had always worked there, although the company operated throughout Britain. The work diminished in Liverpool and they were asked to work in Cumberland.

They refused and were dismissed. Their claims for redundancy payments we're upheld by the Court of Appeal on the basis that there was no express or implied term requiring them to work anywhere but the Liverpool office.

Conversely, in Stevenson v Teeside Bridge and Engineering Ltd (1971) a steel erector was not entitled to a redundancy payment when work dried up at the site where he mainly worked, since travelling between sites was found to be an implied term in his contract, given he had accepted this when interviewed and the contract envisaged mobility since it contained provision for travelling and subsistence expenses.

The third definition of redundancy is perhaps the one where contractual issues dominate. Given that the employee is arguing that the work of the particular kind he was employed to do has ceased or diminished, the tribunal must look to his contract to identify the particular work.

This contractual approach was taken by the EAT in Cowen v Haden Ltd (1982) and was endorsed by the Court of Appeal, although the decision was overturned on the facts. This does not mean that any change of contractual terms is a redundancy, however, if we consider (Chapman v Rostowrack China and Clay Co Ltd (1973)) and the tribunal must see if in relation to the contractual terms the function for which the employee is employed has ceased or diminished.

This means that if the work still remains and the amount of work the employer requires remains the same, the fact he requires the work at different hours does not mean a redundancy has occurred (Johnson v Nottinghamshire Combined Police Authority (1974)). On the other hand, if the requirements for the type of work have diminished, there is a redundancy, even if the employer takes on more employees due to an increase in a different type of work (Murphy v Epsom College (1985)).

So an employer replacing a barmaid with a younger version will not constitute a redundancy because the employer still requires the same function to be performed, albeit by a different type of employee, (Vaux and Brezveries v Ward (1968)), although if he dismisses all his employees and replaces them with independent contractors, then there is a redundancy because his needs for employees have ceased.

One further aspect of redundancy may give rise to contractual issues and that is where the employer argues that the employee is redundant but that he has been offered suitable alternative work which the employee has unreasonably refused (s141).

While the reasonableness of the employee's refusal will normally involve considerations outside of his contract, the question of whether the offer is suitable will entail the tribunal in considering the redundant job and comparing it to the offer to see if the offer matches the employee's skills and capabilities.

In Carron Co v Robertson (1967) the court held that all factors should be considered such as the nature of the work, hours and pay, the employee's strength and training, his experience and ability and his status.

In Standard Telephones and Cables v Yates (1981) it was held that the offer of unskilled assembly work to a skilled card wirer was not an offer of suitable alternative employment. Thus the terms of the employee's original contract will be the starting point for the tribunal and will be an important factor in deciding if the employee has refused suitable alternative work unreasonably and thus denied himself a redundancy payment.

It can be seen therefore, that contractual issues permeate all aspects of a dismissal for reasons of redundancy in that they may be a consideration in relation to dismissal, the definition of redundancy and part of the consideration of weather the employer has offered suitable alternative employment to his redundant employee.