Seminar Notes 09.05.07 Chris Bryden

2 Gray's Inn Square Chambers

Seminar Notes 09.05.07 - Chris Bryden

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Seminar notes:

These notes were prepared by Christopher Bryden and form part of the seminar "Show me the Money!" - Costs and Compensation in the Employment Tribunal given on 9th May 2007 by members of the 2 Gray's Inn Square Chambers Employment Group.

Christopher Bryden

Index

Mitigation of Loss: The end of Norton Tool Co.?

Introduction

The case of Norton Tool Co Ltd v Tewson [1973] 1 All ER 183 is one with which all employment practitioners will be familiar. For over thirty years the principles it established have played an important role in the calculation of the compensatory award due to a successful complainant. It was the first case to assess the then-new principle of unfair dismissal. Sir John Donaldson noted that it was a new cause of action; common law rules did not apply, but the measure of the compensation had to be found from the legislation (Industrial Relations Act 1971, section 116) which laid out the general principles.

Amongst other things Norton Tool Co. established the principle that it is good industrial relations practice that no deduction should be made when arriving at the final compensatory figure for anything which was or could have been earned during the period of notice. However, the recent Court of Appeal case of Burlo v Langley [2006] EWCA Civ 1778 [2007] IRLR 145 has seemingly put an end, for now, to the legal arguments which began not long after the principle in Norton Tool Co. was pronounced (see e.g. Tradewinds Airways v Fletcher [1981] IRLR 272, where the Employment Appeal Tribunal (“EAT”) held that Norton Tool was not setting down a rule of law but merely a rule of practice). Burlo clarifies the principle but ensures that it continues to survive, at least for now, despite the best efforts of the EAT.

These notes are intended to complement this part of the seminar, which will concentrate primarily on Burlo v Langley. Nevertheless the next section deals in some detail with the basic calculation of the compensatory award. It does not deal in detail with the various deductions and/or uplifts except in sketched outline. The remainder of these notes consider the effect of Burlo and the current state of the law.

Index

Compensatory awards: the basics

Section 123(1) of the Employment Rights Act (“ERA”) 1996 provides that a successful complainant may recover a sum in compensation that is just and equitable. This sum is quantified based upon the losses suffered by the complainant as a result of the dismissal insofar as those losses can be attributed to action taken by the employer.

The compensatory award is subject to a maximum of £60,600 (as of 1 February 2007: see the Employment Rights (Increase of Limits) Order 2006, SI 2006/3045), which is RPI index-linked and is updated each year. The award is based on net earnings as it is compensation for actual losses. However if the award exceeds £30,000 it is then grossed up. The application of the cap is only made at the very end of the calculation.

This maximum does not apply to PIDA or Health and Safety dismissals.

The compensatory award is therefore based on actual economic loss through the loss of wages. This includes compensation for loss of benefits that could reasonably have been expected to be gained but for the dismissal (ERA 1996, s123(2)(b)).

Index

How to calculate the award

Because the compensatory award is calculated based on actual loss, the first stage in the calculation is to determine what would have been earned had the employee not been unfairly dismissed. So, if Mr. Lister earns £300 per week net and twenty weeks have passed between the unfair dismissal and the date of the hearing, the starting point in the calculation will be £300 x 20 = £6,000. If there are any additional benefits, contractual or falling within ERA 1996 s123(2)(b), these should also be added to this initial figure.

However, a number of factors may affect the numbers used in the initial calculation. Where a dismissal is procedurally unfair the tribunal may consider that the employee, had the proper procedure been followed, would have been dismissed after the number of weeks required to carry out a fair procedure (Polkey v AE Dayton Services [1987] IRLR 504 HL). So if Mr. Lister was dismissed in a way which was procedurally unfair, and a proper, fair procedure would have taken 6 weeks after which he would have been dismissed, the initial calculation would be £300 x 6 = £1,800.

10.

This starting figure will also be augmented by ongoing losses, should these exist. So where Mr. Lister remains unemployed the tribunal may consider this ongoing loss, although in practice such consideration is likely to be limited in scope, usually to 12 months, and only exceptionally longer, if, for example, the employee is only a few months away from retirement. Similarly, where Mr. Lister has gained re-employment at a lower rate of pay, this loss can be taken into account. Again such considerations will be temporally limited in a similar way.

11.

Finally any other losses, such as costs incurred in seeking further work, lost pension rights and a small sum (usually £250-£300) for loss of statutory rights (the employee having to serve his year in service with a new employer before acquiring many of these) will be added to the calculation.

Worked examples

Mr. Lister is aged 35. He is dismissed from his job as a forklift truck driver, where his net take-home pay was £400 per week. By convention the drivers are paid a bonus of £500 every Christmas. He is unfairly dismissed in November in a way that is not procedural. After ten weeks he finds a new job as a forklift pallet loader, earning £250 per week. The hearing is ten weeks later.

£400 x 10 weeks = £4,000

£150 x 10 weeks = £1,500 (£150 = £400 - £250 current earnings)

Ongoing losses of £150 x 52 weeks = £7,800

Loss of bonus = £500 x 2 = £1,000

Costs of seeking work, loss of pension etc, say £1,500

Loss of statutory rights = £250

TOTAL: £16,050

Mrs. Majrewski is a typist. Her company’s normal retirement age is 65. She is unfairly dismissed from her job on her 63rd birthday in a way that is not procedural. She earned £300 per week net and was contractually entitled to a bonus of £2,000 every year. Despite her best efforts she is unable to find a new job over the course of the 26 weeks it takes for the case to come before a tribunal and she has no real prospect of doing so thereafter.

£300 x 26 = £7,800

Ongoing losses up to retirement age = £300 x 78 = £23,400

Loss of bonus of £2,000 x 2 = £4,000

Costs incurred in her search for work = £250

Loss of pension rights, say £2,000

Loss of statutory rights = £250

TOTAL: £37,700

BUT as the award exceeds £30,000 it has to be grossed up to reflect the tax charge applicable to it.

Mr. Polkey is a high-flying Hedge Fund Manager aged 19. He earns £15,000 per week net. He is summarily dismissed and is given no reasons, although he is in fact dismissed for incompetence. Had a fair procedure been followed it would have taken 6 weeks to dismiss him. The hearing takes place 40 weeks after the dismissal.

£15,000 x 6 = £90,000

Loss of pension rights, say £2,500

Loss of statutory rights = £250

TOTAL: £92,750

12.

These figures of course refer only to the starting figure. Once this figure is arrived at, it then falls to be adjusted. This adjustment will take the form of deductions for monies received (and on this see further below in respect of Norton Tool Co), procedural fairness (Polkey and section 98A(2) of ERA 1996), contributory fault (section 123(6) of ERA 1996) and contractual redundancy pay. It may also take the form of an uplift where the employer has not complied with the statutory disciplinary procedure.

13.

As previously mentioned, if the figure as adjusted exceeds £30,000, it will be grossed up. The reason for this is that any tribunal awards that exceed this amount are subject to income tax. As the compensatory element is intended to put the employee in the position he would have been in had he not been unfairly dismissed, it is clearly logical that where an award is subject to tax, an amount should included to cover the tax liability.

14.

The final stage in the calculation is then to apply the statutory cap, currently £60,600. If the calculation exceeds this amount it is reduced to the level of the cap.

15.

It should of course be borne in mind that the obligation of the tribunal is to assess the compensatory award in accordance with what is just and equitable in all the circumstances. There is therefore no hard-and-fast mathematical rule that will produce an exact compensatory figure in the event of a finding of unfair dismissal.

Index

Norton Tool Co and the subsequent case law

16.

Norton Tool Co established that it is good industrial relations practice that no deduction should be made when arriving at the final compensatory figure for anything which was or could have been earned during the period of notice. An employer who dismisses without notice should make a full payment in lieu of said notice. Therefore where notice was not given, there would be an entitlement at a minimum to compensation for wages which should have been paid during the period of notice (Vaughan v Weighpack [1974] IRLR 105). Further, the employee would potentially be awarded more than their actual loss if alternative employment is found during what would have been the notice period. Whilst this was doubted in subsequent cases, in Babcock FATA Ltd v Addison [1987] IRLR 173 Ralph Gibson LJ made it clear that the Norton Tool Co judgment was not a hard and fast rule, but circumstances allowing departure whilst still remaining good industrial relations practice would be rare:

“…circumstances may arise in which, having regard to the length of notice required and the known likelihood of the employee getting new employment within a short period of time, or for other sufficient reason, an employer may show that a payment less than the wages due over the full period of notice did not offend good industrial practice… The number of cases in which an employer will be able, in the view of the employment tribunal, to justify a departure from the general practice will probably be small”

17.

However Babcock was not always followed by the EAT, and as the case law developed it appeared that the dictum of Ralph Gibson LJ quoted above seriously underestimated the number of cases justifying departure.

18.

The jurisprudential reasoning behind the argument in respect of deduction for monies earned by a summarily dismissed employee during the period of notice is based on the principle of compensation. The compensatory award is in many ways analogous to damages in standard (non-employment) contract disputes. The purpose is to compensate for losses actually suffered, and not, generally, to provide the unfairly dismissed employee with a “profit” over and above them. Furthermore, the duty to mitigate those losses by finding alternative employment as quickly as possible should strictly apply. It must be borne in mind at all times that the calculation of the compensation award is based on what is just and equitable and mitigation and “profit” are both factors in so determining.

19.

Burlo v Langley [2006] EWCA Civ 1778 [2007] IRLR 145 has now “clarified” the position in respect of Norton Tool Co and deductions. Ms. Burlo was employed as a nanny for the children of the Langleys from November 1999. After an argument over a salary increase she was dismissed on 2nd March 2004 and required to work her notice period. She was however unable to work between 5th March and 12th July 2004 as a result of a car crash on the first day of that period. Her contract of employment expressly stated her entitlement to sickness benefit in accordance with statutory sick pay legislation. On 8th March 2004 the Langleys informed Ms. Burlo that she would not be required to work her notice period.

20.

The tribunal awarded £3,440 damages for wrongful dismissal, equating to eight weeks’ pay, Ms. Burlo being entitled to eight weeks’ notice. The tribunal also found that the dismissal was unlawful as there was no disciplinary hearing or right of appeal. It calculated a compensatory award of £5,736. This included nothing for the notice period, that having been awarded in the wrongful dismissal damages.

21.

The EAT ([2006] IRLR 460) allowed an appeal against the award of full pay for the notice period on the basis of the contractual sick pay term, which they found applied equally to a notice period.

22.

More importantly the EAT dismissed a cross-appeal by Ms. Burlo. Ms. Burlo claimed on the basis of the principle set out in Norton Tool Co - that good industrial relations practice required a full payment in lieu of notice without reduction for mitigation – that she was entitled to full pay for the notice period as unfair dismissal compensation. In effect Ms. Burlo was attempting to get round the contractual provision based on a strict application of the Norton Tool Co principle as she had in fact been dismissed without notice.

23.

The Court of Appeal dismissed Ms. Burlo’s appeal. However they found that the Norton Tool Co principle was still good authority, but only for the narrower principle that damages for unfair dismissal should include full pay for the notice period without having to give credit for sums earned from other employers during the notice period. It was not authority for a principle that an employee is therefore entitled to recover unfair dismissal compensation to reflect the difference between what he in fact received and what he would have received if the employer had acted in accordance with good industrial practice.

24.

Anything wider than this narrower principle was obiter. There is therefore no entitlement to compensation equivalent to full pay in lieu of notice in all circumstances. So where all that Ms. Burlo would have got during her notice period was statutory sick pay, that was all that she was due in compensation. Norton Tool Co did not entitle her to eight weeks of her full pay, even if it was good industrial practice to give pay in lieu of notice at the normal rate of pay to an employee summarily dismissed while unfit for work through sickness.

Index

EAT decisions

25.

25. The EAT (Elias P) held that Norton Tool Co was no longer a legitimate juridical basis for awarding full compensation for the notice period. Whilst it was still good industrial relations practice for an employer to make a full payment in lieu of notice who during that period is absent, sick, the Norton Tool Co principle is no longer a legitimate juridical basis for awarding full compensation for the notice period. The EAT declined to follow Babcock, referred to above, on the basis that the House of Lords in Dunnachie v Kingston upon Hull City Council [2004] IRLR 727 HL held that it was inconsistent with section 123 of the ERA 1996 to allow compensation for failure to comply with good industrial relations practice where such compensation exceeds the loss resulting from the dismissal itself.

26.

Elias P noted in passing that at the time of Norton Tool Co the basic award had not been introduced. He conducted an examination of the case law following Norton Tool Co, referring to the attempt to limit (or as Elias P puts it “virtually to subvert”) the principle made by the EAT in Tradewinds (referred to in the introduction to these notes) and the criticism of that latter case in TBA Industrial Products Ltd v Locke [1984] IRLR 48 and reaffirmation of the principle. He then went on to consider Babcock and subsequent cases.

In Hardy v Polk (Leeds) Ltd [2004] IRLR 420 the EAT held that Norton Tool Co and Babcock should not be followed, on the basis that those cases did not take into consideration the duty to mitigate found in s123(4) of the ERA 1996. Burton J stated that it was irrational to ignore the consequences of the duty to mitigate for the notice period. Burton J in Morgans v Alpha Plus Security Ltd [2005] IRLR 234 again held that the Norton Tool Co approach was no longer good law. He then relied on the Dunnachie decision, a case dealing with whether compensation for injury to feelings could be recovered arising out of an unfair dismissal (they can’t be, as they are not a “loss”). Burton J held that following Norton Tool Co was inconsistent with Dunnachie, which provided that there is no justification for an employee to be awarded a bonus, which is what happens if he receives more than his actual loss. Whilst this was said in the context of injury to feelings, Burton J considered it applied equally to compensation during the notice period.

28.

However, Voith Turbo v Stowe [2005] IRLR 228, 2 weeks after the Morgans decision, did not follow it but instead upheld the tribunal’s decision to give effect to Norton Tool Co. The law was therefore clearly in an unsatisfactory state.

29.

Elias P sided against Norton Tool Co. He found that the principle was no longer good law. He did this on the basis of Dunnachie, saying:

“We recognise that in reaching its decision in Dunnachie the House of Lords did not focus on this aspect of the Norton Tool case. There was no reference to the duty to mitigate. But in the majority view it is simply not consistent with the analysis of s.123 to allow compensation for failure to comply with good industrial relations practice. If the requirement is that the assessment should be of loss flowing from the dismissal, it involves having to adopt a concept of a “deemed loss” as well as giving no effect to the duty to mitigate during the notice period. If on the other hand it rests on the just and equitable principle, their Lordships have clearly established that this cannot be used to extend the scope of loss beyond the loss flowing from the dismissal itself. Dunnachie was concerned with non economic loss, but there is no principled basis, it seems to us, for treating economic loss, but not flowing from the dismissal, any differently. So we see no warrant for either approach… we see no legitimate basis for assessing the compensatory award so as to provide a bonus over and above the loss in fact flowing from the dismissal itself.” (at 43-44)

30.

Interestingly, Mr. Smith, one of the wingmen, dissented, considering that the just and equitable formula was broad enough to permit compensation in full for the notice period without regard to mitigation, in the context at least of good industrial practice.

31.

Elias P concluded by stating that the tribunal was in the “invidious position” of being bound by a Court of Appeal decision which conflicted with a House of Lords analysis of the statutory provision. Babcock and Norton Tool Co were therefore not followed.

Index

Court of Appeal decisions

32.

Ms. Burlo made the same arguments to the Court of Appeal as had been tried, and failed, at the EAT. She argued that Norton Tool Co was authority for the “wider principle” that in assessing compensation it was appropriate to take into account the effect of other precepts of good industrial or employment practice, including in this instance that it was good employment practice for an employer to pay the employee at the normal rate during the notice period even if off sick (which had been held to be so by the EAT below). Ms. Burlo further submitted that Babcock was binding and Dunnachie had no effect.

33.

The Langleys argued that Norton Tool Co was limited to the narrow principle; all else was obiter. Babcock, it was argued, concerned whether an employee who did receive payment in lieu of notice could also recover compensation for the same period. Dunnachie was binding inasmuch as Lord Steyn made clear that “just and equitable” did not allow for compensation greater than the actual loss.

34.

Smith LJ gave the leading judgment. She found that Babcock did not affect the “narrow” Norton Tool Co principle, that credit for earnings received did not have to be given. But she found that Babcock made it clear that there was no wider principle by which newly formulated precepts of good industrial or employment practice could be applied to the assessment of compensation, if the result was an award greater than the loss caused.

35.

Smith LJ went on to say, obiter, that she was not convinced that the EAT’s finding that the payment of the full weekly rate of wages in lieu of notice to an employee unfit through sickness was correct. She also found, again obiter, that the passages in Dunnachie dealing with the words “just and equitable” were relevant and impliedly supported the principle that any attempt to extend the narrow Norton Tool Co principle must not be allowed if it led to the award of a bonus. She declined to pronounce on the correctness of the Langleys’ second argument, that even the narrow Norton Tool Co principle offends section 123 as it can and often does lead to the award of a bonus. Until that matter arose the narrow principle remained binding on tribunals.

36.

Mummery LJ however stated, obiter, that he did not agree with the EAT that the narrow Norton Tool Co principle no longer applied. This was because Dunnachie did not expressly overrule Norton Tool Co, and it has not clearly been demonstrated that it impliedly did so either. Mummery LJ was of the view that as the narrow Norton Tool Co had been applied for thirty years, and that it was improbable that the House of Lords had intended to stir up fresh uncertainty when attempting to settle other uncertainty, the narrow principle should be left alone. He stated that whilst the Langleys argument in respect of Dunnachie may be right, it was for the House of Lords to settle the matter, not the EAT or Court of Appeal

37.

Mummery LJ went on to explain that Babcock had shown that the narrow Norton Tool Co principle was not based on a broad “just and equitable” basis but more of a recognition of good employment practice as a relevant factor. He found that Dunnachie was clear authority for the proposition that s123(1) was a composite formula precluding the recovery of compensation for non-economic loss, but did not consider that it was authority that credit should be given for wages which were, or could have been earned during the notice period, as it simply was not considered. He stated that the sooner the House of Lords could settle the matter, the better.

Index

Where are we now?

38.

The Court of Appeal roundly slapped down the attempts by the EAT to remove the narrow principle, that credit need not be given for monies earned during the notice period, or for monies that could have been earned. The duty to mitigate therefore still does not apply. For now at least then, the compensatory award continues to include such payments. But the Court of Appeal agreed with the conclusion of the EAT, if not the reasoning, that Norton Tool Co does not provide a blanket right in all the circumstances to full payment of standard weekly wages in lieu of the notice period. There is no principle that newly formulated precepts of good industrial or employment practice can be applied where this results in a “profit” to the employee. Therefore, even if the EAT was right to hold that full payment in lieu of notice even where an employee is unable to work through sickness was good practice (which Smith LJ doubted), Norton Tool Co was not authority for the proposition that the employee should be compensated in such a way.

So:

Credit does not need to be given for monies earned during a notice period in respect of compensation awarded for failure to give a payment in lieu of notice where the employee is summarily dismissed.

There is no duty to mitigate during that period, and therefore no reduction of the compensation, by a failure to find alternative work.

There is NO principle that new good practice rules can be applied if they result in a “profit” to the employee, offending section 123.

An employee who would be getting statutory sick pay during the period of notice will be compensated at that rate, not at the full weekly rate.

Dunnachie may be found to have changed a) and b) above but it is for the House of Lords to decide. In the meantime the Tribunal is to continue to apply Norton Tool Co in its narrow form.

Index

Conclusion

39.

The Court of Appeal have ducked responsibility for deciding whether Norton Tool Co is still good law. As it stands, it is, and summarily unfairly dismissed employees will still be able to recover compensation for their notice periods, even if they are also earning during that time. The Court of Appeal did ensure that the EAT’s attempts to have Norton Tool Co overturned on the basis of Dunnachie were halted as premature.

40.

Until the House of Lords revisits this area, Tribunals will be obliged to apply the narrow principle. That much is clear from the Court of Appeal’s judgment. There will however be until that time lingering doubts, but until a suitable case falls for consideration we have not yet seen the end of Norton Tool Co.

Christopher Bryden