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PREVIOUS SPEAKERS:

Jane McNeill QC. Old Square Chambers

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Title: Remedies for unfair dismissal – old problems and recent developments: uplifts, reductions, Polkey deductions and “best estimates”

Introduction

1. This paper addresses recent developments in the law relating to unfair dismissal: in particular, the application of section 98A(2) of the Employment Rights Act 1996 ("the ERA") (strictly a fairness and not a remedies issue), Polkey and the tribunal's approach to the prediction of any future loss. It will also consider a miscellany of recent authorities relevant to the calculation of compensation.

   
   

2. A number of practical problems are attached to this paper with a view to discussion as to how parties and tribunals might approach the issue of fairness and the assessment of loss in different types of situation.

   
   

3. The principles of assessment of loss and, in particular future loss, are well-established but their application in practice is not always easy. Assessment has become more complicated since the enactment of section 98A(2) of the ERA but the task has been clarified considerably following the provision of guidance by the Employment Appeal Tribunal ("EAT" ) in Software 2000 Ltd v. Andrews [2007] IRLR 568.

   
   

4. What emerges from the recent cases is that tribunals should not be afraid to speculate in relation to compensation for future losses, provided that their speculation is properly informed by material and reliable evidence. The shift in the authorities is not so much one of principle but one of approach. It will be a rare case in which there will be a finding that an employee would have been employed indefinitely but for the dismissal. And the appellate courts will not interfere with tribunal decisions in relation to future loss unless the tribunal's decision cannot be justified by the evidence adduced before the tribunal by either or both parties or the decision is not properly reasoned.

Statutory Provisions

5. Section 119 of the ERA defines the method of calculation of the basic award and section 123 the principles of calculation of the compensatory award.

6. Section 123 of the ERA provides that the amount of the compensatory award for unfair dismissal should be:

"such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer".

7. Section 98A(1) provides for automatically unfair dismissal in circumstances where there is non-compliance by an employer with the statutory dismissal and disciplinary procedures, which is wholly or mainly attributable to the employer’s failure to comply with the statutory requirements.

8. Section 98A(2) provides that:

"subject to subsection (1), failure by an employer to follow a procedure in relation to the dismissal of an employee shall not be regarded for the purposes of section 98(4)(a) as by itself making the employer's action unreasonable if he shows that he would have decided to dismiss the employee if he had followed the procedure".

This provision does not assist an employer who has failed to comply with the statutory procedures: the dismissal will be automatically unfair even if the application of the statutory procedures would have made no difference. The fact that the application of the statutory procedures would have made no difference would be relevant to remedy only. But the employer who has failed to comply with some other requirement of procedural fairness, whether contractual or otherwise, may avoid a finding of unfair dismissal if the application of the procedure would have made no difference. In the view of the EAT in Kelly-Madden v. Manor Surgery [2007] IRLR 17 (Elias P presiding) "procedure" means any procedure which the tribunal considers should in fairness have been followed. It is not restricted to procedures which an employer has adopted or habitually uses. In so holding, the EAT confirms its view in Alexander and Hatherley v. Brigden Enterprises Ltd [2006] IRLR 422 in preference to the view of another division of the EAT (HHJ McMullen QC presiding) in Mason v. Governing Body of Ward End Primary School [2006] IRLR 432. In Mason, the EAT had concluded that section 98A(2) was of limited scope and applied only where there was a specific procedure which an employer had adopted. It did not apply to a more general failure by an employer to comply with the standards of a reasonable employer. It is possible that the Court of Appeal will, in due course, resolve this difference between two divisions of the EAT but for the moment it seems likely that Kelly-Madden will be followed.

Section 98A(2) applies only to procedural unfairness. Therefore, even where the application of fair procedures would have led to the same result, the dismissal may still be unfair because in substance the employer was not justified in dismissing the employee. For example, the application of fair procedures may still have led to dismissal but the dismissal may still be unfair because of inconsistency of sanction.

Section 124A of the ERA provides that where an award of compensation for unfair dismissal falls to be reduced or increased under section 31 of the Employment Act 2002 (non-completion of statutory procedures) or increased under section 38 of the same Act (failure to give statement of employment particulars) "the adjustment shall be in the amount awarded under section 118(1)(b) and shall be applied immediately before any reduction under section 123(6) or 123(7)". The reduction or increase therefore applies only to the compensatory award (section 118(1)(b) refers only to the compensatory award) and the adjustment is made before any reduction for contributory fault (123(6)) and before the compensatory award is reduced by any excess of any redundancy payment over the basic award (126(7)). This point is sometimes overlooked by advocates and tribunals.

9. The question of how these provisions are to be applied and how they interact with the case law on assessing compensation has been the subject of a number of recent decisions.

Recent Case Law: section 98A(2), Polkey and the process of assessment of future loss

10. In Software 2000, , the EAT (Elias P and lay members) has clearly summarised the principles emerging from the relevant case law in those (relatively common) cases where a redundancy dismissal is found to be unfair by reason of procedural failures. This summary provides useful guidance as to how a claim of this type should be approached. But it also provides useful guidance for the assessment of loss generally in all but the most straightforward unfair dismissal cases. The guidance is as follows:

"(1) In assessing compensation the task of the tribunal is to assess the loss flowing from the dismissal, using its common sense, experience and sense of justice. In the normal case that requires it to assess for how long the employee would have been employed but for the dismissal.

(2) If the employer seeks to contend that the employee would or might have ceased to be employed in any event had fair procedures been followed, or alternatively would not have continued in employment indefinitely, it is for him to adduce any relevant evidence on which he intends to rely. However, the tribunal must have regard to all the evidence when making that assessment, including any evidence from the employee himself. (He might, for example, have given evidence that he intended to retire in the near future).

(3) However, there will be circumstances where the nature of the evidence which the employer wishes to adduce, or on which he seeks to rely, is so unreliable that the tribunal may take the view that the whole exercise of seeking to reconstruct what might have been is so riddled with uncertainty that no sensible prediction based on that evidence can properly be made.

(4) Whether that is the position is a matter of impression and judgment for the tribunal. But in reaching that decision the tribunal must direct itself properly. It must recognise that it should have regard to any material and reliable evidence which might assist it in fixing just compensation, even if there are limits to the extent to which it can confidently predict what might have been; and it must appreciate that a degree of uncertainty is an inevitable feature of the exercise. The mere fact that an element of speculation is involved is not a reason for refusing to have regard to the evidence.

(5) An appellate court must be wary about interfering with the tribunal's assessment that the exercise is too speculative. However, it must interfere if the tribunal has not directed itself properly and has taken too narrow a view of its role.

(6) The s. 98(A)(2) and Polkey exercises run in parallel and will often involve consideration of the same evidence, but they must not be conflated. It follows that even if a tribunal considers some of the evidence or potential evidence to be too speculative to form any sensible view as to whether dismissal would have occurred on the balance of probabilities, it must nevertheless take into account any evidence on which it considers it can properly rely and from which it could in principle conclude that the employment may have come to an end when it did, or alternatively would not have continued indefinitely.

(7) Having considered the evidence, the tribunal may determine:

(a) That if fair procedures had been complied with, the employer has satisfied it "the onus being firmly on the employer" that on the balance of probabilities the dismissal would have occurred when it did in any event. The dismissal is then fair by virtue of s.98A(2).

(b) That there was a chance of dismissal but less than 50%, in which case compensation should be reduced accordingly.

(c) That employment would have continued but only for a limited fixed period. The evidence demonstrating that may be wholly unrelated to the circumstances relating to the dismissal itself, as in the O'Donoghue case¹.

(d) Employment would have continued indefinitely. However, this last finding should be reached only where the evidence that employment might have been terminated earlier is so scant that it can effectively be ignored."

11. The permutations in (7) are examples of the types of determination a tribunal may make but are not comprehensive. For example, they do not deal with the situation where a dismissal is substantively unfair but where the claimant would probably have been dismissed in any event. The authorities would suggest (see O'Donoghue below) that a chances approach should be taken in such circumstances, even if the chances of dismissal are very high (say 80% or more). In cases where tribunals find that a claimant would have been dismissed in any event, it is questionable whether they are intending to take such an approach as a matter of certainty.

12. In providing its guidance in Software 2000, the EAT reviewed a number of the relevant authorities in relation to compensation for unfair dismissal, including the recent cases of Gover v. Propertycare Ltd [2006] EWCA Civ 286 CA, Kelly-Madden v. Manor Surgery (above), Lambe v. 186K Ltd [2005] ICR 307 CA and Scope v. Thornett [2007] IRLR 155 CA.

13. In Gover v. Property Care Ltd², the Court of Appeal refused to consider an argument, raised by the appellants in the Court of Appeal for the first time, at the last moment and without proper notice to the respondent or to the Court, that the Polkey principle applied only to cases where an employer had a valid reason for dismissal but had acted unfairly in his mode of reliance on that reason. Whilst not prepared to consider this argument, the Court made observations which are strictly obiter dicta but which are likely to be given considerable weight in other cases where this issue may arise.

14. The Court of Appeal in Gover considered that the Polkey doctrine was not limited in the manner contended for by the appellants. Polkey is an example of the general application of the requirements of section 123(1) of the ERA³. Whatever the reason for the dismissal and whether that dismissal was for a potentially fair reason or not, there could be a Polkey deduction.

15. The Court of Appeal did consider and rule upon a further argument raised by the appellants, which challenged the tribunal's findings that they would have been dismissed even after proper consultation and advice. The appellants contended, in summary, that such a finding was not open to the tribunal because such a finding was too speculative.

16. Dismissing the appeal, the Court of Appeal referred to King v. Eaton Ltd (No. 2) [1998] IRLR 686, cited with approval in Lambe v. 186K [2005] ICR 307 and to the principle that "the matter will be one of impression and judgment, so that a tribunal will have to decide whether the unfair departure from what should have happened was of a kind which makes it possible to say, with more or less confidence, that the failure made no difference, or whether the failure was such that one cannot sensible reconstruct the world as it might have been". It referred, with approval, to the judgment of the EAT in Gover (HHJ McMullen QC presiding) that a tribunal should "construct, from evidence not from speculation, a framework which is a working hypothesis about what would have occurred had the Respondent behaved differently and fairly" and that all that is necessary is that the tribunal can "sensibly reconstruct what would have happened".

17. The Court of Appeal in Lambe laid to rest (again) the argument that tribunals should take different approaches depending upon whether the unfairness is 'procedural' or 'substantive'. Procedural and substantive unfairness do not need to be differentiated in carrying out the Polkey and section 123(1) exercises. Referring with approval to the judgment of Peter Gibson LJ in O'Dea v. ISC Chemicals Ltd [1996] ICR 222, the Court of Appeal states that it is unproductive to argue about whether a particular unfairness is 'substantive' rather than 'procedural'. To that extent it might be said to modify the approach taken in King v. Eaton (No. 2), although, in practice, it may be more difficult to reconstruct what may have happened but for the unfairness if the unfairness is substantive rather than procedural.

18. The distinction between 'procedural' and 'substantive' may be of no importance in pure Polkey and section 123(1) cases but it remains an essential distinction in cases which raise a section 98A(2) issue. Section 98(A)(2) refers specifically to following 'procedure' and it is only where a fair procedure would have led to the same result that the dismissal may be fair. In principle (6) in Software 2000, the EAT refers to the importance of not conflating the section 98A(2) and the Polkey exercises. The section 98A(2) exercise, in accordance with the decision in Kelly-Madden ,will be carried out on a balance of probabilities, with the employer bearing the burden of proof. The employer may fail to satisfy the tribunal that the claimant would have been dismissed if a fair procedure had been followed but the tribunal may still go on to consider the chances that the claimant would have been dismissed in accordance with all the evidence relevant to this issue adduced by either party.

19. The recent authorities indicate that wherever there is sufficient evidence of risk to the employee’s continuing employment, the tribunal should take that risk into account in assessing compensation for future losses. The question of whether the evidence is sufficient must be considered on a case-by-case basis but it is clear from the recent appellate authorities that the threshold is a low one. As the EAT put it in Software 2000, tribunals should only make a finding that employment would have continued indefinitely (i.e. that there was no risk of dismissal) where the evidence is "so scant that it can effectively be ignored".

20. In Scope v. Thornett, a tribunal had limited a claimant's compensation to six months. The claimant's employment had terminated after her employers had sought to relocate her from Exeter to Cardiff following an established claim of bullying and harassment against her. She had refused to relocate. The tribunal held that it was unfair to seek to transfer the claimant rather than seeking to find a way of retaining her services in Exeter but that, if she had remained in Exeter, the arrangement would only have lasted six months both because of working relationships and because of possible redundancy. The tribunal acknowledged that their calculation of loss was a "highly speculative matter".

21. The EAT allowed an appeal by the claimant on the basis that the tribunal should not "launch itself upon a sea of speculation" and that "the proper approach when it recognises that speculation is involved is to accept that it cannot sensibly reconstruct the situation".

22. The Court of Appeal disagreed with this approach. It held that the assessment of compensation for future loss of earnings will almost inevitably involve a consideration of uncertainties and "inevitably involves a speculative element". The type of evidence available in Scope v. Thornett was evidence which, at its lowest, demonstrated a risk that the claimant's employment would not have continued indefinitely. Tribunals cannot "opt out" of their statutory duty to assess what is just and equitable by way of a compensatory award simply because the task is difficult and involves speculation.

23. Having upheld the tribunal's approach, the Court of Appeal nevertheless remitted the case to the tribunal on the basis that it had not adequately explained how it had arrived at the period of six months.

24. There are a number of references in the recently reported cases which emphasise that issues of what would have happened but for dismissal are primarily for the judgment of the tribunal sitting as industrial jury and that the appellate courts should be slow to interfere (see, for example, Buxton LJ in Gover that "an appellate court should tread very warily when it is being asked to substitute its own impression and judgment for that of the tribunal"). However, recent cases show that the appellate courts will interfere and in practice have interfered in cases where tribunals have found no risk of dismissal in spite of some evidence of risk.

25. Most recently (at least to the writer's knowledge at the time of writing this paper), a division of the EAT (HHJ Burke QC presiding) has held in CEX Ltd v. Lewis UKEAT/0013/07/DA that a case should be remitted when an award allowed for no risk of dismissal. The findings of fact in that case included findings that the claimant was not familiar with certain aspects of the new post for which he had applied in a redundancy exercise and showed a lack of enthusiasm for some aspects of the job and that the only alternative post for which he might have been eligible had gone by the time of his dismissal.

26. In CEX, there was also a cross-appeal by the claimant in relation to the tribunal's decision, following a finding of automatically unfair dismissal, to increase the award under section 31(3) of the Employment Act 2002 by only 10%. The claimant's first ground of cross-appeal was that the tribunal had erroneously taken into account in limiting the uplift to only 10% that the employer had misunderstood the legal position concerning the application of the statutory procedures. The EAT was invited to give some guidance as to the general principles which tribunals should apply in awarding uplifts but declined the invitation. The EAT stated that the tribunal has a broad discretion as to the uplift to be applied and that tribunals" decisions on the appropriate uplift should not be subject to attack on appeal. The EAT considered that culpability might be a relevant factor in assessing uplift and that the employer who deliberately flouted the law may pay a higher uplift than the employer who was ignorant as to the law.

27. This confirms the broad discretion available to tribunals in determining where on the scale (between 10% and 50%) any reduction of or uplift to an award should lie. Until there is any further guidance at appellate level, it seems likely that there will be inconsistency in the approaches taken by tribunals but that factors such as the seriousness of the breach of procedures and the culpability of the party which has failed to comply with the procedures will be relevant factors.

Other recent decisions

28. Burlo v.Langley [2007] IRLR 145 CA. An employee (nanny) who was unfairly and wrongfully dismissed whilst off sick was entitled to compensation for her period of notice assessed on the basis of her contractual rate of pay (in this case, Statutory Sick Pay) during her period of notice. Employers are not required to pay compensation in respect of a period of notice at the normal rate of pay, if normal pay would not have been paid if the employee had still been employed, even though it may be good industrial practice to pay for a notice period at the normal rate. It was observed (the CA disagreeing with the majority of the EAT on this point) that the narrow Norton Tool principle (that a claimant should not have to give credit against compensation for notice pay for monies earned from other employers) should continue to apply for the time being unless and until it was departed from or overruled in a case on appropriate facts. In Burlo, there was no issue that the claimant had received earnings from another employer during her notice period. The CA did not agree with the majority of the EAT that the Norton Tool principle had been undermined by Dunnachie.

29. It therefore remains open to an employer in an appropriate case to seek to challenge at the highest appellate levels the principle that credit does not have to be given for earnings in alternative employment during the notice period, on the basis that the claimant in such circumstances double recovers.

30. In Kelly-Madden, in addition to the key issue concerning the interpretation of section 98A(2), the EAT commented on the inappropriateness of a finding of 100% contributory fault where there was some blameworthy conduct by the employer. Where the employer had been guilty of failures in its regulatory and administrative procedures and a lack of communication and a lack of communication, all of which had contributed to the dismissal, a finding of 100% contributory fault should not have been made.

31. In Gab Robins (UK) Limited v. Triggs UKEAT/0111/07/RN, the EAT (HHJ Peter Clark presiding) considered an issue as to whether a loss of earnings was recoverable in a constructive dismissal case based on a breach of trust and confidence, where employer-caused ill-health which preceded the date of dismissal led to a loss of earnings. The case was a "last straw" case. It was contended by the employer, on the basis of Eastwood v. Magnox, that the claimant's loss of earnings was not in consequence of her dismissal but because of pre-dismissal incapacity. The claimant contended that the cumulative sequence of events which had caused the claimant's ill-health were the events which led to her constructive dismissal and that she should therefore be compensated for her losses arising from her ill-health under section 123(1).

    
    

32. The EAT preferred the claimant's contentions. The breach of the implied term of trust and confidence represented an accumulation of events which had caused the claimant's illness and formed part of the constructive dismissal. The remedy was therefore for a loss of earnings under section 123(1). The EAT further confirmed that incapacity benefit should be deducted from the loss of earnings recoverable by the claimant for unfair dismissal.

    
    

33. In Melia v. Magna Kansei Ltd [2006] IRLR 117 CA, the Court of Appeal held that there could be compensation for "delayed payment" (akin to interest) in cases where compensation for past losses was awarded under section 123(1).

    
    

34. In Knapton v. ECC Card Clothing Ltd [2006] IRLR 745, the EAT held that there should be no compensation for past loss of the benefit of a life assurance policy when such a policy had not been purchased and the insured event had not occurred. The same principle would apply to a private health insurance policy.

9^th September 2007

PRACTICAL PROBLEMS

What approach should be taken to fairness, section 98A(2) and/or the assessment of compensation in the following circumstances?

1. Employee A is a housing officer employed by a local authority. She is dismissed on grounds of gross misconduct involving an (admitted) physical assault on a tenant, which had caused the tenant a serious cut above the eye. Her appeal against her dismissal (on the grounds that she had been severely provoked) is to a panel of elected members, who dismiss her appeal. Because of difficulties in availability of elected members, her appeal is not heard until six months after her effective date of termination. She claims compensation for the period leading up to the date of her appeal hearing and for six months after that. At the time of her dismissal, she had been employed for ten years.

2. Employee B is employed by a registered charity employing 15 people. He is dismissed on grounds of redundancy when the funding for his post comes to an end. The employer, which has no surplus funds available to pay for legal advice, fails to set out in writing the circumstances which have led the employer to contemplate dismissing the employee and is therefore in breach of the statutory procedures. The employer has, however, held two proper consultation sessions with B and has clearly explained the reasons giving rise to the redundancy. The employer has not, however, given proper consideration to alternative employment. Had it done so, there was a chance that B could have carried out maternity cover for another employee who was due to return to work three months after the date of dismissal.

3. Employee C is summarily dismissed on grounds of capability. He has been diagnosed with depression and anxiety. By the time of his dismissal, he has been absent from work for nine months and his entitlement to sick pay under the employer's contractual scheme has come to an end. For that reason, the employer considers it unnecessary to give him notice. His notice entitlement was eight weeks. He had been receiving psychotherapy which was funded under a policy of medical insurance paid for by his employer under a contract of insurance, which is terminated at the same time as he is dismissed. His employer has complied with the statutory procedures but his dismissal is found to be unfair because it was unreasonable to dismiss summarily rather than with notice.

4. As in example 3 but the dismissal is found to be unfair because of a failure to obtain medical advice in relation to C's condition and his prospects of returning to work. If such advice had been taken, medical evidence adduced at the tribunal is to the effect that there was only a 40% chance that C would have been capable of returning to work within the next six months following the dismissal meeting.

5. As in 4 but the prospects of a return to work were 75% in the period of four weeks following the dismissal proceeding.

6. As in 4 but C's condition was caused by the negligence of his employer.

7. Employee D is dismissed by his employer under a managing for attendance procedure. The statutory procedures have been complied with and so have the contractual procedures but other employees in similar circumstances and with a similar attendance record have not been dismissed but have only been given a final warning. Following the dismissal, the staff representative in D's department tells the employer that the other 6 members of the department are extremely relieved that D has been dismissed because he had been taking an excessively prurient interest in the private lives of two junior female members of the department in particular and he had created a bad atmosphere in the department. No formal complaints or grievances had been raised.

8. Employee E (a receptionist) was dismissed on grounds of redundancy, the statutory procedures having been complied with. The tribunal found that redundancy was not the genuine reason for dismissal (in fact the employer wanted him out because he was aggressive in his dealings with others) and that the dismissal was unfair. Two months after his dismissal, E was arrested and subsequently convicted of an offence of criminal damage. He had returned to his employer's premises and thrown a brick through the window. E claimed that this action was a direct result of his anger at being unfairly dismissed.

9. Employee F was employed as a senior manager in a company employing over 1,000 persons. He had been employed by the company for 17 years, having started in a junior clerical position. He was selected for redundancy in a restructure, in the course of which two senior management positions (including his) were to be replaced by a single position. He was in a pool of two and believed that he was selected for redundancy because he was paid more highly than the other (female) member of his pool and the company was trying to save money. When he raised this during the consultation process, the manager who was conducting the consultation dismissed it out of hand. F appealed against the decision to make him redundant but was told by his employer that there was no appeal process for redundancy: only for dismissals under the disciplinary procedure. In any event, the company's dismissal procedures were fair and highly regarded and no appeal (nor any unfair dismissal claim to an employment tribunal) had ever succeeded where the company had dismissed. This evidence is repeated when the claim comes before the tribunal. The tribunal concluded, as a matter of fact, that the consultation process was unfair because of the failure to consider the issue raised by F but also found as a fact that the female member of the pool had brought an equal pay claim against the company, based upon F's pay, which was likely to be considered by a tribunal during the week following F's tribunal hearing. The tribunal found that there was a genuine redundancy and that the real reason for selecting F was that it did not want to select the female employee in case a victimisation claim was brought. The female employee had scored more highly than F in a scoring process but only because she had scored more highly in, what the tribunal found was an excessively subjective category, labelled "aptitude for work". But for this category, the scores would have been equal. It was correct that the company had never allowed an appeal against a decision to dismiss.

10. Employee G was dismissed in circumstances where an employer had failed to follow the statutory procedures. On being told that her employer was contemplating dismissing her and would be arranging a meeting and that she would receive a letter to that effect, she had left her employer's premises saying that they could dismiss her if they wanted. She had no intention of attending any meeting. One week later, she received a letter saying that she was dismissed and enclosing one week's pay. By then, she had found alternative work at the same rate of pay. She nevertheless brought a claim, on advice, to the employment tribunal claiming unfair dismissal.

11. As in 10 but the employee was unemployed for four weeks before returning to work at the same rate of pay.

12. Employee H was constructively dismissed. No issue arose as to compliance with the statutory procedures. She resigned after her employers failed to comply with a contractual obligation to pay her a bonus to which she was entitled. One month after her dismissal and following a family bereavement, she experienced a serious depressive episode lasting four months. This was the third serious episode of depression which she had experienced, the first having been caused by a serious incident of sexual harassment three years previously for which her employer had accepted liability. The third serious episode was not causally linked to the dismissal but was by reason of pre-existing vulnerability caused by her employer. If her employment had not been terminated, it was probable that she would have remained in her employer's employment during this third episode of depression and that she would have been paid full sick pay during this period, although there was a 25% chance that her employment would have been terminated.

Notes:

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