In general, when making an employee redundant, employers need only think about statutory redundancy payments and contractual termination clauses. However, some employers offer enhanced discretionary redundancy packages, often in exchange for the employee signing a settlement agreement. Although called 'discretionary' schemes is there a risk that such enhanced redundancy schemes could become an implied term of the employment contract? We report on a recent case and give guidance to employers.
What is an implied term?
An implied term is a contractual term which, although not expressly written down or agreed on by the employer or employee, is a term which is implied either by fact, custom or practice, common law or statute. Often terms are implied to make the contract 'work'. Examples of implied terms include the duty to pay wages, health and safety duties, mutual trust and confidence, and indeed from an employee, the duty to exercise reasonable care and skill when carrying out their duties. Not complying with an implied term constitutes a breach of contract just as an express term.
How could this affect redundancy payments?
The recent case of Peacock Stores v Peregrine illustrates the risk of an employer routinely using enhanced redundancy packages. The question in this case was whether the consistent practice of an employer calculating redundancy payments without statutory caps could convert a discretionary enhancement into a contractual right for future practice. The tribunal held that it could, holding that there was a 'consistently applied and well understood policy of enhanced redundancy payments' and 'it is probable that remained the situation until 2002 when Mr Thomas was made redundant. The danger, therefore, with offering enhanced redundancy packages is that they could become an implied term by way custom or practice.
How can employers limit the risk whilst still offering enhanced redundancy packages?
Whether a discretionary redundancy scheme potentially gives rise to a contractual entitlement will always be a question of fact in every case. Part of the danger lies in the fact that by regularly using such schemes, employees have a belief and expectation that they are entitled to the enhanced package. This reinforces the fact that it has become custom and practice. However, changing the terms and calculations of your redundancy package regularly, or at least annually, is one way of demonstrating there is an element of change and an inconsistent approach. Also make clear that schemes are discretionary and not contractual. Discretion should not be fettered and should be used fairly when it is exercised.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.