A CONTRACTUAL CAUTIONARY TALE

Employment contracts can be tricky things. Not quite how his Honour Judge Simon Auerbach put it in AMDOCS Systems Group v Langton. His Honour was rather more eloquent and legalistic as befits a Judgment made in the Employment Appeal Tribunal.

This case, like all cases, is very fact specific which is the principle reason why it is so fiendishly difficult to advise what to do in any situation. Previous cases which are so useful in other fields of law are harder to apply in employment law. Nevertheless this particular case does have some important principles which are of wider application.

The first point to note about contracts of employment is that their terms are contained in and derived from several different sources. This is true for virtually every employee. The contractual terms are likely to begin with the offer letter. There should be a written contract of employment. That is the first section of the Employment Rights Act 1996 and, to be fair, is usually complied with.

There may be a Handbook and or specific policies e.g. bullying and harassment or internet use. There are likely to emails or memos perhaps with changes to hours, place of work or pay rises. There are also terms implied by law e.g confidentiality, honesty and good faith which don’t have to be written down at all. There may even be terms which are not written down but which the parties carry out in practice e.g an employee works from 9.00am to 5.00pm Monday to Friday. Even if there is no written contract recording that, if those are the hours the employee actually worked they will become a contractual term.  In larger unionised employers there may be terms negotiated by the union on behalf of all workers that form part of the individual employee’s contract of employment.

The second point is that contracts of employment and other employment documents are rarely put together by lawyers. Usually it is the employer’s managers or perhaps HR department or even external HR advisers. It is recognised that they won’t be put together or negotiated with the rigour of a commercial contract. Some informality and inexact wording is generally considered acceptable and since disputes often governed by an overarching concept of reasonableness or the band of reasonable responses it is easier to get away with looser contractual wording. Not to be encouraged though especially when dealing with contractual benefits which was the point in issue in the Langton case!!

Not all documents and not all terms in those documents will have contractual force but many of them will be and it is an employment Judge’s job in almost all case to determine what are the applicable contractual terms when looking at all the relevant documents and considering the oral evidence of witnesses at a Tribunal.

Mr Langton was a typical case. He had an offer letter, a separate document entitled “Summary of Benefits” and a contract of employment. During the course of his employment there were various changes to his contract including pay rises and a TUPE  transfer to another employer. In his offer letter Mr Langton was told he had the benefit of a PHI cover i.e. an insurance policy which would continue to pay his salary if he was on long term sick. The offer letter referred him to another document where he could find further details of the policy. This one page Summary of Benefits document did give a few further details of the PHI policy and this included reference to an escalator which was a year on year increase of 5% of the monies he would receive under the policy. Nice benefit if you can get it.

Mr Langton’s employment proceeded in a fairly standard way. His employer’s changed the insurance company which provided the PHI policy. The new policy did not contain an escalator but was similar in other respects. During his employment there was a take over of his employer and Mr Langton found himself working for a new company though his contractual rights were preserved by virtue of the TUPE regulations. In 2009 Mr Langton went off work on long terms sick and the PHI policy kicked in. He was still on long term sick 10 years later.

It is unclear what happened between 2009 and 2016. Mr Langton was paid 75% of his salary by the insurance company but there does not seem to have been any dispute about the escalator. In 2016 he woke up to the money he was missing or maybe he decided it was time to kick up a fuss. When he asked to be paid the escalator the employer told him it was not part of their present policy and it was not due. They could and would only pay him what the insurance company paid out. It had apparently not been part of the PHI scheme since 2008.

Mr Langton was not happy with this and in 2018 he took his employers to Tribunal claiming that the failure to pay him the escalator was an unlawful deduction from wages.

The Tribunal had to decide two issues;

  1. Was the escalator clause a term of the contract between Mr Langton and his employer.
  2. Was the employer only bound to pay the amount due to be paid under whatever terms were in its current contract of employment.

These are, of course, related questions. On the first the Tribunal regarded it as significant that the term concerned Mr Langton’s remuneration. Although it was only briefly referred to in a document entitled  “Summary of Benefits” it was clear enough and it was not qualified in any way. Anything relating to pay or benefits which is ambiguous is likely to be construed in the employee’s favour.

The employer had brought in a new insurer with slightly different terms. They had not drawn this to Mr Langton’s attention and attempted to vary his contract. I suspect no-one appreciated the subtle difference and the need to inform the employee. Without any valid variation and confirmation that the escalator was a term of the employment contract the employers lost. They had to stump up the cash because the insurance company was not bound to do so.

The employer appealed broadly on the grounds that there was a reference to a Manual with different terms and these should apply and that the Notes to the “Summary of benefits” document referred to Group policies which meant those pertaining at the time the benefits was paid. Both arguments were rejected. The term was established, it was sufficiently detailed and certain and it was never varied. Any confusion or ambiguity in the various contractual documents was construed against the employer. The Judge was particularly concerned to stress that the employer could not simply limit the benefit by referring to the insurance policy. If they wanted to limit the benefit to whatever was paid out under an insurance policy they would have to set this out in clear and unambiguous wording. He was also concerned with what he called the language of entitlement which, I think, means that an employer should be especially careful with the wording of a contractual term setting out benefits.

Even in 2003 I suspect an escalator or salary increase of 5% per year was bit mad. With interest rates at such a low level (0.1% currently) a 5% salary increase per year looks positively nuts. Judges have been clear in previous cases that commercial common sense cannot be invoked with the benefit of hindsight to escape the effect or mitigate the objective and natural meaning of the language of a contractual term. If you said 5% that was what you meant and that was what you have to pay.

The case did not really establish any new law but it is a very salutary reminder to be careful when producing the initial contractual documents and to keep them under review especially when there are significant changes being made. In this case the change of insurance policy provider and the TUPE  transfer were points at which the contractual terms of the employees should have been considered.

Another alternative would have been to make the benefit contain an element of discretion to be exercised by the employer so that they could make changes as and when required usually, as in this case, to respond to commercial expediency.

My experience is that disputes about benefits and commission and bonuses (really part of pay albeit normally peripheral to it) are much more common than disputes about wages and salary. Easy to say but employers should pay more attention to them at the time when they hold the contractual negotiating power. Failing to pay attention could be financially painful.