Canter Levin & Berg Employment Solutions

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January 2016 Review

the employment law briefing

Welcome to our latest monthly review of employment law news with a particular emphasis on issues of relevance to SMEs. Topics covered include the tax treatment of awards for injury to feelings, the widely reported European Court of Human Rights case about monitoring personal communications at work (not as groundbreaking as it might first appear), the introduction of fines for those who are late paying tribunal awards, the (some might say) cynical exclusion of an RBS retail manager who was over 50 from a voluntary redundancy scheme and the report of Mr Justice Briggs on the srtucture and operation of the civil courts, which might be seen as paving the way for integration of employment tribunals within the civil courts. As I explain, this might also be the first step towards the routine award of costs in employment cases, something that most small employers would see as very welcome and long overdue.

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This month's news:

  1. Tax tribunal holds that compensation for injury to feelings is taxable
  2. Exclusion from voluntary redundancy of director aged over 50 was discriminatiry
  3. Unpaid award penalties to be intriduced in April
  4. European Court rules that private messages at work can be read bty employers
  5. Briggs Report on the future of Courts and Tribunals

Kind regards

Martin Malone

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This month's news round-up:

1. Tax tribunal holds that compensation for injury to feelings is taxable


In the absence of a codified system of law (such as that which operates in France) there is a risk that conflicts can arise between different jurisdictions and courts. For example, an insolvency court might make an order concerning property while a family court (applying its different rules) may make a conflicting order in respect of the same property. Which one prevails?

Another example is whether someone is an employee for tax purposes and for employment law purposes. It is possible to be an employee in one sense and not the other.

Another area of contention is whether compensation is taxable. The generally accepted view is that compensation for injury constitutes damages and as such should be tax free. However, compensation for financial losses, e.g. loss of earnings, should be taxable subject to the usual allowances and exemptions. In Moorthy v Commissioners for HM Revenue and Customs the Tax and Chancery Chamber of the Upper (Tax) Tribunal considered whether compensation for injury to feelings should be taxable.

Mr Moorthy worked for Jacobs Engineering (UK) Limited. In March 2010 he was made redundant and received a statutory redundancy payment of £10,640. He brought proceedings claiming unfair dismissal and discrimination. Following mediation he entered into a settlement agreement which provided for him to receive an "ex gratia payment of £200,000 by way of compensation for loss of office and employment". Jacobs treated the first £30,000 as free of tax applying the usual exemption (section 403 Income Tax (Earnings and Pensions) Act 2003). Basic rate income tax was deducted from the remainder. Mr Moorthy completed his 2010-11 tax return on the basis that the full settlement amount was tax free. HMRC disagreed and amended the return to include an additional £140,023 taxable income. The issues on appeal were (1) whether the settlement payment was in connection with the termination of employment and was therefore chargeable to income tax (subject to the £30,000 exemption) (section 401); (2) if so, was it taken out of the charge to tax as a payment or benefit "on account of injury employee", namely injury to feelings (section 406); and (3) whether Mr Moorthy could rely on the concession made by HMRC in the closure notice that £30,000 of the settlement amount should be treated as damages for age discrimination and therefore not chargeable to income tax.


2. Exclusion from voluntary redundancy of director aged over 50 was discriminatory


Mr Donkor was born in 1960 and started his employment with the Royal Bank of Scotland in 1978. He worked through the ranks and, from 2003, was employed as a regional director in retail banking. In 2012 there was a bank restructure which effectively meant that all existing regional directors would have to go through a selection exercise. Following a "desktop exercise" those not selected for interview would be given an options letter, allowing them to volunteer for redundancy. Those aged over 50 would also be given the option of early retirement.

Mr Donkor and three others were not offered an interview. He was one of two of the four over 50. However, when severance costs were calculated it was apparent that out of a total cost if £1.4m, £1.25m would be accounted for by the two employees aged over 50. In Mr Donkor's case the overall cost would be £552,286.87, including a pension contribution of £460,275. The Bank reviewed the process and offered interviews to those who were initially successful. The result was that one of the four was successful. Mr Donkor was not. the value of Mr Donkor's proposed settlement required approval at a higher level. While this process was ongoing the two other employees, both under 50, were given letters inviting them to apply for redundancy or redeployment. Mr Donkor was not sent such a letter.

In May 2012 an alternative role became available. He and Mr Batey (one of the employees under 50) were considered to be suitable candidates. Mr Donkor was notified accordingly and asked whether redundancy options were available. He was told that they were not since there was a suitable alternative role. He was offered and accepted the role before the selection exercise concerning him and Mr Batey was conducted. He remained in post until a further unrelated restructuring in 2013. In the meantime the bank changed its pension rules so that the minimum age at which volunteers for redundancy could apply for early redundancy was raised from 50 to 55. Within the 2013 restructure he was permitted to apply for voluntary redundancy and his employment terminated in September 2013.

He brought a claim of age discrimination on the basis that in the 2012 exercise he was not given the option of voluntary redundancy whereas comparable employees aged under 50 were. At the Employment Tribunal it was held that the employees aged under 50 were not appropriate comparators because they could not apply for voluntary early retirement. Alternatively, bearing in mind that Mr Donkor was not offered the option of voluntary early retirement, they were all treated in the same way. Further, even if there was less favourable treatment the reasons were the considerably higher cost and the likelihood that such a package would not be approved when there was suitable alternative employment. Accordingly, his claim failed. However, on appeal the Employment Appeal Tribunal disagreed with the Employment Tribunal and noted that the ET "lost its way when it came to this particular aspect of the direct age discrimination claim before it".


3. Unpaid award penalties to be introduced in April


Section 150 of the Small Business, Enterprise and Employment Act 2015 provides for a new Part 2A to be inserted in the Employment Tribunals Act 1996 and entitled "Financial Penalties for Failure to Pay Sums Ordered to be Paid or Settlement Sums". This brings into effect the much heralded and somewhat delayed procedure for imposing financial penalties on paying parties who do not make their payments on time. Notably, any lateness, even of a day or two, can trigger the process although there is a final opportunity to make payment before the fine is levied.

New section 37A confirms that the scope is financial awards made by an order in tribunal proceedings including costs and expenses and amounts ordered to be paid to the Secretary of State. The amount covered includes the initial award and interest. It does not include any amount awarded when the order can still be appealed. Where an award is payable by instalments and there is a default in making a payment when it falls due any remaining instalments are treated as falling due on the same date as the missed payment, i.e. the balance is treated as payable forthwith.

The new system provides for the appointment of enforcement officers. Where a default is identified an enforcement officer may issue a warning notice stating an intention to impose a financial penalty overdue payments are made by a specified date. If there has been a prior penalty notice a further one cannot be issued for at least three months since the end of the prior relevant period. the date for payment (the specified date) must be at least 28 days after the date of the warning notice and the specified amount must be the amount due on the date when the warning notice is given. Once served it is possible for the employer (assuming that the employer is the paying party) to make representations with a view to challenging the order.

If the employer fails to comply with the warning notice an enforcement officer may issue a penalty notice This requires the paying party to pay a financial penalty to the Secretary of State. If the unpaid amount is less than £200 the penalty is £100. If it is more than £10,000 the penalty is £5000. Otherwise it is 50% of the unpaid amount of the relevant sum.


4. European Court rules that private messages at work can be read by employers


As widely reported a couple of weeks ago the European Court of Human Rights has handed down a significant judgment in the Romanian case of Barbulescu which confirms the right of employers to access the private communications of employees while they are at work.

Mr Barbulescu, a Romanian national living in Bucharest, worked for a private company as an engineer in charge of sales from August 2004 to August 2007. At his employer's request he set up a Yahoo Messenger account to be used as a means of replying to clients' enquiries. On 13 July 2007 he was informed that his Messenger communications had been monitored from 5 to 13 July and this revealed that he had been using the account for personal purposes. Mr Barbulescu countered by suggesting that the monitoring of the account was criminal activity. The analysis showed that he had exchanged messages with his fiancé and his brother and the messages related to personal matters including his personal health and sex life. His employment was terminated on 1 August 2007 for breach of the employer's regulations which included a ban on using electronic media for personal purposes.

Mr Barbulescu brought a claim in the Bucharest County Court and failed on the basis that the employer's regulations were not illegal and correct procedures were followed. He appealed and sought to rely on Article 8 of the European Convention on Human Rights (right to respect for family and private life). The Bucharest Court of Appeal again found in favour of the employer. In the ECHR it was noted that Mr Barbulescu alleged that his personal Yahoo Messenger account had been accessed by the employer in addition to the analysis of the work account. He maintained that he was entitled to expect privacy, given the very nature of the software in question.

There was a balance to be struck between respect for the individual's private life and correspondence and the employer's legitimate interests as a private company. The domestic courts had found that the applicant had used Yahoo Messenger on the company's computer and that he had done so during working hours. This is what established the disciplinary breach and the consequent lawful termination of employment.

The employer had acted within the scope of its disciplinary powers. It was not unreasonable for an employer to want to verify that its employees are completing their professional tasks during working hours. Further, the employer's monitoring was limited in scope and proportionate.

However the decision should not be seen as providing carte blanche for employers to snoop on their employees' private communications.


5. Briggs Report on the future of Courts and Tribunals


On 12 January Lord Justice Briggs published his interim report concerning the structure and operation of the civil courts. The full review is expected to be completed by the end of July 2016.

Mr Justice Briggs has identified a "clear and pressing need to create an Online Court". This is intended to deal with claims with a value of up to £25,000. With the charming but concerning naivety of many senior judges Mr Justice Briggs suggests that this will "for the first time...give litigants effective access to justice without having to incur the disproportionate cost of using lawyers". It is worth bearing in mind that as long ago as the 1950s the Tribunals Service was set up with the same objective - a straightforward process for the disposal of cases with the minimum of fuss and no need for lawyers. Well, as we all know, some of the most technical legal arguments and most appealed cases are those heard in and emanating from the employment tribunals.

Mr Justice Briggs identifies three stages in the process. Stage 1 is "a largely automated, inter-active (note the hyphen - nothing too modern here) online process for the identification of the issues and the provision of documentary evidence". Stage 2 is conciliation and case management, by case officers. Stage 3 is to be resolution by judges. He envisages the court using "documents on screen, telephone, video or face to face meetings to meet the needs of each case". I am bound to say "good luck with that" in a lawyer free environment and with the Courts' abysmal record in installing and managing IT.

He also envisages that many functions currently undertaken by judges will be dealt with by "case officers supervised by judges". We have seen similar changes in the tribunals and as long as there are sensible limits placed on the powers of the case workers this would in my view be a welcome development.

However, by far the most interesting proposal for readers of this blog is the suggestion that the Employment Tribunals and Employment Appeal Tribunals might be integrated into the structure of the civil courts.

Regular readers of the blog will know that I have for very many years advocated the merging of tribunals with the civil courts. There are obvious savings to be made in terms of overheads, particularly properties and staff. Perhaps some of the county courts currently earmarked for closure could be saved by taking on what are currently tribunal claims in addition to their current caseloads. There would be a great deal to be said for having common procedural rules instead of similar but occasionally significantly different rules applied in different forums. Merging the courts and tribunals would also remove the anomaly that certain claims can only be brought in employment tribunals whereas others (e.g. contract claims) can be brought in the county courts, with the obvious risk of duplication and additional costs.


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