Employment Law E-Bulletin

Cases: June 09

Irrationally Generous Compensation Payment

For our first case this month we thought that it would be useful to cover a case on the topic of compromise agreements which has attracted a great deal of press coverage recently.

The case of Gibb v Maidstone & Tunbridge Wells NHS Trust saw the High Court ruling on the validity on the Department of Health’s refusal to pay Ms Gibb the amount that had been agreed under the compromise agreement.  Ms Gibb had been the Chief Executive of Maidstone & Tunbridge Wells NHS Trust for 3 years when there was a serious outbreak of the superbug C. difficile at some of the hospitals under her management.  The outbreak resulted in a number of deaths and a large amount of negative publicity for the Trust.

An investigation was launched which concluded, amongst other things, that there had been serious leadership failures within the Trust.  As a result, the Trust decided to terminate Ms Gibb’s employment.  The Trust then entered into a compromise agreement with Ms Gibb agreeing to pay her £70,000 in lieu of notice and a compensation payment of approximately £175,000.  The executives who negotiated the agreement with Ms Gibb had significant sympathy for her position, had a good relationship with her and wanted to reward her for her previous good service to the Trust rather than punish her for the superbug incident even though this was the reason for terminating her employment.

Although the sum in respect of her notice period was eventually paid, the Department of Health refused to authorise the Trust to make the compensatory payment.  Ms Gibb then sued for breach of contract.

Unfortunately for Ms Gibb, the High Court decided that, looking at the best case scenario, the maximum that Ms Gibb would have obtained had she brought a case for unfair dismissal was £145,000, being her contractual notice and the maximum unfair dismissal award at that point.  Although Ms Gibb argued that the rest of the compensation covered the legal and management costs that the Trust would have incurred if a Tribunal claim had been brought, the judge felt that the Trust had not made any attempt to calculate Ms Gibb’s loss and that the compensation payment was not related to the value of any potential claims that she may have had.  Instead, the Trust had been guided by personal feelings.  With this in mind, the judge felt that the amount agreed had to be viewed as irrationally generous, and that, given the problems at the Trust, the decision to pay such an amount must be ultra vires – that is to say that, although the Trust had the power to compensate an employee for loss of employment, if such a power was not exercised reasonably, then the decisions made under it would be void.  The judge ruled that the decision to pay Ms Gibb such a large amount was not reasonable and, consequently, the compromise agreement was void. 

Unfortunately for Ms Gibb, she had known that the Trust would not be making the compensation payment in good time to bring Tribunal proceedings for unfair dismissal but had chosen not to do so.  The High Court therefore felt that she should not be protected, or awarded any sums on any other legal basis.

Although this decision is most important for those working in the public sector and for those working with charitable organisations who also have only limited powers to make ex gratia payments, it is still an interesting case for anyone involved in the termination of a senior executive’s employment contract.  The reason being that such contracts are often terminated without a fair reason as required under the Employment Rights Act 1996.  In acknowledgement of this fact, it is still very common for a senior executive to be offered a large compensatory package. However, this case highlights that, if there is no correlation between the amount offered and the amount that could feasibly be recovered by the executive in an unfair dismissal or breach of contract claim, then the payment may be subject to challenge.  It is always worth taking advice, therefore, not just on the wording of the agreement but also on the amounts offered.

Constructive Unfair Dismissal

Back in February 2007, we featured the case of Abbey National Plc v Fairbrother to highlight the EAT’s decision that the “range of reasonable responses” test, usually applied in unfair dismissal, was also applicable when considering an employee’s decision to resign as a result of the handling of her grievance.  The case was authority for the proposition that the range of “reasonable responses test” should be considered when deciding whether it was reasonable or not for the employee to resign in view of the employer’s conduct.  That decision has now been somewhat eroded by the EAT in the case of Bournemouth University Higher Education Corporation v Buckland.

Professor Buckland had been employed by the University for approximately 3 years when, in the summer of 2006, there was an exceptionally high failure rate for one of his courses.  The papers for that particular course were re-marked but the head of department confirmed, without asking Professor Buckland for his input, that the poor marks which had been awarded were correct.  Professor Buckland complained about this and, although his complaint was investigated, Professor Buckland was unhappy with the outcome so he resigned and claimed constructive dismissal.

The Employment Tribunal which originally heard Professor Buckland’s claim found that the University’s conduct had amounted to a fundamental breach of contract and that the University had acted in such a way as to destroy the relationship of trust and confidence between Professor Buckland and the University.  The University appealed.

The EAT supported the Employment Tribunal’s view that there had been a fundamental breach of the implied term of trust and confidence and expressly stated (contrary to the Fairbrother decision) that there was no need to consider whether the University’s actions fell within the “range of reasonable responses” when coming to that conclusion.  The EAT stated that the “range of reasonable responses” test is irrelevant in the case of constructive dismissal.  Instead, the test for constructive dismissal should be as follows:

1. did the employer’s conduct amount to a fundamental breach of contract;

2. if the breach of contract relied on by the employee is a breach of the implied term of trust and confidence, has the employee shown that the employer had, without reasonable and proper cause, conducted itself in a manner calculated or likely to destroy that relationship;

3. has the employer shown that the dismissal was for a potentially fair reason; and

4. if the employer can show that the dismissal was for a potentially fair reason, was dismissal within the “range of reasonable responses”.

Unfortunately for Mr Buckland, the EAT also went on to find that the complaint which he relied upon as the fundamental breach of contract was his head of department’s handling of the re-marking of the papers.  Although the investigation into this complaint did not vindicate him as he had expected, the University had formally acknowledged, prior to Mr Buckland’s resignation, that the head of department’s behaviour had been unacceptable.  On this basis, the EAT found that the University had rectified the breach of contract and, therefore, that Professor Buckland had not in fact been entitled to resign.

This case creates a conflict at EAT level and the point for employers is that it may no longer be possible for them to argue, as a defence to a constructive dismissal claim, that the employee was not entitled to resign because the employer’s behaviour had been within the “range of reasonable responses”.  We will have to wait and see what the definitive guidance on this point will be from the Court of Appeal.

Discrimination on the Grounds of Part Time Workers Status

Back in May 2007, we also covered the case of McMenemy v Capita Business Services Ltd and the Court of Session (Scotland) decision that the regulations preventing unfavourable treatment on the grounds of part time status were only applicable if the reason for the difference in treatment was solely that the employer in question was a part time worker.

In that case, the Court of Session found that if there was another reason for the treatment, whatever that reason may be, the unfavourable treatment would not be unlawful despite the fact that, when compared to their full time colleagues, the employee suffered a detriment as a result.

The recent decision in Carl v University of Sheffield has cast some doubt on that position.  In this recent case, the EAT stated that the Claimant’s part time status need not be the sole reason for the less favourable treatment.  If part time status was the effective and predominant cause of the treatment in question, then the regulations did, in the EAT’s view, provide protection for the employee in question.

In this case, Mrs Carl was a part time lecturer in the University’s journalism department.  She claimed that she was being treated less favourably than a full time colleague as the full time colleague was paid for preparation time but she was not.  The Employment Tribunal that heard the claim decided that she had not been treated less favourably because her part time status was not the sole reason for the difference in treatment.  Reviewing all of the authorities, the EAT came to the conclusion that this was not the right test.  In their view, the Tribunal should have looked at whether part time work was the effective and predominant cause for the less favourable treatment complained of, rather than focussing on if it was the only cause.

Unfortunately, the EAT felt that the claim was bound to fail in any event as Mrs Carl had not identified an appropriate full time worker to compare herself to, so there is no helpful advice on how this test might be applied in the future.  However, there is now a clear distinction between the position in Scotland and the position in England on this important point.  For the moment, employers in either country would be wise to adopt a cautious approach and ensure that when dealing with, for example holidays, there is no detriment to part time staff thus avoiding the need to establish the ‘cause’ of the detriment altogether.

Read this month's article on Compromise Agreements

Back to Employment Law E-Bulletin June 2009

June 09