Balance of payments
Date: 11 December 2009
Authors: Rad Kohanzad
Issue: Vol 159, Issue 7397
Categories: Features, Employment
The decision of the Court of Appeal in Stuart Peters v Bell [2009] EWCA Civ 938, [2009] All ER (D) 54 (Oct) provides that an employee who is constructively unfairly dismissed without notice has to give credit for earnings he earns during his notice period. An expressly dismissed employee does not.
This decision represents another nail in the coffin for the “notice pay” point in Norton Tool v Tewson [1972] ICR 501, [1973] 1 All ER 183. Are there any more such nails lurking?
Section 123 of the Employment Rights Act 1996 is the statutory provision that dictates compensation in unfair dismissal cases, and is the same provision that was in existence at the time of Norton Tool, although within a different Act.
NIRC ruling
In apparent contradiction to the common law duty to mitigate your losses, the National Industrial Relations Court (NIRC)—now the Employment Appeal Tribunal (EAT)—in the case of Norton Tool, found that where employees are unfairly dismissed without notice they are entitled to be paid their full notice pay, even if they get another job during their notice period.
The reasoning of the judgment does have some considerable merit. The NIRC held that, where an employee is unfairly dismissed without notice, absent gross misconduct, good industrial practice requires the employer to pay wages in lieu of notice.
If the employer had complied with good industrial practice, the employee would have had the payment in lieu of notice and would benefit from wages from the new employer should he be fortunate enough to get another job during his putative notice period. Therefore, the employee is treated as having suffered a loss insofar as he receives less than he would have received in accordance with good industrial practice.
This principle had been the target of numerous attacks over the years because it appears to result in the employee potentially benefiting from having been unfairly dismissed by allowing him to be paid both his notice pay from his old employer and wages from his new employer for the same period of time (“double recovery”), assuming he gets a job in the notice period. This also appears to offend the duty to mitigate your losses.
The Norton Tool principle was affirmed by the Court of Appeal in Addison v Babcock [1987] ICR 805, [1987] 2 All ER 784, according it with Court of Appeal authority, thereby now requiring the Supreme Court to overturn this principle.
Norton Tool eroded
The first significant dent in the Norton Tool principle occurred in the case of Burlo v Langley [2007] IRLR 145, [2007] 2 All ER 462, where Smith LJ rejected the “the wider Norton Tool principle”, ie: “that, in assessing compensation for unfair dismissal, it was appropriate to take into account the effect of other precepts of good industrial or employment practice, besides the one that specifically arose in Norton Tool itself.”
Instead, she held that Norton Tool was simply authority for the fact that: “It was good employment practice for an employer who has dismissed an employee without notice to make a payment in lieu of notice and that, in assessing compensation for dismissal, this payment should not be subject to any deduction for sums earned in other employment during the notice period.”
The court called this “the narrow Norton Tool principle”.
Although there were no appellate authorities on the point, it appears that since 1972, this principle has been applied to all cases of unfair dismissal, including constructive dismissals, on the basis that the definition of “dismissal” entails both actual and constructive dismissals, as well as the expiry of a fixed-term contract.
The next significant dent to the principle arose in the case of Stuart Peters v Bell, where the employers argued, unsuccessfully before the employment tribunal and the EAT, but successfully before the Court of Appeal, that the principle in Norton Tool was based on what good industrial practice was, and that, industrial practice differed between express dismissals and constructive dismissals. In express dismissals employers often paid employees in lieu of notice, but that was not the case in constructive dismissals.
The Court of Appeal accepted this, and, therefore, that a constructively dismissed employee suffered no loss because they did not receive less than they would have received in accordance with good industrial practice, because there was no such practice in place.
There are still many employment lawyers who are not comfortable with the Norton Tool principle because of the potential for double recovery. On the face of it, Elias LJ is one such person. He gave judgment in Burlo when it was at the EAT where he held that that the principle in Norton Tool was no longer good law, something rejected by the Court of Appeal when the case went up to it.
Furthermore, the employers in Stuart Peters were somewhat fortuitous that in the interim between Burlo and Stuart Peters, Elias LJ was promoted to the Court of Appeal, where he gave the leading judgment in the latter case in their favour.
The employees in Stuart Peters did not appeal to the Supreme Court, possibly for fear of bringing the whole of Norton Tool crashing down. So it looks as though for the foreseeable future the status quo will remain. Are there any more changes afoot?
Maintaining the status quo
The first criticism of the status quo is that it still allows expressly dismissed employees to double recover. The second is that it now leaves employees who have been constructively dismissed in a potentially worse position than those who have been expressly dismissed. Despite these cogent criticisms I believe that the current state of the law is correct, and will survive challenge.
Dealing with the first criticism, Norton Tool does not result in the making of a compensatory award greater than the loss actually suffered. Although it may appear distasteful for an employee to benefit financially from being unfairly dismissed, I suggest the distaste is misplaced because it is predicated on the employee profiting from the unfairness of the dismissal.
However, the employee is not benefiting from the unfairness, but rather from having been dismissed.
That is, it is not the “unfair” part of “unfair dismissal” which leads to the double recovery, but rather the “dismissal” part of it. This is demonstrated by the fact that an employee who is fairly dismissed without notice, and paid in lieu of notice, can double recover.
If the Supreme Court were to overturn Norton Tool, it would lead to a potential pecuniary inequality between an employee who is fairly dismissed without notice, who can double recover, and one who is unfairly dismissed without notice, who could not. So the unfairly dismissed employees would be in a worse financial position than the fairly dismissed employee.
Dealing with the second criticism, although a disparity in compensation between those who have been expressly and constructively dismissed is undesirable, the two alternatives are either to do away with Norton Tool altogether, or revert back to the pre-Stuart Peters position, which would lead to constructively dismissed employees potentially benefiting from having been unfairly dismissed.
In my view, allowing double recovery is a greater evil than the existence of a compensatory disparity between expressly and constructively unfairly dismissed employees.
If the case were ever to get to the Supreme Court, a simple, although circular argument, in favour of the status quo could be that given there is a widespread practice of paying employees who are expressly dismissed without notice in lieu of notice, that it is an implied term of the employment contract, either simply through custom and practice, or potentially the officious bystander test.
It is for these reasons that, despite inelegance, the status quo is here to stay.
Rad Kohanzad is managing director of Employment Law Advocates, and a pupil barrister at 10 King’s Bench Walk
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