Appeal No. EAT/337/92

	EMPLOYMENT APPEAL TRIBUNAL
	58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

		At the Tribunal
		On 9th November 1994
	Judgment delivered on 10 March 1995

	Before

	THE HONOURABLE MR JUSTICE MUMMERY (PRESIDENT)

	MISS J W COLLERSON

	LORD GLADWIN OF CLEE CBE JP

MRS A M CLARK	APPELLANT

SECRETARY OF STATE FOR EMPLOYMENT	RESPONDENTS

	Transcript of Proceedings

	JUDGMENT

Revised

	APPEARANCES

For the Appellant	MR J CAVANAGH
(of Counsel)
Messrs Tinsdills
Chichester House
14 Broad Street, Hanley
Stoke on Trent ST1 4EU

For the Respondents	MISS E SHARPSTON
(of Counsel)
The Treasury Solicitor
Queen Ann's Chambers
28 Broadway
LONDON SW1H 9JS

MR JUSTICE MUMMERY (PRESIDENT)         Is a woman on maternity leave when her employer becomes insolvent entitled to payment out of the National Insurance Fund by the Secretary of State for Employment of a sum equivalent to an amount payable in lieu of notice?

	The issue involves a significant question on the interpretation of Article 119 of the Treaty of Rome and its impact on S.122(3) and other provisions of the Employment Protection (Consolidation) Act 1978 ("the 1978 Act").  The resolution of the issue affects a number of pending cases before Industrial Tribunals.  There is no request for a reference to the European Court of Justice under Article 177 and we do not think it necessary to make a reference.  

The Facts
	The crucial facts are concise.

	On 12th January 1976 Mrs Clark started employment with W H Grindley Ltd ("the Company").  On 21st November 1990 she gave notice to the Company of commencement of her maternity leave and of her intention to return to work after confinement.  She started her maternity leave on 3rd December 1990.  During each of her five weeks on maternity leave she was entitled to be paid 90% of her normal weekly pay.    On 16th January 1991 the Company went into insolvent liquidation.  Mrs Clark's employment terminated.  Her baby was born on 21st January 1991.

	Mrs Clark made a claim against the Secretary of State for Employment under S.122 of the 1978 Act which provides for payment by the Secretary of State of specified debts of an employer who has become insolvent.  Mrs Clark's claim was for a sum equivalent to 12 weeks' pay in lieu of notice which she was entitled to receive from the Company on dismissal.

	Mrs Clark's claim was rejected by the Secretary of State on the ground that S.122 did not apply to that debt.

	On 20th July 1991, Mrs Clark presented a claim to the Industrial Tribunal.  For Full Reasons notified to the parties on 30th March 1992, the Tribunal dismissed her claim.  She appealed on 5th May 1992 by a Notice of Appeal which raised for the first time the point that Article 119 operated to give rise to a right to payment similar to that claimed against the Secretary of State.  The Secretary of State did not object to this new point being taken on appeal, but contended that the refusal to make the payment was not a contravention of the Article.

New Point on Appeal
	Before we heard argument on the substantive appeal we asked counsel for Mrs Clark and the Secretary of State to satisfy the Appeal Tribunal that it was appropriate to decide on appeal a significant point which had not been argued before, or decided by, the Industrial Tribunal.

	We have decided to allow the Article 119 point to be taken by Mrs Clark on appeal for the following reasons:-

(1)  It is common ground that no fresh evidence is required to decide the point.  It is a pure point of law.

(2)  The decision of the Industrial Tribunal contains all the factual material necessary to decide the point finally (subject, of course, to appeal) without remitting the matter to the Tribunal for fresh evidence, further argument and formal adjudication.

(3)  It was not asserted by either side, and it does not appear to us, that the introduction of the new point of law would produce an injustice as between the parties.

	Our reasons are based on the principles relating to new points on appeal stated in Kumchyk v. Derby City Council [1978] ICR 1116; Hellyer Brothers Ltd v. McLeod [1987] ICR 526 at 561, 565 and Wilson v. Liverpool Corporation [1971] 1 WLR 302 at 307.

Provisions of the 1978 Act
	The following points are common ground on S.122 of the 1978 Act:-

(1)  The Company has become insolvent;

(2)  Although Mrs Clark was on maternity leave, she remained an employee of the Company until the date on which it became insolvent;

(3)  Her employment has been terminated;

(4)  Mrs Clark was entitled to 12 weeks' notice in accordance with S.49(1)(c) of the 1978 Act.

	The crucial point in dispute is whether Mrs Clark was "on the relevant date ... entitled to be paid the whole or part of any debt to which [S.122] applies": S.122(1)(b).  Section 122(3) specifies the debts to which the section applies.  Debts include -

	"(b)  Any amount which the employer is liable to pay the employee for the period of notice required by S.49(1) or (2) or for any failure of the employer to give the period of notice required by S.49(1)".
If the Company was not liable to make payment of a sum in lieu of 12 weeks' notice to Mrs Clark the Secretary of State is not liable to make that payment in the place of the Company.

	In order to determine what the employer was liable to pay to Mrs Clark it is necessary to refer to the provisions of Schedule 3 to the 1978 Act which, by virtue of S.50(1) of that Act have effect
	"as regards the liability of the employer for the period of notice required by S.49(1)."
Paragraph 2 of Schedule 3 is material.  It sets out conditions as follows:-
	"2(1)  If an employee has normal working hours under the contract of employment in force during the period of notice, and if during any part of the normal working hours -

	(a)  the employee is ready and willing to work but no work is provided for him by his employer; or

	(b)  the employee is incapable of work because of sickness or injury; or

	(c)  the employee is absent from work in accordance with the terms of his employment relating to holidays ..."
If any of those conditions are met, the employer is liable to make a notice payment in relation to that part of the working hours covered by sub-paragraphs (a), (b) or (c).

	Paragraph 2(2) of Schedule 3 provides:-
	"Any payments made to the employee by his employer in respect of the relevant part of the period of notice whether by way of sick pay, statutory sick pay, holiday pay or otherwise shall go towards meeting the employer's liability under this paragraph.

	The question which arises under paragraph 2 of Schedule 3 is whether Mrs Clark could, while absent from work through pregnancy or childbirth and in receipt of maternity pay, bring herself within any of the three categories set out in paragraph 2(1) of the Schedule.  It was argued unsuccessfully on behalf of Mrs Clark at the Industrial Tribunal that while she was on maternity leave she was an "employee incapable of work because of sickness" within the meaning of paragraph 2(1)(b).

	It should be noted that it is no longer necessary for an employee on maternity leave to attempt to persuade an Industrial Tribunal of such an impossible proposition since paragraph 2 has been amended to extend its scope expressly to an employee who is "absent from work wholly or partly because of pregnancy or childbirth".  That amendment, by the insertion of a new paragraph 2(1)(ba), was achieved by the Trade Union Reform and Employment Rights Act 1993, S.49(2), Schedule 8, paragraph 27.  The amendment does not assist Mrs Clark as it is not retrospective.

Decision of the Industrial Tribunal
	The Industrial Tribunal unanimously decided that Mrs Clark's application should be dismissed for the following reasons:-
(1)  Mrs Clark could not bring her case within paragraph 2(1)(a) of Schedule 3 to the 1978 Act because she was not, at the relevant time, ready or willing to work.  The Tribunal rejected the submission that the paragraph should apply because hers was not a case of a voluntary refusal to work and that she should not be penalised for a biological condition which rendered it impossible for her to be ready or willing to work.

(2)  She was not incapable of work because of a sickness.  Absence from work on account of pregnancy could not be deemed to be covered by that situation.  The Tribunal referred to the provisions of paragraph 9(1) of Schedule 13 to the 1978 Act.  Schedule 13 deals generally with the computation of the period of employment and paragraph 9 deals, in particular, with periods in which there is no contract of employment.  It provides -
	"9(1)  If in any week the employee is, for the whole or part of the week -

	(a)  incapable of work in consequence of sickness or injury, or 
 (b)  ...
	(c)  ...
	(d)  absent from work wholly or partly because of pregnancy or confinement, that week shall, notwithstanding that it does not fall under paragraph 3, 4 or 5, count as a period of employment."

	The Tribunal was impressed by the distinction drawn in those provisions between, on the one hand, absence because of incapacity to work in consequence of sickness or injury, and, on the other hand, absence because of pregnancy or confinement and concluded that those provisions were echoed in paragraph 2(1)(b) of Schedule 3 in referring to the case of an employee incapable of work because of sickness or injury.  The absence of a reference in paragraph 2(1) to pregnancy or confinement was significant and could only mean that 
	"... there was a policy decision by Parliament to exclude from entitlement to money in lieu of notice employees who are absent wholly or partly because of pregnancy or confinement."
The Tribunal added that they reached that decision with regret -
	"We can see no logical distinction between a male employee given notice while absent from work through ill-health and a female employee given notice whilst absent from work through pregnancy and who has given notice of her intention to return after confinement.  We would have thought that neither of them was in a better position than the other to be able to say with certainty whether or not they were going to return.  It is difficult to see why one gets the benefit of the provisions of paragraph 2 of Schedule 3 and the other does not ..."

	That theme was taken up and developed by Mr Cavanagh in his arguments on Article 119.

The Article 119 Point
	The case on Article 119 is put by Mr Cavanagh, on behalf of Mrs Clark, in two ways:-

(1)  The construction of paragraph 2 of Schedule 3 adopted by the Industrial Tribunal is, if correct, contrary to Article 119.  Paragraph 2 should therefore be applied as if the benefits carried with it apply to employees absent from work wholly or partly because of pregnancy or confinement.  We accept this contention for the reasons stated later.

(2)  Alternatively, the reference in paragraph 2(1)(b) to an "employee incapable of work because of sickness" should be construed by the Tribunal to accord with Article 119 and should therefore be regarded as including employees absent from work because of pregnancy or confinement.  We reject this contention.  It is not possible, as a matter of construction, to treat "sickness" as including pregnancy, even on the broad approach followed in Litster [1989] ICR 341. 

	Both lines of argument were contested by Ms Sharpston on behalf of the Secretary of State.  The arguments on each side were clearly, cogently and concisely advanced and did not suffer in quality as a result of compliance with the provisional time-limits for submissions suggested by the Tribunal.

The Relevant Principles
	The material parts of Article 119 provide as follows:-
	"Each Member State ... shall during the first stage ensure and subsequently maintain the application of the principle that men and women should receive equal pay for equal work.

	For the purposes of this Article, "pay" means the ordinary basic or minimum wages or salary and any other consideration, whether in cash or in kind, which the worker receives, directly or indirectly, in respect of his employment from his employer."

	Article 119 has been frequently interpreted by the European Court of Justice.  It is possible to state its effect and scope with reasonable certainty.  

	(1)  For the purposes of Article 119 "pay" includes payments made to a worker on (or after) the termination of the employment relationship in the form of "deferred pay" to which the employee is entitled by virtue of that employment relationship.  In Kowalska v. Freie und Hansesstadt [1992] ICR 29 the European Court of Justice stated that
	"11  ... In principle, compensation paid to a worker on termination of the employment relationship falls within the definition of pay contained in Article 119 of the Treaty."     
Other decisions have held that the following payments are "pay" for the purposes of Article 119.
(a)  Redundancy pay, whether paid by virtue of legislative provisions or on a voluntary basis: Barber v. GRE [1990] ICR 616 at 673C; R v. Secretary of State for Employment Ex Parte Equal Opportunities Commissions [1994] ICR 317 at 325E.
(b)  Pension benefits: Barber v. GRE (supra) at 673D
(c)  Compensation for unfair dismissal: R v. Secretary of State Ex Parte Equal Opportunities Commission  (supra) at 332A - B; Mediguard Services Ltd v. Thame [1994] ICR 751 at 758H - 759B.

(2)  A payment to an employee in lieu of notice is compensation on the termination of an employment relationship and is in respect of the employee's employment.  If the employer had given notice in conformity with the contract, instead of acting in breach of it by failing to give notice, the employee would have had the opportunity to earn the notice payment by working through the period of notice: Delaney v. Staples [1992] ICR 483.

(3)  A payment made pursuant to a statutory obligation may nevertheless be "pay" Mediguard v. Thame (supra) at 759B; Barber v. GRE (supra) at 668F.

(4)  A payment may be "pay" within Article 119, even though it is made to the employee by someone other than the employer.  Fissher v. Voorhuis Hengelo [1994] IRLR 662 (128/93 ECJ 28th September 1994).  In that case the European Court of Justice held that a worker was entitled to rely on Article 119 against the administrators of an occupational pension scheme who were not parties to the employment relationship.  The payments made by them to employees were in performance of the employer's obligations and might therefore constitute pay just as much as payments directly made by an employer.  In paragraph 31 of the decision the European Court reasoned as follows:-
	"Since the administrators of a pension scheme, although not party to the employment relationship, are called upon to pay out benefits which constitute pay within the meaning of Article 119, they must comply with that provision by doing all within their power to ensure that the principle of equal treatment is observed in the respect and the scheme members must be able to rely upon it as against them.  The effectiveness of Article 119 would be considerably diminished and the legal protection required to achieve real equality would be impaired if an employee could rely upon that provision only against the employer and not against the administrators of the scheme who are expressly charged with performing the employer's obligations."
As also appears from the judgment of the European Court of Justice in Coloroll [1994] IRLR 586 (200/91 also decided on 28th September 1994) the Trustees of a pension scheme were bound to comply with Article 119. The payments to employees do not lose the character of pay for the purposes of Article 119 as a result of being paid by trustees or administrators of a pension scheme rather than by the employer direct.  Article 119 may therefore be relied upon in National courts and tribunals against third parties, such as trustees and pension scheme administrators.

Submissions of the Secretary of State
	The Secretary of State disputed the application of Article 119 to this case principally on the ground that the amount claimed by Mrs Clark could not be "pay" within Article 119 because (a) it is a publicly funded payment and (b) it is not paid by an employer to an employee.  Further, even if the payment were "pay" within Article 119 there is no breach, because the failure to include pregnant women in the scheme of employees' rights on the insolvency of an employer is not discriminatory.  A male employee absent through sickness is not an appropriate comparator for determining discriminatory treatment.  It was therefore submitted that the Secretary of State's refusal to pay Mrs Clark was not rendered unlawful by the provisions of Article 119.

	In amplification of those general propositions, Ms Sharpston made the following specific points.
(1)  There is no decision of the European Court of Justice or of the National courts directly on the question whether compensation for failure to give notice is "pay" within Article 119. 

(2)  The expression "in respect of his employment" in Article 119 presupposes an unseverable causal connection between "pay" and "employment": Burton v. British Railways Board [1982] ECR 579 at 589.

(3)  Payments by the Secretary of State under S.122 of the 1978 Act are not "pay" within Article 119.  It is necessary to look both at the source of the funds and the party making the payment.
(a)  Source of Funds    Payments are made by the Secretary of State out of the National Insurance Fund, ie out of the public purse, not out of the pocket of the employer.  There is no matching of employer's contributions to the National Insurance Fund and the extent of the Secretary of State's liability to answer for the employer's debt.

(b)  Person making Payment     There is no unseverable causal connection between payments by the Secretary of State and the employee's employment.  The payments by the Secretary of State are directly governed by legislation, without any element of agreement between employer and employee.  The financing of the payment is determined less by the employment relationship than by considerations of social policy.  The employees receive the payments, not because of the employer's contributions to the National Insurance Fund, but solely because they fulfil the statutory conditions entitling them to the payment.  The section does not impose on the Secretary of State a blanket requirement to cover all the liabilities of an insolvent employer.  It puts in place a limited, specific scheme to protect individuals in relation to certain liabilities to them.

(4)  Particular reliance was placed on the decision of the European Court of Justice in Defrenne v. Belgium State [1971] ECR 445 at 451, paragraphs 7 - 12.  The European Court of Justice stated -
	"7  Although consideration in the nature of social security benefits is not therefore in principle alien to the concept of pay, there cannot be brought within this concept, as defined in Article 119, social security schemes or benefits, in particular retirement pensions, directly governed by legislation without any element of agreement within the undertaking or the occupational branch concerned, which are obligatorily applicable to general categories of workers.

	 8  These schemes assure for the workers the benefit of a legal scheme, the financing of which workers, employers and possibly the public authorities contribute in a measure determined less by the employment relationship between the employer and the worker than by considerations of social policy.

9   Accordingly, the part due from the employers in the financing of such schemes does not constitute a direct or indirect payment to the worker.

10  Moreover the worker will normally receive the benefits legally prescribed not by reason of the employer's contribution but solely because the worker fulfils the legal conditions for the grant of benefits.

11  These are likewise characteristics of special schemes which, within the framework of the general system of social security established by legislation, relate in particular to certain categories of workers.

12  It must therefore be found that situations involving discrimination resulting from the application of such a system are not subject to the requirements of Article 119 of the Treaty."

(5)  Differences were also identified between this case and the cases on occupational pension schemes.  It was pointed out that the case of Barber v. GRE (supra) is not an authority directly in point.  It was conceded on behalf of the Secretary of State that that case established that compensation granted to a worker under a contractual scheme in connection with his redundancy falls, in principle, within Article 119 (paragraphs 13, 14).  It was, however, argued that Barber is distinguishable on a number of grounds.  It concerned payments made by an employer within the contractual context of employment.  The contracted-out pension scheme was financed by the employer and/or both the employer and the employees without any contributions made by public authorities.  The Scheme was not compulsorily applicable to general categories of workers and the benefits granted under the Scheme may have exceeded those available under the statutory scheme.  The benefit was received by the employee indirectly from the employer, as the scheme was administered by trustees.  By way of contrast it was pointed out that under S.122 payments are made by the Secretary of State, not by the employer, and are financed at least in part or potentially by public authorities.  Payments under S.122 are compulsorily available to all categories of workers who fulfil the conditions in the legislation.  The benefits are quintessentially statutory in nature and the statutory limit for payments may not be exceeded.

(6)  It was also argued that the more recent decision of the European Court of Justice in Coloroll Pension Scheme Trustees v. Russell & Ors [1994] IRLR 586  , concerning trustees of an occupational pension scheme, does not assist Mrs Clark any more than the judgment in the case of Barber.  It was submitted that there was no sufficient nexus between the financing of the National Insurance Fund and the S.122 payments to justify a finding that those payments arise out of the employment relationship.  The payments under the 1978 Act are more in the nature of social security benefits.  Section 122 is a mechanism for guaranteeing benefits to former employees in circumstances in which they would otherwise have no effective remedy.  The scheme derives more from social concerns than from the employment relationship.  In Coloroll one of the concerns of the European Court was to prevent employers from evading their obligations by use of the device of a trust.  That concern cannot exist in the present case where the scheme is statutory and can only be altered by statutory amendment.  It was emphasised that in Coloroll, as well as in Barber, the court was concerned with a pension trust in which the employer usually retains some degree of involvement, whereas in the case of payments under S.122 the employer has no element of control.

(7)  In addition to the submission that payments under S.122 are not "pay" within the meaning of Article 119, the Secretary of State argued that, even if he was wrong on this point, the refusal to make such payment to Mrs Clark was neither direct nor indirect discrimination on the grounds of sex.  It was argued that the omission from Schedule 3 to the 1978 Act, as unamended, of an express provision for absence from work, wholly or partially because of pregnancy and confinement, was not to be assimilated to the situation covered by paragraph 2(1)(b) of that Schedule where an employee is incapable of working because of sickness or injury.  The decisions of the European Court of Justice in Webb v. Emo [1994] IRLR 482 and the case of Handels v. Dansk [1990] ECR 3979 cast doubt on whether, as a matter of law, it is right to assimilate the position of a pregnant woman to that of a man absent from work on medical grounds.  Even if it were correct to make a comparison between absence by a pregnant woman and absence by a sick man there were clear and material differences between them.  In the case of sick leave the person sick or injured is absent from work for a variable length of time and is in receipt of contractual and statutory sick pay for the period of incapacity.  By way of contrast, in the case of statutory maternity leave, the employee has a statutory right to return under S.39 of the 1978 Act and it is not necessary for the employee to demonstrate actual incapacity to work, for example, by a production of a medical certificate for the period of the maternity leave.  The two cases are not directly comparable.  Maternity rights are a form of special treatment permissible under the Equal Treatment Directive.

(8)  Insofar as Mrs Clark was making a complaint that refusal of a payment under S.122 was per se direct discrimination on the grounds of sex without any need to make a comparison with a male comparator, the Secretary of State submitted that there was no universal rule that direct sex discrimination occurs unless the fact of pregnancy is ignored.  Reference was made to the decision of the European Court of Justice in Dekker v. V J V [1990] ECR 3941.  In paragraph 12 of the judgment the European Court of Justice observed that -
	"Only women can be refused employment on grounds of pregnancy and such a refusal therefore constitutes direct discrimination on grounds of sex."    
It was submitted that the European Court did not intend that principle to be applied to all situations regardless of their particular facts.  The more recent decision of the European Court of Justice in Webb did not assist Mrs Clark, as it was concerned exclusively with dismissal from employment of a pregnant woman employed for an indefinite period.  Even though only women are absent from work because they are on maternity leave, the exclusion of that case from Schedule 3, paragraph 2(1) is not automatically discriminatory.

Conclusions
	We have considered the detailed submissions of the Secretary of State and the decisions on which they are based, but we are unable to accept them in defence of the decision of the Industrial Tribunal.  In our judgment, this appeal should be allowed.  The decision of the Industrial Tribunal is erroneous in law because, although the Tribunal's construction of the 1978 Act is correct, the effect of the relevant provisions is contrary to Article 119 on which Mrs Clark is entitled to rely and which, in the event of inconsistency with the provisions of the 1978 Act, prevails over those provisions.

	Our conclusions on the legal position are briefly these.

(1)  Mrs Clark is entitled to invoke Article 119 directly in respect of the claim brought by her against the Secretary of State in the Industrial Tribunal.

(2)  Sums payable by an employer to an employee for failing to give notice to which the employee is entitled are "pay" within the meaning of Article 119, because such payment is in respect of the employee's employment.  The fact that the payment is made on termination of the employment rather than during the currency of the employment does not prevent it from being "pay".

(3)  The payments retain the character of pay and remain "pay" within the meaning of Article 119, even though a statutory provisions require payment to be made by the Secretary of State in the event of the inability of an insolvent employer to make payment.  So far as the employee is concerned the character of the payment remains the same.  So far as the employer is concerned the payment retains the character of pay, because the Secretary of State's liability to pay the sum is directly dependent on and related to that of the employer.  The Secretary of State is only bound to pay to the employee the debt which the employee was entitled to be paid by the employer.  The Secretary of State has subrogated rights against the insolvent employer in respect of any such payment made by him (S.125(1).  He stands in the shoes of the employee as against the insolvent employer.  The right to payment by the Secretary of State relates directly to and rests on the employment of the employee by the employer, the employer's liability to that employee and from the employee's entitlement as against that employer.

(4)  The principle of equal pay contained in Article 119 is breached by the failure of the 1978 Act to extend the benefits of that Act, in particular, paragraph 2 of Schedule 3, to women absent from work by reason of pregnancy and confinement.  The effect of those provisions, before amendment, was to treat women absent from work by reason of pregnancy and confinement less favourably than other employees absent from work through no fault of their own.  That is direct discrimination on the grounds of sex and as such cannot be objectively justified: Webb v. Emo [1994] ICR 770 at 798 C-E and Habermann [1994] 2 CMLR 681, paragraphs 16 - 21.

(5)  The consequence is that Article 119 must prevail and paragraph 2 of Schedule 3 must be read by the Industrial Tribunal and by this Appeal Tribunal as if it applied to women employees absent from work because of pregnancy and confinement.  The discriminatory effect of the provisions of the 1978 Act must be set aside and there must be applied to persons in the disadvantaged group of women absent from work due to pregnancy and childbirth the same advantages as are enjoyed by persons in the favoured class: Smith v. Avdel Systems Ltd [1994] IRLR 602 (28th September 1994) at paragraph 16 and 17: Kowalska (supra) at 35D -H, paragraph 17 - 20 and R v. Secretary of State Ex Parte Equal Opportunities Commission (supra) at 325E.

	For the above reasons we allow the appeal.