Warning to employers who regularly enhance redundancy payments

Warning to employers who regularly enhance redundancy payments


Author: Jayne Flint

The EAT in Peacock Stores v Peregrine has confirmed that where an employer consistently makes enhanced redundancy payments such action could give rise to an implied contractual entitlement.

What the Law says

Under the Employment Rights Act 1996 a statutory redundancy payment is calculated using an employee's age, weeks' pay (capped at the current limit of £450 but due to increase to £464 on 6 April 2014) and length of service (up to a maximum of twenty years service).

Background to the case

From 1996 to 2002 Peacock Stores made redundancy payments in excess of the statutory entitlement. In particular, it did not cap the amount of a week's pay nor the number of year's service to be applied. This meant that an employee with, for example thirty years' service was credited with 10 years' more service than the statutory scheme allows for.

From 2002 to 2006 the approach taken by Peacock Stores was more sporadic and it could not be said with absolute certainty that an enhanced redundancy payment was always made during this period.

At first instance, the Tribunal was satisfied that when Mr Peregrine was made redundant he had an expectation that the enhanced scheme would apply to him. Such belief derived from a consistently applied and well understood policy of enhanced redundancy payments which Mr Peregrine was well aware of, irrespective of whether or not that policy was written down anywhere.

The Employment Appeal Tribunal agreed and found that Peacock Stores' decision to enhance redundancy payments had been followed without exception for a considerable period of time and therefore had, by virtue of custom and practice, established a contractual term to the effect that enhanced redundancy payments would always be made.

Having established the existence of a contractual term, the fact that Peacock Stores had not complied with that term when calculating Mr Peregrine's redundancy payment meant Peacock Stores were in breach of contract, entitling Mr Peregrine to pursue his claim for breach of contract alongside any claim for unlawful deductions.

The clear message from this case is that where enhanced redundancy payments have consistently been paid out using the same terms for several years, this is likely to create an implied contractual entitlement for future employees to also receive the same enhanced terms. Where such enhanced terms are consistently paid, it will be difficult to successfully argue that the redundancy payments are genuinely discretionary. This will be the case even if there is no written policy to support the employee's argument that he or she is entitled to the enhanced redundancy payment.

Practical tips:

  • If you are concerned about establishing an implied contractual entitlement then be careful not to pay enhanced redundancy terms using the same calculation each time; vary the method in which enhanced terms are calculated.
  • Asking employees who receive enhanced redundancy terms to exit by way of settlement agreement with strict confidentiality provisions will be a useful tool but will not prevent custom and practice being established if such terms are well known amongst employees.
  • If you believe that you have already created an implied contractual entitlement, consider consultation with the workforce (and unions) to seek agreement to the introduction of new redundancy terms before any future redundancies take effect, although doing so is likely to expose the existence of the contractual entitlement. However it may be preferable to get employees "on board", rather than risk future claims, when employees who are expecting a generous redundancy package suddenly discover that such terms are no longer available.