Employees sometimes argue that what the employer considered a discretionary benefit has become a binding term of their employment contract through custom and practice.
Common scenarios where disputes of this nature may arise are those where the benefit in question is particularly valuable to the employee, such as an enhanced redundancy payment or bonus.
While employees and their representatives might be quick to argue that an implied term has arisen through custom and practice, this is actually much harder to establish than is often believed.
This article examines the legal framework in relation to terms implied by custom and practice and gives some tips for employers seeking to avoid discretionary benefits offered to their employees becoming legally binding.
Custom and practice is one of various ways that terms may become implied into an employment contract. In order for a term to become implied by custom and practice it must be,
"reasonable, notorious and certain".
In other words the term must be:
- fair and not capricious,
- well established over a period of time,
- known to employees,
- clear and unambiguous.
The fact that a benefit has been granted by an employer for a number of years will not necessarily mean it has become a binding entitlement. Firstly, this is because the term must be known to the workforce so that employees have a reasonable expectation of receiving the benefit. For example, if details of the benefit are published in an easily accessible document such as a staff handbook this might point towards an implied term. However, if information about the benefit is set out in a restricted policy document available only to a small group of management or HR, this would point away from the benefit having become an implied term. Secondly, the employer must have behaved in such a way which suggests it felt a sense of legal obligation to provide the benefit.
Ultimately, the question a tribunal or Court will ask is whether the circumstances demonstrate that the parties intended the term to form part of their contract? In other words, can they be taken to have accepted that the practice has attained contractual status?
In the recent case of Park Cakes v Shumba & Ors, which concerned a disputed entitlement to an enhanced redundancy payment, the Court of Appeal stressed that the crucial task for a tribunal was to assess objectively whether the employer's conduct evidenced an intention to be bound by the term:
". the essential question.. Must be whether, by his conduct in making available a particular benefit to employees over a period, in the context of all the surrounding circumstances, the employer has evidenced to the relevant employees an intention that they should enjoy that benefit as of right?"
The Court went on to set out some useful questions to be considered in such cases.
On how many occasions, and over how long a period, have the benefits in question been paid?
Subject to the other considerations below, the more often enhanced benefits have been paid, and the longer the period over which they have been paid, the more likely it is that employees will reasonably understand them to be paid as of right.
Are the benefits always the same?
For example, if an employer invariably pays enhanced redundancy payments, but varies the amounts or the terms of payment, that is inconsistent with a legal obligation. Any inconsistency during the period relied on as establishing the custom is likely to be fatal. It is, however, possible that in a particular case the evidence may show that the employer has bound itself to a minimum level of benefit even though from time to time more has been paid on a discretionary basis.
How far are the enhanced benefits publicised?
Where the availability of enhanced benefits (for example, on redundancy) is published to the workforce generally, that will tend to convey that they are paid as a matter of obligation. In some circumstances publication to a trade union, or perhaps to a significant group of employees, may be enough to constitute publication to the workforce as a whole. Employment tribunals must judge whether, as a matter of industrial reality, the employer has conducted itself so as to create "widespread knowledge and understanding" on the part of employees that they are legally entitled to the enhanced benefits.
How are the terms described?
If an employer clearly and consistently describes benefits in language that makes clear that they are offered as a matter of discretion - for example, by describing them as ex gratia - it is hard to see how the employees or their representatives could reasonably understand them to be contractual, however regularly they may be paid. A statement that the payments are made as a matter of "policy" may, depending on the context, point in the same direction. Conversely, the language of "entitlement" points to legal obligation.
What is said in the express contract?
As a matter of ordinary contractual principles, no term should be implied, whether by custom or otherwise, which is inconsistent with the express terms of the contract, at least unless an intention to vary the relevant contractual term can be established.
Is the position ambiguous?
The burden of establishing that a practice has become contractual is on the employee, and she will not be able to discharge it if the employer's practice is, viewed objectively, equally explicable on the basis that it is pursued as a matter of discretion rather than legal obligation.
Tips for employers
The circumstances and context of a case will be crucial and no single point below will be determinative. However, adopting some of the suggestions may assist an employer in arguing that a benefit remains discretionary.
- The language used is very important because it can shape employees' expectations. For example, referring to "ex-gratia" payments rather than "entitlements" in any policies and handbooks clearly signals that the employer does not consider it is legally required to provide the benefit but is choosing to do so. Phrases such as "aspiration", "aim" or "policy" are far less problematic than "shall receive" or "guaranteed payment".
- Communications to the wider workforce about any policy need to be very tightly controlled and managed. Even oral discussions could inadvertently give rise to misunderstandings by employees about their entitlements which they could later seek to rely upon.
- In a redundancy situation, where the employee asks for details of their termination package be very careful to differentiate between the statutory, contractual and discretionary elements of any package on offer.
- No discretionary benefits should be paid automatically without consideration of the circumstances and specific sign-off. Such consideration and reasons for a decision to pay/not pay should be documented and filed.
- All benefits paid should be accompanied by standard wording clearly stating any payment made is at the employer's discretion and is not contractual.
- Ideally, do not put details about discretionary benefits in a staff handbook. If a written policy exists ensure access to it is limited to HR and higher management. If a discretionary policy is set out in a staff handbook or publicly available elsewhere label it clearly as non-contractual and make sure it is clear that it is indicative only and is not intended to confer any legal rights.
- Any policy wording should clearly state that the employer has an element of flexibility so that benefits may not be paid in every situation or may be discontinued altogether at the employer's discretion.
- Express wording in a contract of employment which excludes the implication of terms relating to any other benefits by custom and practice may be helpful. For example, in ExxonMobil Sales and Supply Corp v Texaco Ltd  EWHC 1964 (Comm), the High Court held that a clause stating that the written agreement "contains the entire agreement of dealing affecting it" prevented a term based on custom from being implied.
- Consider linking payment of discretionary benefits with the signing of a settlement agreement on termination or to assessment of performance/loyalty in the case of bonuses.
Park Cakes Ltd v Shumba and Ors  EWCA Civ 974