E-BULLETINS

E-bulletin 21
Decision on Constructive Dismissal Compensation
1. Court of Appeal Dishes Out Harsh Decision on Constructive Dismissal Compensation
2. Pay in Lieu of Notice – Can an Employer Force an Employee to not Work his Notice?
3. Preventing Ex-Employees from Working for the Opposition
1) New Law - Harsh Decision on Constructive Dismissal Compensation!

It has always seemed fair that when claiming constructive dismissal an employee should be able to claim damages for his/her loss leading up to the dismissal. So if the reason for resignation/dismissal was a breach of confidence but leading up to that, the employer had bullied an individual, who subsequently became sick as a result then compensation would flow from the general mal treatment. In  GAB ROBINS (UK) LIMITED and Gillian Triggs C.App 30th January [2008] EWCA Civ 17 The employer's appeal, brought with the permission of the EAT, was solely against the upholding of the ET's remedy directions. The employer's case, was that the ET misdirected themselves in holding that, in assessing Mrs Triggs's entitlement to compensation for the loss she sustained in consequence of the dismissal, account could and should be taken of the loss flowing from the employer's injurious, repudiatory conduct towards Mrs Triggs which she accepted so as to effect the dismissal in respect of which she brought her claim.
That conduct had caused her to become ill, following which she left work and was on sick pay for part of the time leading up to the eventual dismissal. The employer's submission was that it was not open to the ET, in assessing compensation for her unfair dismissal, to have regard to that pre-dismissal conduct: the assessment must be confined to compensating her for the loss sustained by the dismissal itself, namely (in this case) compensating an employee who at the time of dismissal was already ill and on sick pay, being pay in respect of which her rights were shortly to be exhausted.
The key quote came from Lord Justice Rimer:
‘Sympathy cannot, however, be allowed to get in the way of principle; and Mr Clarke's submission was that the ET's approach was wrong in principle and cannot be reconciled with the guidance provided by the House of Lords in Eastwood and another v. Magnox Electric plc; McCabe v. Cornwall County Council and others [2004] IRLR 733 ("Eastwood"), which was one of the five authorities to which the ET were referred. The point, in short, was that loss of the type identified by the ET did not flow from the dismissal, which happened in March 2005. In so far as it was caused by the employer, it was caused by the employer's antecedent breaches of the implied term of trust and confidence, being breaches which, by the time of the dismissal, had already caused Mrs Triggs to become ill and so impaired her earning capacity. Mr Clarke accepted that she might have a separate common law remedy in respect of the damage so caused (including her reduced income-earning capacity); and we were told that Mrs Triggs has issued a claim form for such a remedy. But it was not recoverable as compensation in an unfair dismissal claim before an employment tribunal.’
It wasn’t all bad for Mrs Triggs however as it was held that compensation in respect of such lost wages might be recoverable as damages in a personal injury claim brought in the ordinary civil courts. Of course were Mrs Triggs to bring such a claim, she would have to give credit in it for any compensation for lost earnings that she had earlier recovered in her unfair dismissal claim.




 
2) 'Pay in Lieu of Notice - Can an Employer Force an Employee to not Work his Notice?


This question was inadvertently put before the Court of Sessions in Scotland in the case of Morrish v NTL Group Ltd [2007],  which considered whether a company could lawfully terminate its employee’s contract summarily by making a payment in lieu of notice (PILON) when no such clause existed in the contract.

Mr Morrish had an express term in his contract entitling him to 12 month's written notice but no PILON provision. However, he was dismissed by NTL without notice and was instead given a payment in lieu.

Mr Morrish argued that he would have been entitled to a bonus and commission had he worked the 12 month notice period and brought a claim for breach of contract and loss of opportunity.

NTL argued that it was not in breach because Mr Morrish’s contract included an implied term giving it the right to lawfully terminate his contract by making a payment in lieu of notice.

The Scottish Court of Sessions was not prepared to accept NTL's argument as Mr Morrish’s contract already contained an express clause dealing with his notice period. It commented that it had “strong reservations as to whether, in the 21st century, there is any scope for the implication of such a term”.
It also referred to s86 of the Employment Rights Act 1996 which sets out minimum statutory notice periods of termination in employment contracts. Section 86 sets out statutory entitlement to employees for minimum periods of notice and the Court was reluctant to imply a term into the contract where a statutory term already existed. The Court referred to the decision of Lord Hoffmann in Johnson v Unisys Ltd [2003] 1 A.C. 518 who said:

"Any terms which the courts imply into a contract must be consistent with the express terms. Implied terms may supplement the express terms of the contract but cannot contradict them. Only Parliament may actually override what the parties have agreed."

Failure by an employer to give the minimum notice required by ERA 1996 s.86 is a breach of contract and therefore amounts to wrongful dismissal (see ERA 1996 s.91(5).  The period of loss ends at the time when the employer could have terminated the contract lawfully.

The result of the case highlights the importance of having an express PILON clause in the contract of employment. Without an express clause, employers will be open to a breach of contract claim by employees who have missed the opportunity to enjoy benefits or other payments during the notice period.

Employers should also be aware that if an employee’s employment is terminated by a payment in lieu of notice, and no express provision exists in the contract, then there will have been a breach and therefore any post-termination restrictions contained within the contract will not normally be enforceable.

So how does a prudent employer protect itself? One answer is to include a term in the contract to place an employee on 'garden leave' during their notice period. This means that the employee is still employed but is normally required to stay away from the workplace during the period of leave, which is often the notice period to terminate the contract. As long as the clause is reasonable, there will be no breach of contract and therefore no right by the employee to claim additional damages.

However, although there is a general right at common law to tell most employees not to turn up for work as long as they are paid, the courts have indicated a willingness to make an exception to the general rule and imply a duty to provide a reasonable amount of work in order that the employee maintains his or her particular skill set. This implied term can be very relevant when considering the enforceability of garden leave if it would lead to a diminution in an employee's marketable skills.

A garden leave clause will allow an employer to keep an employee away from the workplace whilst retaining an employees express and implied duties towards the employer, for example, not to set up in competition with the employers business and to maintain a duty of confidentiality, both during and after employment.  Employers should note that garden leave can only be invoked when there is an express provision in the contract as no such implied term exists.

For most employers the effect of the decision in Marrish v NTL Group Limited [2007] will not cause too much concern except to ensure that a PILON clause includes compensation for car use and other benefits so as not to be unreasonable, and therefore unenforceable.

However, with executive contracts, bonus entitlements may be affected and an employee could bring a claim based on failure to pay bonus or loss of entitlements. There may be an adverse effect on accrual of pension rights (beyond the loss of premiums) if the notice period is sufficiently lengthy.

Of most significance is that a breach of contract by the employer can nullify the enforcement of restrictive covenants rendering them inoperable.

Employers should also note that an employee who is wrongfully dismissed does not have to give credit for sums earned from other employers during the notice period as established by Norton Tool Co. Ltd v Tewson [1972] and supported in the Court of Appeal recently in the case of Burlo v Langley [2007].

From a practical point of view, before putting an employee on garden leave, employers should consider the length of the notice period and the nature of the employees skills sets. The longer the notice period and the more skilled the employee, the more likely it is that the employee could challenge the requirement to stay at home and 'garden'.

Employers should also consider the tax position. The Revenue has indicated that where a PILON clause exists any payment under it to the employee is taxable, any payment in lieu of notice where there no such provision exists is effectively compensation for breach of contract which does not normally give rise as a taxable payment.  

Employers are therefore lawfully able to force their employers not to work their notice periods if express provision allows for it in the contract. If not, employers run the risk of a claim for damages for losses up to the point where they could have legitimately terminated the contract.


Preventing Ex-Employees from Working for the Opposition

Most would agree that entrepreneurs who provide much needed employment are entitled to protect their investment in new technology and business connections from unauthorized use or disclosure by unscrupulous employees.  On the other hand nobody wants to see employees shackled to one employer long after their contracts of employment have ended. The law in my opinion has done a good job in balancing these two often conflicting principles.
Often an employer will try to protect a business by introducing agreements with employees which aim to prevent the employee soliciting or working for clients and/or competitors once they leave the company. Post termination restrictive covenants (ie Restrictive covenants in employment contracts which are intended to operate after employment has ended) are usually seen as anti-competitive and in restraint of trade.
Agreements, therefore not to poach staff or customers/clients from the employer or not to work for a competitor after employment has ended are basically void. They are enforceable only if the ex-employer can show that they do no more than is reasonable to protect his legitimate business interests.
What is Capable of Protection Under a Restrictive Covenant?
In the case of, Thomas v Farr plc and Hanover Park Commercial Limited* A Managing Director (the Employee) appealed a High Court decision on the basis that a non-competition clause in his employment contract was an unreasonable restraint of trade and unenforceable. The Court of Appeal upheld the decision of the High Court that the clause was reasonable and that there was a legitimate business interest to protect.
The Employee was the managing director of a firm of insurance brokers. Contained within his employment contract was a 12 month non-competition clause preventing him from competing with the company for 12 months after the termination of his employment. The Employee terminated his employment in 2003 and subsequently sought a declaration that the non-competition clause was an unreasonable restraint of trade and unenforceable. The Manager also had a clause in his contract forbidding him to approach clients of the ex-employer for a period of 12 months.
The High Court Judge ruled that once employment has ended only information which is either a trade secret or, whilst not capable of being properly described as a trade secret, is in all the circumstances such as to require the same protection as a trade secret, is protected information. The judge held that the information being sought to be protected in this case was exactly the type of confidential information which is likely to fall under the category which can be protected by express agreement.
An item of information is either secret or it is not and, if it is not, its use or disclosure after the employment comes to an end cannot be restricted by a covenant in the employee's service contract. Such a covenant can be enforced only if it is reasonably necessary to protect the employer's secret and, even then, only for so long as such protection remains necessary.  Such temporary protection may be necessary where the skills and knowledge that the employee develops include trade secrets but only until the rest of the industry catches up
Further it was held that solicitation of clients was unlikely to be carried out personally by the Employee but by staff below him so there were practical problems in trying to police a non-solicitation clause which did not provide adequate protection. As such the non-compete clause was reasonable. The employee appealed this decision to the Court of Appeal. It was also upheld that in this circumstance due to the type of business being underwritten and the fact that the policies were often for 12 months or longer a 12 month non-compete clause was reasonable.
In summary, the type of information, which may be the subject of protection in a restrictive covenant must be;
·A trade secret
·Information that in all the circumstances, is such as to require the same protection as a trade secret (in the above case insurance policy details).
A restrictive covenant can be enforced only if;
·It is reasonably necessary to protect the employer's secret.
·And for so long as such protection remains necessary.
·The terms of the covenant are reasonable in length and in general content. The shorter the duration or the smaller the pool of competitors cited the more chance that they will be allowed to stand (It is advisable always to seek legal advice when drafting the terms of such a clause).
The implied duty of fidelity prevents employees from working for competitors or discussing their employers' private business with strangers without permission for so long as their employment subsists. Thereafter the employer can only protect genuine trade secrets and, only then, for so long as they remain secret. Tight and documented procedures for regulating the disclosure of information to those who need to know rather than draconian covenants are the proper way to protect such secrets.
Whilst in Employment
The position is different during employment. Courts may grant an injunction forbidding an employee to work for his employer's competitors while the employment contract subsists regardless of possible non-enforceability of post-termination restrictive covenants. In practice this rule is, for obvious reasons, especially important in cases where there has been constructive dismissal of a senior employee.
Garden Leave
An employee who has been given notice of dismissal (or who has himself given notice to quit) and who continues to receive normal salary but is told not to report for duty during the notice period is said to be on ‘garden leave’.  This is probably the safest way of ‘locking an employee away from the opposition’.
Typically this happens if an employer needs to protect himself against competition or poaching of customers/clients/staff by a senior employee who has given notice or is to be dismissed. Restrictive covenants are less reliable and difficult to enforce against ex-employees so it may be attractive for the employer to send the employee home on ‘garden leave’.
The attraction has been increased by recent case law confirming that post termination restrictive covenants can start at the end of garden leave. An employer may have difficulty in imposing ‘gardening leave’ if there is no specific contractual provision giving him the right to do so.
When there is no Contract Term
It is the case that many duties of an employee will not be expressed in black and white within a contract. Certain ‘invisible’ terms however are implied to exist in the contract of employment. An example is the duty of an employee to take reasonable care of the employer's property. If sufficiently serious, breach of an implied term can justify disciplinary action, and sometimes even dismissal, just as much as breach of an express term. For this reason industrial action such as a work to rule can nevertheless sometimes justify disciplinary action and even dismissal.
Although there is an implied duty of ‘trust and confidence’ in employment contracts there is no overall implied duty of disclosure. In normal cases neither party is obliged to disclose to the other all facts (eg one's own failings) which the other may consider relevant to deciding to enter into or. However each case must be considered on its own facts and merits so that if an employee is sufficiently senior he may be under a duty to disclose his own misconduct to his employer. Further if the employee is also a director, his obligations qua director will mean that he is under a positive obligation to disclose misconduct of which he is guilty.

The implied duty of fidelity prevents employees from working for competitors or discussing their employers' private business with strangers without permission for so long as they are employed (it is advisable to remind employees of this duty in their contract of employment). Thereafter, the employer can only protect genuine trade secrets and, only then, for so long as they remain secret. Tight and documented procedures for regulating the disclosure of information to those who need to know rather than draconian covenants are the proper way to protect such secrets.

*Thomas v Farr plc and Hanover Park Commercial Limited [2007] EWCA Civ 118 27th February 2007

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