CHAPTER TWO – FUNDAMENTALS OF EMPLOYMENT LAW
Our first consideration when advising on the employment aspects in a corporate transaction should be the appreciation of some fundamental principles of employment law.
Often a corporate transaction will involve the ending of an employment relationship either by the transferor or the transferee. In this chapter we will consider what rights an individual employee has when their contract of employment is terminated with specific reflections on the issues that arise during a corporate transaction.
Rights on termination
Employees have specific employment law rights when their contract of employment comes to an end. First, we must consider the rights that arise under an employee’s contract of employment. The second aspect are the rights that an employee has under various statutes, primarily the Employment Rights Act 1996 (“ERA 1996”).
In order to access these rights, both under the contract of employment and the statutory rights under the ERA 1996, an employee must have been dismissed. This might sound an obvious point. However, there is a specific definition of dismissal under the ERA 1996 and an employee needs to be able to show that they have been dismissed in line with this definition in order to pursue a claim.
Section 95(1) ERA 1996 definitions of dismissal:
An employee is dismissed by their employer if:
Practical tip: ensure you appreciate that during a commercial transaction employees have dismissal rights arising from their contract of employment as well as the ERA 1996.
Dismissal rights under the contract of employment
Wrongful dismissal arises when an employee has been dismissed in breach of the contract of employment. For example, when the employer has dismissed a member of staff and not given them sufficient notice of termination to which they are entitled under the contract of employment or failed to follow certain stages of a contractual disciplinary procedure.
The significance of wrongful dismissal is that an employee can bring a claim to an employment tribunal or through the courts without having to have the 2 years’ continuous employment necessary for bringing a claim of unfair dismissal (see later section on unfair dismissal)
Wrongful dismissal claims are generally common law claims and as such are enforceable in the courts.
Wrongful dismissal claims can also be heard within the employment tribunal system, but, as tribunal awards are capped at £25,000, compensation from a county court or the High Court may be more beneficial to the claimant.
The principle is that the employee should be put back in the financial position which they would have been in, had the contract been performed lawfully. Damages can potentially be quite high in some cases, for example where an employee is dismissed without notice and it is wrongful, a court can award compensation of the number of weeks’ pay that would have been due. However, claimants are required to mitigate their loss, which may result in an award of compensation which is less than the face value of the breach of contract.
Practical tip: Generally, higher earning employees seeking to pursue wrongful dismissal claims will need to seek redress in the civil courts because of the £25,000 cap. Ensure you link up with your civil team to discuss this at an early stage.
Summary dismissal is the dismissal of an employee without notice or pay in lieu of notice. It generally occurs as a result of an act of gross misconduct by the employee. In these circumstances the employee would not be entitled to receive any notice of termination and the employer would not have to pay in lieu of any notice.
An act of gross misconduct is so serious as to justify summary dismissal of an employee. The concept of gross misconduct relies on a repudiatory breach of the express or implied terms of the contract of employment through an employee’s conduct.
A repudiatory breach is one which renders the whole contract broken. The breach is so serious that it relieves the employer from any further duties under the remainder of the contract.
Apart from a dismissal for gross misconduct, terminating the contract of employment without notice is likely to be a breach of the employment contract that could allow the employee to bring a claim of wrongful dismissal.
A fair process is required to be followed for summary dismissal. For acts of gross misconduct, it is normal to suspend the employee whilst an investigation is conducted, and the disciplinary meeting is arranged. Without this fair process, a tribunal could find the dismissal procedurally unfair.
Where an employee has been dismissed without due notice, they will also be entitled to the value of other contractual benefits that would have been available during that notice period, such as accrued holiday pay, company car (or equivalent allowance) and pension contributions.
As we have outlined above, when an employee is dismissed, they are entitled to notice of that termination. The required notice period is the statutory amount, or the amount agreed in the contract of employment, whichever is longer.
An employee’s required notice period must be given in their contract or written statement, or the statement must refer to the relevant legislation on notice periods.
To avoid disputes, most employers specify that notice must be given in writing so that a resignation date is transparent. In dismissal cases, an employer should specify a date of dismissal in order to be clear about when the notice of termination takes effect.
Statute requires that where an employer proposes to terminate employment, certain minimum periods of notice must be given by the employer to the employee.
Section 86(1) ERA 1996 requires:
(1) The notice required to be given by an employer to terminate the contract of employment of a person who has been continuously employed for one month or more—
(a) is not less than one week’s notice if his period of continuous employment is less than two years,
(b) is not less than one week’s notice for each year of continuous employment if his period of continuous employment is two years or more but less than twelve years, and
(c) is not less than twelve weeks’ notice if his period of continuous employment is twelve years or more.
For the employee giving notice, the statutory requirement is less balanced:
Section 86(2) ERA 1996 states:
The notice required to be given by an employee who has been continuously employed for one month or more to terminate his contract of employment is not less than one week.
As you can see, an employee is only legally required to provide the employer with one week’s notice of termination (after they have completed one month’s service). This does not increase with an employee’s length of service. That is why an employer will usually increase this minimum notice requirement in a contract of employment.
These requirements are the statutory minimum, and a contract of employment would usually contain express terms greater than the statutory minimum. For senior staff the periods of notice contained in a contract of employment are often much longer than the statutory amounts of notice, for example 6 months’ notice of termination is not uncommon for directors and senior executives.
If an employee does not give the employer the correct notice of termination either under their contract or statutory notice, the employer can bring a claim against the employee for breach of the contract of employment. However, these types of claims are rare and not particularly practical, as the employer would need to show the business has been damaged in some way.
Pay in lieu of notice (“PILON”)
A PILON clause enables the employer to terminate the contract early and lawfully.
Either the employer or the employee can waive its right to receive notice of termination of the contract of employment and accept a payment in lieu instead. If agreed, the parties can then treat the contract as terminated. An employer wanting to pay for notice in these circumstances should reserve the right to make a payment in lieu of notice in the contract of employment.
When an employee leaves an employer, either because they have resigned or through dismissal, they have an implied right to continue attending their workplace during their notice period.
An employer might not always want an employee to continue working, perhaps because they might continue to have access to commercially sensitive information. In which case a garden leave clause can be inserted into the contract of employment which prevents the employee from having to attend work and in effect requiring the employee to remain at home during their notice period.
During this period of garden leave the employee is still entitled to be paid their full salary and benefits and remains bound by the terms of their contract of employment.
If an employer wants to put an employee on garden leave, there must be an express clause in the contract of employment.
Practical tip: ensure as a practitioner you appreciate the difference between garden leave and PILON clauses. Check your understanding on how these contractual clauses impact on the corporate transaction and the bargaining position of the parties
Rights on termination under the ERA 1996
An employee has the statutory right not to be unfairly dismissed (s94 (1) ERA 1996).
Fair reasons for dismissal
An employer may fairly dismiss an employee provided that there is a fair reason for the dismissal. Section 98 ERA sets out potentially fair reasons for an employer to dismiss an employee. We will explore later that there are reasons which make a dismissal automatically unfair, but there are also reasons where the dismissal will usually be deemed a fair one. For there to be a fair dismissal an employer must show their reason for dismissing an employee was due to one of these fair reasons.
Once an employer has identified a fair reason for a dismissal, an employer must then follow a fair process.
Section 98 ERA sets out potentially fair reasons for an employer to dismiss which are:
statutory illegality; or
some other substantial reason (SOSR).
There are many reasons why an employer may want to dismiss an employee during a corporate transaction. For example, where there is a sale of a business as a going concern (which is explored in Chapter 3) and the purchaser does not want senior key employees from the transferor’s business, if these employees are dismissed, this will be an automatic unfair dismissal as the only reason those individuals are being dismissed is because of the TUPE transfer (see Chapter 6).
Likewise, following a TUPE transfer if an employee is repeatedly late for work, or has unsatisfactory work performance; it will be reasonable for the transferee to dismiss for reasons relating to the employee’s conduct provided that a fair disciplinary process has been followed.
Let’s now explore each of these fair reasons in turn:
Conduct, or more correctly misconduct, is one of the most common reasons for a dismissal. Dismissal for misconduct may be due to one occurrence of serious misconduct which is generally referred to as gross misconduct, or due to a series of smaller misdemeanours such as poor timekeeping, minor policy breaches or, for example, swearing. Conduct is often referred to in disciplinary procedures with examples of gross misconduct and more minor offences, so that employees are clear of acceptable standards of behaviour at work.
Before dismissing for misconduct, the employer should carry out a thorough investigation into the allegations, to be satisfied that on the balance of probabilities the employee committed the act(s).
The employer is expected to be fair and to inform the employee of what is being said against them by others, provide them with the evidence that is available and give them the opportunity to respond to the allegations. The means of achieving this will be discussed later.
The procedure used by the employer will be closely scrutinised by the employment tribunal, particularly how far the employer’s procedure complies with or adopts the principles of the ACAS Code of Practice on Disciplinary and Grievance Procedures.
Capability concerns the employee’s ability to perform the kind of work they are employed to do, having regard to ‘skill, aptitude, health or any other physical or mental quality’. Dismissing an employee for capability therefore includes dismissal based on inability to do the job, failing to reach acceptable standards, underperformance in a role, as well as illness.
A tribunal will expect an employer to manage poor performance and illness in different ways. For example, it will be reasonable to warn an employee that they should improve their standard of work, it may not be reasonable to warn an employee “to get well, or else!”
Additionally, capability reasons should be clearly identified and managed properly. Employers need to consider whether or not an employee is inherently incapable (“cannot”) or is not capable through laziness, negligence or perhaps sheer stubbornness (“will not”). These “will not” reasons are almost certainly going to fit more comfortably into a conduct reason rather than one of capability. There is often a fine line between cannot and will not, however an employer needs to identify at an early stage whether it is an issue of conduct or capability, as the two processes are managed very differently.
To dismiss for capability, an employer needs to use a progressive disciplinary procedure to encourage improved performance or attendance. The progressive approach; starting at the lowest stage of disciplinary action, offering training and support to help the employee meet agreed targets with further disciplinary action, ultimately leading to dismissal should the targets not be achieved.
The employer must produce evidence of poor performance, but need not prove that the employee was incapable of performing all their duties. The employer is expected to conduct a proper investigation or appraisal of the employee’s performance, identify the problem, provide training, supervision and encouragement, monitor progress, give them a reasonable chance to improve and warn them of the consequences of not doing so.
Employers need to be careful to ensure performance improvement targets and timescales are reasonable and achievable. If an employee is set up to fail it is likely that a dismissal will be viewed as unfair.
In cases of long-term sickness or ill health, the employer should discuss matters with the employee as early as possible and continue contact throughout the absence. A medical investigation should be undertaken, and advice sought from medical experts on the employee’s health. Alternative employment should also be considered.
Practical tip: ensure you appreciate the difference between conduct and capability, as both need to be managed in different ways either pre or post transfer. Conduct is generally thought to be within an employee’s control and related to their behaviour. Capability is often not within an employee’s control as they may not be able to do something/perform for reasons outside of their control e.g., long term illness.
Redundancy is a fair reason to dismiss an employee. The ERA 1996 also requires the employer to follow a fair procedure when managing redundancies. Even where the employer can show that redundancy is the reason for dismissal they must act reasonably.
Where a former employee brings a claim of unfair dismissal on the grounds of redundancy to an employment tribunal, an employer must show that redundancy was the fair reason for the dismissal. Even if redundancy is shown as the reason, if the employee shows they were chosen for a reason which is automatically unfair or there was a lack of consultation or warning, the employee will win their claim for unfair dismissal.
To establish redundancy as a fair reason an employer must show that a redundancy situation exists within the meaning of s139 (1) ERA 1996.
Section 139 ERA 1996:
(a) the fact that his employer has ceased or intends to cease—
(i) to carry on the business for the purposes of which the employee was employed by him, or
(ii) to carry on that business in the place where the employee was so employed, or
(b) the fact that the requirements of that business—
(i) for employees to carry out work of a particular kind, or
(ii) for employees to carry out work of a particular kind in the place where the employee was employed by the employer,
have ceased or diminished or are expected to cease or diminish.
Redundancy in itself is a valid reason for dismissing an employee and may be necessary in a corporate transaction. We will explore later the concept of ETO reasons under TUPE in Chapter 6, however it is important to stress that redundancy is a classic ETO reason. Put simply, it will entail a change in the workforce and can be relied upon as a defence by the dismissing employer.
Overview of a redundancy process
In addition, as with any other reason for dismissal, the tribunal needs to be satisfied that the employer has acted reasonably. The employer is required to:
give adequate warning of impending redundancies;
identify a pool of employees at risk of redundancy;
consult with individuals who are affected;
consult with unions and/ or employee representatives;
seek volunteers for redundancy;
fairly operate an objective selection procedure; and
consider suitable alternative employment prior to dismissing.
The employer may also consider offering the right to appeal against any decision to dismiss.
If an employer is making fewer than 20 employees redundant there is a clear process which should be followed which includes meeting with the affected employee on a one-to-one basis and discussing the redundancy with them.
It should be explained to the employee that the employer is considering making the employee’s job redundant and an explanation given of the reasons why the particular post is the one to be selected. At this stage no decision has yet been made and the employee should be given a reasonable amount of time to consider their position and to make suggestions. What is a reasonable period of time is not defined in law, although typically this could be between two and four weeks for a small employer.
A further meeting should be held to hear any proposals put forward by an employee and at which the final decision can be taken; and it is good practice to offer the right to appeal and to hold an appeal hearing, if the employee wishes to appeal against the decision to make them redundant.
Collective consultation with trade unions and/or employee representatives
Under s188 Trade Union and Labour Relations (Consolidation) Act 1992 (“TULR(C)A) 1992”) where redundancies are proposed which affect between 20 and 99 employees at one establishment within a 90-day period, employers are under a statutory duty to consult with appropriate representatives of employees for a minimum of 30 days.
Where 100 or more employees are affected, a minimum 45 day consultation period with any appropriate representatives is required.
If there is a recognised trade union the consultation must be with trade union representatives.
Collective consultation must begin in good time and must include ways of avoiding or reducing the redundancies and mitigating the consequences of redundancies.
Consultation should include:
the reasons for the redundancies;
the numbers and descriptions of jobs it is proposed to make redundant;
the total number of employees in the organisation where the redundancies are occurring;
the method of carrying out the redundancies, including the selection criteria;
how redundancy pay will be calculated; and
any proposals for reducing or avoiding the redundancies and for mitigating or reducing their consequences.
Under the provisions of the TULR(C)A 1992, employers are also required to notify the Secretary of State of redundancies of 20 or more employees on one site.
Through consultation, the employer is not obliged to accept contrary views and does not have to accept the employee’s views or proposals. However, they must properly consider them and should be able to evidence that they listened and considered the employee’s views before reaching a final decision.
In collective redundancy situations, the failure to consult unions or employee representatives will generally render a dismissal as unfair. Even where collective consultation takes place, there is also the requirement for employers to consult with employees individually.
Practical tip: often employers want to use redundancy as a reason for dismissing to “soften the blow” to the employee, perhaps to mask other underlying performance issues. Ensure that if your client is using redundancy as a fair reason for a dismissal, that it is a genuine redundancy situation and ensure they follow a fair redundancy process.
Statutory redundancy pay
Employees who have two years’ service with an employer are entitled to receive a statutory redundancy payment (“SRP”) if they are made redundant. SRP is calculated on the basis of a person’s age and length of service.
To receive SRP, an individual must:
be an employee, i.e., partners, casual workers, agency workers, the self-employed and directors not working under a contract of employment do not qualify;
have at least two years’ continuous service; and
have been dismissed.
SRP is based on:
the employee’s age;
the employee’s amount of continuous service – up to a maximum of 20 years; and
the employee’s weekly pay – up to a statutory limit which is reviewed by the government from time to time.
An employee has six months from the date their employment ended to make a claim for payment to an employment tribunal where either:
The employee disagrees with the amount of the payment; or
The employer fails to make any SRP.
Practical tip: save a statutory redundancy payment calculator to your desktop, where you can input an employee’s age, length of service and rate of pay. There are various websites with access e.g.: https://www.gov.uk/calculate-employee-redundancy-pay.
Contractual enhanced redundancy pay
As you can see from the above statutory redundancy payment calculations, the rates are relatively low. Often employers will enhance or top up the statutory redundancy payment. For example, rather than applying the statutory limit (which at the time of writing is £544 – April 2021-22) the employer would calculate an enhanced redundancy payment based on the employee’s full pay rather than applying the statutory cap.
Therefore, careful consideration needs to be given to the contractual terms, which should be highlighted during the due diligence process and through the employee liability information (see Chapter 6 below).
An employer may dismiss an employee in circumstances where their continued employment would be illegal. For example, if a bus driver is disqualified from driving, they may be fairly dismissed as they are employed solely to drive, and to allow them to continue to drive would be illegal. Similarly, to dismiss an employee who is not permitted to work legally in the UK is a potentially fair reason for dismissal on the grounds of statutory illegality.
In the case of a driving ban, before dismissing the employee, an employer should first consider the likely duration of the ban; whether the ban affects all or part of the employee’s work; and whether the employee can be redeployed. In other words, if driving is only part of an employee’s job and/or the employer’s business has scope to provide alternative tasks that could be allocated, then it may be unfair to dismiss in those circumstances. However, if driving duties comprise all of the employee’s duties then in such circumstances, if other work is not available, it may be fair to dismiss.
Some other substantial reason (“SOSR”)
A SOSR dismissal almost seems to be a “catch all” reason, in that if the reason does not fall within any of the other four reasons it may be caught by this one. Case law shows a variety of different situations that fall within SOSR, the two most common situations that arise are for business needs and pressure from third parties. In a corporate transaction, SOSR is often used as a fair reason, particularly when terminating a contract of employment and reengaging on fresh terms and conditions. The dismissal in these circumstances would be for SOSR.
There are a number of cases where a tribunal has found an employer could justify a dismissal for SOSR. The fairness of a dismissal for SOSR will depend on whether, in the circumstances (including the size and administrative resources of the business), the employer had acted reasonably or unreasonably in treating that reason as a legitimate reason for dismissing the employee in question (see Treganowan v Robert Knee & Company Limited  IRLR 247, Scott Packing and Warehousing Co Ltd v Paterson  and Skyrail Oceanic Limited t/a Cosmos Tours v Coleman  IRLR 226).
Eligibility to pursue a claim of unfair dismissal
To be eligible to present a complaint of unfair dismissal to an Employment Tribunal, an individual must be an employee and have been continuously employed for at least two years of employment (s108 ERA 1996).
Automatic unfair reasons
There are a number of automatically unfair reasons for dismissal. If a dismissal falls within one of these automatic unfair dismissal reasons, it means that an employee does not have to have two years’ continuous service with an employer to be able to bring a claim of unfair dismissal (except in TUPE cases). In such cases the dismissal will be deemed to be automatically unfair. This means that once the tribunal has established that the reason for the dismissal falls under one of these heads, it will not have to go on to consider the reasonableness of the decision under s98(4) ERA 1996.
There are a number of special cases where the normal rules relating to unfair dismissal are varied and one of these is where an employee is dismissed prior to, or immediately following, the transfer of a business under TUPE. However, it must be stressed that whilst this is referred to as an automatic unfair dismissal under TUPE, an employee still needs to have 2 years’ service in order to qualify for the right not to be unfairly dismissed.
Other automatic unfair dismissal reasons (not requiring 2 years’ service include dismissal for pregnancy or maternity related reasons, dismissal for undertaking a statutory duty (e.g., jury service) and dismissal for whistleblowing under the Public Interest Disclosure Act 1998.
Remedies for unfair dismissal
There are three main remedies available to employees who are found to have been unfairly dismissed.
Reinstatement – the reversal of the dismissal decision so the employee gets their old job back.
Re-engagement – a claimant does not return to their previous role, but they return to a different job with the employer.
Compensation for unfair dismissal
Given that orders for reinstatement or re-engagement are made in fewer than 1% of cases, the main remedy for unfair dismissal is financial compensation. This is made up of two key elements.
The basic award is to compensate the employee for the loss of their job. It is calculated in exactly the same way as a statutory redundancy payment (see above) and is based on a person’s age and length of service as follows:
1/2 a week’s pay for each year worked before 22nd birthday;
1 week’s pay for each year worked between 22nd and 41st birthday;
1 1/2 week’s pay for each year worked after 41st birthday.
The above is subject to a statutory maximum weekly rate which is reviewed annually and a maximum of 20 years’ service. In addition, the award can be reduced for:
unreasonable refusal of an offer of reinstatement;
any redundancy pay received;
any ex-gratia payment.
The compensatory award is to compensate the employee for the loss they have suffered as a result of the dismissal. The tribunal will take into account a variety of factors when assessing compensation under this heading including loss of earnings, loss of benefits, expenses in looking for work, loss of pension rights and loss of employment protection (s123 ERA 1996).
Essentially the purpose of the compensatory award is to compensate the employee for their financial loss. It is not aimed at penalising the employer, but to put right the employee’s loss. An award may be reduced by any earnings since the dismissal or any social security benefits received and an unfair dismissal claimant has a duty to try to find another job as quickly as possible in order to ‘mitigate their loss’.
The tribunal has the power to award compensation for future loss; that is loss which has not occurred at the date of the hearing. Future loss is at the discretion of the tribunal and will depend largely on the employee’s prospects for securing another post quickly e.g., it will be more difficult to find another role if the employee only has particular sector experience or lives in a remote location.
In an unfair dismissal claim the limit on the compensatory award shall be the lower of a set amount (currently £89,493 April 2021/2) and the product of 52 multiplied by a week’s pay of the employee concerned.
Put simply, constructive dismissal arises when an employee resigns and feels that they have no option but to do so because of the employer’s unreasonable behaviour. Generally, an employer’s behaviour needs to be so unreasonable as to fundamentally breach the contract of employment.
Examples of constructive dismissal include:
demoting an employee without good reason;
reducing an employee’s pay without a good reason;
changing someone’s job responsibilities without consulting with them; and
failing to pay salary and/or benefits to an employee.
The statutory definition of constructive dismissal is found in s95(1)(c) ERA 1996 which provides:
” (1) An employee is dismissed by his employer if
(c) the employee terminates the contract under which he is employed (with or without notice) in circumstances in which he is entitled to terminate it without notice by reason of the employer’s conduct.”
It does not automatically follow that because the employer is in breach of contract that the constructive dismissal is unfair (see Hall v Lodge  IRLIB 76). As we have outlined above for a dismissal to be fair, the employer must have a fair reason and also act reasonably in all the circumstances.
If the employer is guilty of conduct which is a significant breach going to the root of the contract of employment, or which shows that it no longer intends to be bound by one or more of the essential terms of the contract, then it is in repudiatory breach of contract.
The employee may choose to treat any further performance of the contract as discharged. In other words, the contract is broken, and the parties are no longer bound by any other part of it.
For constructive dismissal, two elements are therefore needed:
Repudiatory conduct on the part of the employer. This may be an actual or anticipated breach, but it must be sufficiently fundamental to justify the employee resigning. The breach can be a breach of an explicit term of the contract, or a breach of the implied term of trust and confidence; and
A decision by the employee not to accept the breach and treat the contract as at an end. The employee must act in response to the breach and must not delay too long or else it may be deemed that the employee has accepted the breach.
The “last straw” principle
Under this principle, an employee can resign in response to a series of breaches of contract or a course of conduct by their employer which, taken cumulatively, amounts to a breach of the implied term of trust and confidence. It is called the last straw principle because often the final incident in the chain is in itself insubstantial, but is nonetheless sufficient to render the whole series of incidents as a breach of the implied term. The case of London Borough of Waltham Forest v Omilaju  EWCA Civ 1493 is a useful illustration of the “last straw” principle and the factors the Court of Appeal took into consideration.
In this chapter we’ve considered a number of key principles in employment law that the parties need to take into account throughout a corporate transaction. Our next chapter explores the corporate aspects of a transaction.