Enhanced redundancy payments: at your discretion?

In addition to statutory redundancy pay, some employers make enhanced redundancy payments, either on a discretionary basis (usually in exchange for signature of a settlement agreement) or because the employees are contractually entitled to it. This contractual entitlement can stem from express contract terms agreed orally or in writing, or incorporated from other documents, such as collective agreements, policies or employee handbooks.

However, even where there is no express entitlement, an employer’s custom and practice of making enhanced payments can lead to employees acquiring an implied contractual entitlement.

Employers making enhanced redundancy payments on a discretionary basis should therefore take steps to reduce the risk of this practice bestowing a contractual entitlement on future employees.Enhanced redundancy payments: at your discretion?

Recent case

In Park Cakes Ltd v Shumba and others [2013] EWCA Civ 974, employees claimed an implied contractual right to enhanced redundancy payments as a result of custom and practice. A tribunal found that there was no such right, however on appeal the EAT and the Court of Appeal directed that the facts should be reconsidered by a fresh tribunal.

In its judgment, the Court of Appeal gave useful guidance on when an implied contractual right to enhanced redundancy payments may arise. By distilling this new guidance, and key points from previous cases, we have produced the ‘in practice’ guide for employers below.

In practice

Start by reviewing your current position. If you have any concerns about the discretionary status of your enhanced redundancy payments, get in touch with your usual Brodies contact for advice. If past practice is so embedded that there is undoubtedly an implied contractual right to enhanced redundancy pay, we can work through your options going forward (which may include a contract change exercise).

If entitlement to enhanced payments is more of a ‘grey area’, it is time to consider your tactics. An employer’s assertion that, subjectively, it did not intend to create a contractual entitlement will hold little sway with a tribunal if there has been conduct or communications which, viewed objectively, create a reasonable expectation amongst employees that they will be entitled to enhanced benefits. As such, consider the following to reduce your risk:

• Contract. Consider including an express contract term which makes clear that there is no contractual right to enhanced redundancy payments and that any such payments will be discretionary.
  
• Publication. Avoid publicising enhanced payments on, for example, an intranet site, or drawing them to the attention of the workforce generally. In some circumstances, publication to a trade union or large group of employees may constitute publication to the workforce in general. Don’t have standard enhanced terms which are ‘systematically’ provided to potentially redundant employees or available for employees to view ‘on request’.
  
• Frequency. The more often enhanced benefits are paid, and the longer the period over which they are paid, the more likely it is that employees will reasonably consider these an entitlement, rather than a discretionary benefit.
  
• Negotiation and variation. Where a number of employees are being made redundant at the same time, it will be impractical, and seen as unfair, to negotiate different terms for each individual. However, benefits applied consistently, on every occasion redundancies are made, will point to a contractual entitlement. As such, the amounts and terms of payment should be varied and negotiated afresh in respect of each separate redundancy exercise. Avoid conduct which, viewed objectively, could indicate that payments are made automatically. Note, however, that it may be possible to become bound to a minimum level of benefit even though more is paid from time to time on a discretionary basis.
  
• Language. Consistently describe enhanced redundancy payments in language that makes clear that they are offered as a matter of discretion. Avoid words such as ‘entitlement’ which can point to a legal obligation. Be aware, however, that simply describing individual payments as ‘ex gratia’ may not of itself be sufficient to stop a contractual entitlement arising.
   

Also of note…

Even if enhanced redundancy pay is discretionary, employers have a duty to exercise their discretion to award it rationally and in good faith.

Employers providing enhanced redundancy terms should take care to avoid discrimination. Enhanced payments which mirror the statutory redundancy payment formula, with uplifts, are not discriminatory on the grounds of age. However, other schemes which include age or length of service criteria must be objectively justified.

It is usually advisable to make enhanced redundancy payments conditional on employees signing settlement agreements.