Legal update: Enhanced redundancy payments may be an implied contractual entitlement

13 May 2014

Whilst redundant employees are usually entitled to receive statutory redundancy payments from their employer, the contractual right to receive enhanced redundancy payments is less common in practice.  Sometimes the employer is liable for enhanced redundancy payments because it is bound by a business or industry wide collective agreement that sets out enhanced redundancy pay terms. Alternatively the employer may be liable for enhanced redundancy payments pursuant to the express provisions of the terms and conditions of employment of some or all of its employees.  The relevant enhanced redundancy package terms may be set out in individual employment contracts, or in another contractual document (for example, a contractual redundancy policy in the employee handbook).  However, that is not necessarily the end of the story: it is also possible for employees to benefit from an implied contractual entitlement to enhanced redundancy pay.  The case of Peacock Stores v Peregrine & Ors is an example of this.

This is an important issue in practice.  Statutory redundancy payments are often fairly small. For very long serving employees, they are capped at £13,920, but the average statutory redundancy payment is much lower in value.  It is not surprising therefore that employees affected by a redundancy situation often try to claim an implied contractual entitlement to enhanced redundancy pay.

In Peacock the Employment Appeal Tribunal confirmed that the employer was required to pay enhanced redundancy payments, and not only statutory redundancy payments, as a result of the implication of a contractual redundancy term.  The evidence showed that the consistent practice of the employer in various redundancy situations from the early 1980s to 2002 had been to make redundancy payments based on statutory terms, but without applying the cap on years of service or weekly pay.  There was also some more generalised evidence to the same effect covering 2002 to 2006.  The Employment Judge found that by then an implied term existed as a result of consistent custom and practice by the employer.  Although the position from 2006 to 2012 (when the redundancies at issue in the case occurred) was less clear cut, there was no basis to say that the implied contractual right that existed by then had lawfully been varied. The EAT confirmed that any departure after that date by the employer from its previously well established custom and practice of making enhanced redundancy payments amounted to a breach of contract, so the employer could not rely on any inconsistency of practice on its part after 2006 to say that the implied term had been varied or no longer applied.  

The key issue in cases like this is whether, viewed objectively, the employer's conduct can reasonably be understood by employees as indicating that there is an automatic entitlement to enhanced redundancy pay.  Peacock illustrates that providing enhanced redundancy payments to employees can be a risky business for employers.  Employers can inadvertently find themselves bound by implied terms that are undesirable, and should also be aware that previous custom and practice needs to be considered in the early stages of planning redundancies.  This case also highlights the fact that the potential existence of implied contractual redundancy terms is an important due diligence issue in business acquisitions and other TUPE transfers. 

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