Defending an unfair dismissal claim which could have settled

News has emerged of a very costly outcome for the BBC following its failure to defend an unfair dismissal claim brought by former chief technology officer, John Linwood. Mr Linwood was dismissed in 2013 following the disastrous failure of the Corporation’s Digital Media Initiative. Launched in 2008 it was intended to modernise production and output by transferring to a fully digital, tapeless workflow. However, after numerous problems and delays, the BBC’s contract with Siemens was terminated in 2009. It emerged that Siemens had been appointed without a tendering exercise. At the time of termination in 2009 the BBC’s losses were £38.2m but these were partially offset by a £27.5m settlement paid by Siemens.

In 2011 the BBC was criticised by the National Audit office for its mishandling of the project. Details of the sorry tale were set out in the NAO’s full report issued in January 2014. Remarkably it continued to limp along until an embarrassing press release was issued by Director of Operations Dominic Coles on 24 May 2013 which confirmed its closure once and for all. Remarkably, by then the overall losses had spiralled to £98.4m. News of the abandonment of the project coincided with the announcement that Mr Linwood had been suspended pending an external investigation. He was sacked in July 2013 and did not receive a pay out.

In January 2014, when giving evidence to the Public Accounts Committee, Mr Linwood revealed that he had brought legal proceedings against the BBC, essentially on the basis that he had been scapegoated. His claim was heard in the London Central Employment Tribunals throughout most of May and four days in June 2014, following which the unanimous decision of the Tribunal was that he was unfairly dismissed. There was a 15% finding of contributory fault.

What makes the story of renewed interest is that it has now emerged that the BBC spent nearly £500,000 on defending a claim that could have been settled for £50,000. A Freedom of Information Act request has revealed that the BBC spent £498,000 on costs, VAT and expenses, plus damages estimated at £80,000. However, an offer to settle of £50,000 had been rejected before the bulk of the legal fees were incurred.

According to the Tribunal judgment a culture of “sacrificial responsibility” at the BBC led to “avoidance strategies” and “the steering of the spotlight of blame in other directions” by those who feared that they would be associated with “a sinking ship”.

Is a settlement payment taxable?

One of the most frequently asked questions in HR is whether or not a settlement payment is taxable. Several different and apparently conflicting answers can all be correct, depending on the circumstances. In 2014 I wrote about the £30,000 tax exemption which does not apply in all circumstances and in 2011 I highlighted a potential trap for employers.

Now we have a further and significant contribution in the form of a decision by the Tax Chamber of the First Tier Tribunal in the matter of Mr A v HMRC. It is a basic principle of tax law that earnings are taxable. Unsurprisingly HMRC interprets “earnings” widely as including any payments in respect of which earnings are involved (section 62 Income Tax (Earnings and Pensions) Act 2003). As a result severance payments are frequently regarded as taxable (subject to the £30,000 exemption pursuant to sections 401 to 404A of the 2003 Act when applicable).

Mr A worked as a trader for a Bank in London. His job title was managing director and he was on a basic salary of £120,000 plus eligibility for the Bank’s bonus scheme. In the period from 2003 to 2007 he received significant bonuses based on the bank’s overall performance. In 2007 there was a dispute concerning his bonus and when the Bank was bought out he was made aware of imminent redundancies. He raised grievances including allegations of race discrimination (based on inappropriate comments made by the bank’s chairman and vice chairman).

In early 2008 he raised further grievances including the fact that other directors had received bonuses and he had not. A questionnaire was sent to the employer in accordance with the relevant provisions of the Race Relations Act (as it then applied). On March 2008 the Bank informed Mr A that he was to be made redundant and he was offered £1650 in statutory redundancy pay and a further ex gratia redundancy payment of £48,898. A couple of days later Mr A was offered a further payment if he agreed to sign a compromise agreement (now referred to as a settlement agreement). The agreement provided that in addition to the payments already offered he would receive a further payment of £600,000 in settlement of all outstanding claims. The terminology used will be familiar to those who have dealt with settlement agreements:
The parties have entered into this Agreement to record and implement the terms on which they have agreed to settle all outstanding claims which the Employee has or may have against the Employer…arising out of or in connection with or as a consequence of his employment and/or its termination. The terms…are without any admission of liability on the part of the Employer…
Unsurprisingly HMRC queried the £600,000 payment and asked for a detailed breakdown of what it consisted of.

local authority spending and the spiralling cost of the agency carousel

In September last year I wrote about the problem of what have been described as “revolving door managers” in the NHS. Settlement payments have amounted to a shocking £1.6 billion, often paid to employees who were re-employed in virtually the same or similar jobs with weeks or months. Faced with a problem on such a massive scale the Government proposed arrangements for clawbacks in the event of re-engagement. However, I and others pointed out that a direct intervention to alter contractual rights would be fraught with difficulties and no doubt susceptible to frequent legal challenges. The problem remains unresolved.

In the meantime it seems that the contagion has spread to local authorities, but on a scale perhaps even greater than in the NHS. According to research carried out by The Times (£) local authorities have spent an eye-watering £5 billion in rehiring staff they recently made redundant in a “scandalous…spending spree on agency and consultancy workers”.

The spending is all the more surprising since it comes at a time when councils have seen their budgets cut by £20 billion. It seems that the response to losing 400,000 permanent or other salaried staff has been to replace them with agency workers and consultants. In some sectors, for example social workers, the same person who used to work for the council secures higher paid work in the private sector, perhaps as a self-employed consultant, and then sells those services to the council, in effect to do the same work as before.

The newspaper conducted its research by making a series of freedom of information requests to local authorities. The results revealed that the worst offenders were Birmingham (£155 million in the last five years), Essex (£133 million), Kent (£127 million) and the London Boroughs of Lambeth (£125 million) and Camden (£125 million). Locally, Lancashire was the biggest spender (£51.2m), followed by Manchester (£48.3m), Liverpool (£29.7m), Cheshire East (£29.4m), Wirral (£18.9m) and St Helens (£16.2m).

However, what is the alternative? If councils are required to make savings then, as with any business, by far the biggest expense is the wage bill. The problem is that, as any accountant will tell you, moving an expense item from one column to another (e.g. permanent staff to consultants or agency staff) delivers no saving at all. The situation can get even worse if, for example, the only available service providers (e.g. for social care) cost a good deal more than direct employees. No-one can blame the agencies for charging as much as they can get away with.

is it really possible to recover public sector payoffs?

The contentious issue of what are often referred to in the media as “public sector payoffs” has attracted a good deal of attention in the last few months.

Faced with budget cuts and staff reductions there has been a good deal of irritation about managers receiving generous severance payments, only to take up alternative employment elsewhere in the public sector and thereby enjoy what many would regard as a windfall.

Matters came to a head a couple of months ago when it emerged that some 4,000 NHS managers received large severance payments only to be rehired – so-called “revolving door managers”. On a wider basis since 2010 there have been 38,000 “severance agreements” which cost a staggering £1.6bn. Since last year there have been 6,330 exit packages for NHS staff, costing £197m. In 2013 237 managers were paid £100,000 to £150,000, 83 got between £150,000 and £200,000 and 40 got over £200,000.

In the face of a system which appears inequitable and out of control the Government has held a consultation which expired on 17 September with a view to recovering exit payments when high earners return to the same part of the public sector within twelve months of leaving. It is suggested in the consultation that repayment in full would be required in the event of re-employment within 28 days with a sliding scale of repayments applying for the remainder of the twelve months following termination.

The scope is wide-ranging and is intended to cover:

redundancy payments – these will include both voluntary and compulsory redundancies, whether offered on an individual basis or as part of a workforce-wide scheme
voluntary exit payments
discretionary payments made to buy out actuarial reductions in pensions to allow for early retirement
ex gratia payments and special severance payments
compensation payments due as a matter of contractual entitlement
payments representing the value of fixed term contracts
payments made to facilitate a dismissal on the grounds of efficiency
payments in lieu of notice
payments that have a potential if not actual monetary value, including share options or benefits in kind

Enabling legislation is intended to be included within the Small Business, Enterprise and Employment Bill.

The obvious problem with this is that there are existing contractual arrangements and collective agreements that have been negotiated and applied over many years.

settling TUPE claims

Two recent cases have considered the effect of compromise agreements in TUPE cases where claims are made against more than one employer.
In Optimum Group Services Plc v Muir the Employment Appeal Tribunal looked at the situation in which an employee with a claim arising out of a TUPE transfer reached a settlement with one transferee (in a case where he was claiming against the transferor and a number of other potential transferees), while carrying on against other respondents. At the tribunal hearing he did not disclose the settlement, which the Employment Tribunal decided should not be deducted from the compensation he was awarded. It included a compensatory award of £23,668.84, after applying a 50% deduction to reflect the possibility he would have been made redundant in any event.
The Employment Appeal Tribunal overturned this decision, remarking that the compensatory award “should not over compensate the claimant. To do so could hardly be said to be just or equitable“. It ordered the claimant to disclose the £20,000 he had received under the compromise agreement, and ruled that it should be deducted from the figure he could recover for loss of earnings. It did, however make it clear that under Norton Tool Co Ltd v Tewson, notice pay would continue to fall outside the principle that there should be no double recovery of loss of earnings.
Lady Smith summarised the principles governing the award of compensation as follows:

compromise agreements and probably the world’s most expensive lunch

It is an often-heard maxim in contract law that a party cannot seek to claim the benefits of a contract which he has breached. While that is a rather simplistic statement and is, in practice, subject to numerous qualifications and exclusions, the decision of the High Court in Imam-Sadeque -v- Bluebay Asset Management (Services) Limited is an example of how the general principle can apply, even in the most complex of cases.

Heard over seven days and with the judgment of Mr Justice Popplewell running to 235 paragraphs in 61 pages, the case concerned the departure of Mr Imam-Sadeque from Bluebay. As is common with executive contracts there were “good leaver” and “bad leaver” provisions. Resignation would make Mr Imam-Sadeque a “bad leaver”. The distinction was particularly important for him since, as a good leaver, he would be able to exercise share options worth £1.7m. Terms were therefore set out in a compromise agreement.

feeling left out?

Tamang v ACT is an illustration of the importance of careful drafting – and of the importance of not making assumptions. The case arose after a pair of security guards claimed that they had been unfairly dismissed for a TUPE related reason after a service provision change, and that they had not been consulted about the change. They started claims against both their old employers and the new service providers, but then reached an agreement to drop their claims against the original employers, and signed settlement agreements which only named those original employers. The employees then carried on the proceedings against the new service providers, who sought to rely on the compromise agreements, arguing that they acted as a release against all the respondents.
The Employment Appeal Tribunal rejected that argument, holding that the agreement was a valid form of settlement, but only against the respondent actually named; it was not in fact a release of the respondents but a promise not to continue or start new proceedings against a named party.
The EAT referred to Chitty on Contracts (widely regarded as the leading work on contracts subject to English law) with particular reference to release, accord and satisfaction.

more about settlement agreements and compensatory awards

Proposals regarding settlement agreements from earlier this year have been fleshed out in a new government paper. Avid readers will recall talk of “protected conversations” – these seem to have died a death for now. The Government’s response to consultation seems to accept that such a concept could add to the administrative burdens on employers and create a new area of contention which could be “a field day for lawyers”. The response instead concentrates on “settlement agreements” to replace compromise agreements. The question is whether this will amount to more than just a change of name.
The paper sets out a proposed model wording for a settlement agreement, which doesn’t differ all that much from the sort of wording seen in compromise agreements in common use. This is not too surprising, given that any wording must be sure to satisfy the requirements of s203 of the Employment Rights Act 1996, which permits contracting out from employment rights in limited circumstances. Moreover, the standard wording sets out a long list of potential claims which could be covered. Many compromise agreements look pretty cumbersome, it is true, but that is for a number of reasons – some excessive caution perhaps, but many issues are often dealt with over and above statutory employment claims. Pensions and personal injury claims are frequently carved out. Benefits in kind and so on are dealt with. Employers want post termination restrictions and confidentiality obligations added or reaffirmed. The tax position needs to be dealt with. The employer wants written confirmation that the necessary legal advice has been given. The model agreement put forward covers some, but not all of these, and extends, with its guidance notes, to 15 pages.
More specifically we now have the answer to the question of contribution to the employee’s legal costs.

new (or maybe not so new) proposals to "streamline employment law"

In our June newsletter I outlined what changes were to be expected as a result of the Government’s review of employment law. If anything, what has now emerged is an even more diluted version of what was anticipated in the sense that the proposed changes will be the subject of numerous consultations, rather than firm decisions to implement changes. The "fire at will" Beecroft proposals are nowhere to be seen but those which remain are unlikely to provide radical alterations to the existing employment tribunal provisions (except perhaps for the introduction of fees – see our July round-up).
It is clear that Vince Cable has had his way with the BIS press release emphasising that the UK has a lightly regulated, flexible labour market, considered by the OECD to have the third lowest employment protection among 20 OECD countries and 10 emerging countries.
Introducing the changes Mr Cable said
We have been looking across the range of employment laws with a view to making it easier for firms to hire staff while protecting basic labour rights.

Our starting point is that Britain already has very flexible labour markets. That is why well over one million new private sector jobs have been created in the last two years, even when the economy has been flatlining.

But we acknowledge that more can be done to help small companies by reducing the burden of employment tribunals, which we are reforming, and moving to less confrontational dispute resolutions through settlement agreements.
The consultations will cover:

what are “settlement agreements” and how, if at all, do they differ from compromise agreements?

During the second reading of the Enterprise and Regulatory Reform Bill on 11 June Vince Cable announced that the Government wants to promote and increase the use of agreements relating to the termination of employment as an alternative to employment tribunal proceedings. No details were provided but the intention is to "ensure that the offer of a settlement cannot be used against an employer in an unfair dismissal case". But, hang on, isn’t that what a compromise agreement under the current legislation does and are these new settlement agreements going to be confined to unfair dismissal claims?

It has been suggested that, for small employers, there will be no need to obtain legal advice. But small employers do not need legal advice as matters stand: it is employees who must obtain advice in order for an agreement to be binding. Clearly, employees might not know whether a proposed settlement is fair and reasonable given the circumstances and the requirement to obtain legal advice is intended to address this understandable lack of knowledge. However, the Government has suggested that employees will continue to enjoy full employment protection because they can reject a settlement offer and proceed to an employment tribunal.