Appeal No. UKEAT/0124/04/SM

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 21 May 2004

Before
HIS HONOUR JUDGE PETER CLARK
SIR A GRAHAM KBE
MISS G MILLS

DCM OPTICAL CLINIC PLC	APPELLANT

MR D A STARK	RESPONDENT

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellant	MS MELANIE KERR
Instructed by:
Messrs Harper MacLeod
8 Melville Street
Edinburgh
EH3 7NS	
For the Respondent	THE RESPONDENT NEITHR PRESENT NOR REPRESENTED	

SUMMARY

Whether ex gratia payment made to retain employee during his notice period fell to be deducted from gross assessment of loss for purpose of compensatory award for unfair dismissal.  The Employment Tribunal found nothing.  Appeal by employer allowed.  Payment deductible.

HIS HONOUR JUDGE PETER CLARK

1.	This is an appeal by DCM Optical Clinic Plc (DCM) against the decision of the Newcastle-upon-Tyne Employment Tribunal, promulgated with Extended Reasons on 24 November 2003 in unfair dismissal proceedings brought against DCM by their former employee, Mr Stark.  The issue is whether or not the Employment Tribunal was correct in law in holding that a so-called ex gratia payment of £8,333, made by DCM to the Applicant, did not fall to be deducted from the gross assessment of loss following his unfair dismissal, there being no appeal against that liability finding.

The Facts
2.	The Applicant commenced employment with DCM on a temporary contract at a salary of £40,000 per annum plus bonuses on 4 July 2001.  On 1 October 2001 he was appointed Group Financial Controller and his salary raised to £50,000 per annum.

3.	In late July 2002 Mr Fleming, brought in as Finance Director to review the Company’s management structure, decided that the roles of operations finance director, then held by Mr Plant and Financial Controller, should disappear to be replaced by a single post, that of chief accountant.  The news was broken, first to Mr Plant and then to the Applicant on 29 July.

4.	A factual dispute arose to what was said at the meeting between the Applicant and Mr Fleming, attended also by Mrs Black, the HR Manager.  The Employment Tribunal found, preferring the evidence given by the Applicant that he was not given the opportunity to apply for the new post of Chief Accountant.  Mr Plant left immediately with a statement of his termination payment entitlement.

5.	The Employment Tribunal found that the Applicant’s dismissal was not by reason of redundancy, as DCM contended and was unfair.  They rejected a further argument by the Respondent that any compensation fell to be discounted under the Polkey principle.

6.	As to the payment of £8,333 (the payment) the Employment Tribunal found the facts to be as follows.  After his initial meeting with Mr Fleming on 29 July the Applicant discovered that other staff, including Mr Plant, were leaving immediately with pay in lieu of notice.  He then returned to Mr Fleming later that day and enquired whether he would be required to work out his notice.  It seems that he had a contractual entitlement to 3 months notice.  It was left that Mr Fleming would consider the position and the Applicant would seek legal advice; however, before seeing his Solicitor, the Applicant received a telephone call from Mr Fleming, who offered him an additional payment over and above his normal salary if he agreed to work for a period of time during his notice period and if his work output was satisfactory during that period.  The Applicant thereafter saw his solicitor and following further discussion with Mr Fleming the pair of them reached an agreement which was reflected, accurately the Employment Tribunal found, in a letter to the Applicant from Mr Fleming dated 2 August (that is, 2002, not 2003 as the Employment Tribunal record at paragraph 8(b) of their reasons).

7.	The letter reads, so far as is material:
“I have attached a document, which details your entitlements for redundancy.  As discussed, at present, we will require you to work your notice period however, should we be able to facilitate an earlier handover, you will be placed on garden leave.  You will be paid in the normal way, for the next three months commencing 15 September 2002, your final payment will be made to you on 15 November 2002.  This will also include all outstanding holiday pay, an agreed ex gratia payment and any other monies, which are due to you.  Please be advised that holiday pay subject to tax, likewise as any payments made in lieu of notice.  Your notice period will commence on Monday 5 August 2002.”

8.	The document attached to the letter is headed ‘Redundancy calculation’ and sets out the Applicant’s entitlement.  Due to his short service he was not due redundancy pay, but the ‘Value of lieu of Notice’ was put at £12,500, that is 3 months gross pay at £50,000 per annum and there is an item ‘Ex Gratia Payment’ in the sum of £8,333, being 2 months gross pay.

9.	The Employment Tribunal accepted the Applicant’s case that the payment was specifically tied to his agreement to work during the notice period, at least until required and was subject to his work being satisfactory.  The Employment Tribunal recognised the benefit to DCM of the Applicant remaining to ensure a smooth handover to his successor, whilst acknowledging that had he chosen to leave immediately he would not then have received pay in lieu of notice.  As Mr Fleming described the arrangement in evidence to the Employment Tribunal, the payment was “partly as a thankyou and partly as carrot/retention bonus.”

10.	In the event the Applicant was not required to work throughout his notice period, which expired on 4 November.  An earlier leaving date of 4 October was agreed between the parties and after he left, the Applicant did receive the payment as well as the balance of his notice pay.

The Law
11.	The expression ‘ex gratia’ payment may be something of a misnomer.  It suggests, by definition, an extra contractual payment.  However, such a payment may be contractual; see, for example, the old case of Edwards v Skyways [1964] 1AER 494.

12.	The question in this appeal is whether the payment, made in the circumstances of this case, fell to be taken into account in the calculation of loss flowing from the Applicant’s unfair dismissal.

13.	We begin with the statutory provisions.  Section 123(7) of the Employment Rights Act 1996 ERA provides so far as is material:

“ … If the amount of any payment made by the employer to the employee on the ground that the dismissal was by reason of redundancy … exceeds the amount of the basic award … that excess goes to reduce the amount of the compensatory award.”

14.	We mention this provision, only to discount it in the circumstances of this case, first, because the Applicant was not in fact entitled to any redundancy payment in view of his short service and secondly, because the Employment Tribunal found that the reason for dismissal was not in fact redundancy - see Boorman v Allmakes Ltd [1995] IRLR 553, to which the Employment Tribunal refer at paragraph 9 of their reasons.  Section 123(1) ERA, again so far as is material, provides:
“… the amount of the compensatory award shall be such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer.”

15.	The extent to which payments made by the employer at or about the time of dismissal should be taken into account in assessing the compensatory award has been the subject of some judicial consideration.

16.	In MBS Ltd v Calo [1983] IRLR 189 the Applicant was summarily dismissed by his employer.  That dismissal was held to be unfair.  On dismissal he was given an ex gratia payment representing 3 months gross salary.  He was entitled under his contract to only 4 weeks notice.  Thus he benefited in 2 ways, first the payment represented more than his contractual entitlement to notice; secondly the payment was made gross, not net of tax and national insurance deductions.  The Employment Tribunal concluded that since he had received 3 months gross pay they would assess his future loss over 4 months having found that he would be out of work for 7 months, ordering the employer to pay compensation representing 4 months net pay.

17.	On the employer’s appeal the Employment Appeal Tribunal held that the Tribunal’s approach was wrong in law.  They ought to have assessed his net loss over the 7 month period and then deducted the whole of the ex gratia payment - see the judgment of Browne-Wilkinson P, paragraphs 11-12.

18.	The Employment Appeal Tribunal in Scotland then appears to have taken a wrong turn in relation to the treatment of pay in lieu of notice in the cases of Finnie v Top Hat Frozen Foods [1995] IRLR 365, following Clydebank Co-operative Society Ltd v Mackie (22 August 1983  Unreported), later corrected by the Court of Appeal in Babcock FATA Ltd v Addison [1987] IRLR 173.  However, on the question of ex gratia payments, the approach of Lord MacDonald in Finnie, that such payments ought to be taken into account in assessing the compensatory award, was not disapproved by the Court of Appeal and was followed by the Employment Appeal Tribunal, French J presiding in Horizon Holidays v Grassi [1987] IRLR 371 - see paragraph 11, itself decided after the Court of Appeal judgment in Addison.

19.	It therefore seems to us that the overwhelming weight of authority is in favour of deducting ex gratia payments when assessing the net compensatory award for unfair dismissal, subject to this exception, to be found on the facts of Addison itself, that where, following a fair dismissal the ex gratia payment to the Applicant would have been made in any event in the future it ought not then to be brought into account in calculating the compensatory award for unfair dismissal.

The Employment Tribunal Decision
20.	We can do no better than set out in full the Employment Tribunal’s reasoning at paragraph 9 of their reasons:

“9	Upon the basis of this finding, we broadly accept the applicant’s submissions as to the status of the payment.  It was not paid in respect of the termination of the applicant’s employment or as partial recompense in respect thereof.  It was expressly paid as additional recompense, or as a loyalty bonus, for the applicant continuing to work during his notice period for as long as he was required by the respondent.  In spite of the fact that it was called an ex gratia payment, we conclude that there was a contractual obligation upon the part of Health Clinic plc to pay it quite apart from any other sums which might be payable, separately, in respect of the applicant’s dismissal.  This was not properly so called an ex gratia payment for which there was no consideration.  Thus the payment was not of the same quality as, for example, an excess payment in lieu of notice as in MBC v Calo [1983] IRLR 189, or a genuine ex gratia payment properly so called made in respect of redundancy as in Rushton & Harcross Timber and Building Supplies Limited [1993] ICR page 230.  Nor was it the sort of payment that should be set off against the basis award for the same reason and because it was not paid by reason of a redundancy.  The applicant was not in fact dismissed for redundancy whether the respondent believed it or not.  See Boorman v Allmakes Limited [1995] IRLR page 553.  No reduction should be made to the basic award under section 119(4), nor to the compensatory award under section 123(7).  Further it would not be just and equitable under section 123(1) to take the payment into account.  The loss sustained by the complainant in consequence of the dismissal was mitigated in any way by the payment made to induce him to stay during the notice period.”

The Appeal
DCM’s first ground of appeal was dismissed by a division presided over by Cox J at the Preliminary Hearing on 17 March 2004 in this case.  The remaining 2 grounds are advanced by Ms Kerr on behalf of the employer today.  The Applicant is not present, nor represented on economic grounds but we have taken into account the Respondent’s answer and skeleton argument lodged on his behalf.

21.	Having considered both parties’ submissions we have concluded that this appeal succeeds and the Employment Tribunal decision on the treatment of the payment must be reversed.  The principal error by the Employment Tribunal, it seems to us, lies in their holding (Reasons paragraph 9) that the payment was not made in respect of termination of the Applicant’s employment.  On the facts as found that was the sole reason for making the payment.  The fact that it was contractual, that is, a promise given for consideration, is nothing to the point.  The question under section 123(1) is what loss has the Applicant sustained in consequence of the dismissal.  That requires an account to be taken of what he would have received, but for the unfair dismissal, and what he in fact received.  He received, among other things, the payment.  Further, it was, on the Employment Tribunal’s findings, not a payment he would have received in any event (cf Addision).  Plainly it was a one-off payment designed to retain him until a smooth handover to his successor could be effected.

22.	For these reasons we must differ from the Employment Tribunal in the approach to be taken in law and allow this appeal.  The payment falls to be deducted from the calculation of loss for the purposes of the compensatory award due to the Applicant.