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Case law

First, we round up a few important cases that have come before the courts during 2018.

Holidays – workers may carry over accrued annual leave where employer has not done enough to encourage them to take it

In two recent German cases, the European Court of Justice (ECJ) considered the circumstances in which workers can carry accrued holiday entitlement (or the right to payment in lieu of that entitlement on termination) into a subsequent holiday year.

The employees in both cases had accrued annual leave which they had not taken when their employment came to an end. They sought payment in lieu of that leave (including entitlement from previous holiday years), which their employers refused. The employers argued that the employees could have taken their leave in the holiday year in which it accrued, but had failed to do so and therefore lost that entitlement.

The ECJ held that national law cannot provide for the automatic loss of accrued but untaken annual leave entitlement on termination, or at the end of the relevant holiday year, on the basis that the worker failed to seek to exercise their right to annual leave unless the employer could show that it had enabled the worker to exercise their entitlement, particularly by providing the worker with sufficient information on both their entitlement and the risk of losing it. It was for the employer to prove that it had done enough in this regard.

Although this is a European case, the UK courts must continue to interpret our domestic law compatibly with EU law, at least while the UK remains a member of the EU (and, unless we leave without a Brexit deal, during any transition period). Accordingly, this case may well have an impact on the law on holiday entitlement in the UK. Employers would therefore be well advised to closely monitor employees’ use of their holiday entitlement, ensure that they actively remind employees to take their holiday and make them aware that accrued holiday will be lost if it is not taken in the relevant holiday year.

PHI – implied term prevented employer from dismissing employee for incapacity

In Awan v ICTS UK Ltd, the Employment Appeal Tribunal (EAT) decided that a term should be implied into an employee’s employment contract to prohibit the employer from dismissing the employee on grounds of his continuing incapacity to work once he had become entitled to payment of Permanent Health Insurance (PHI) benefits to which he was entitled under his contract. In the EAT’s view, such a term would operate to limit, rather than contradict, the employer’s express contractual right to terminate the employee’s employment on notice, by preventing the employer from exercising that right in circumstances where doing so would frustrate the employee’s express contractual entitlement to PHI benefits.

The EAT’s decision in this case, whilst strongly protective of the employee’s rights, is perhaps not surprising, as the contract in question neither expressly reserved a right for the employer to terminate for incapacity notwithstanding that to do so would deprive the employee of their right to PHI benefits, nor stated that refusal of cover by the insurer would discharge the employer’s duty to pay under the scheme.

This case is unusual, however, in that it touched on the relevance of these contractual arguments to the question of whether the employee’s dismissal was unfair and amounted to discrimination arising from disability. On unfair dismissal, the EAT noted that dismissal in breach of contract is not necessarily unfair. But here the contractual right to the benefit was "very relevant indeed" as part of the circumstances against which the reasonableness of the employer's actions were to be judged. Given this, the employer conceded that the original tribunal's conclusion that the employee's dismissal was fair, and that it was a proportionate means of achieving a legitimate aim, could not stand. The EAT therefore remitted these questions to a fresh tribunal for reconsideration.

The key message for employers who provide contractual PHI benefits to their employees via an insurance scheme is to look carefully at how those contractual entitlements are defined. It is strongly advisable to specify in the contract that the benefit is subject to the terms of the insurance scheme from time to time in force and that the employer’s liability to provide the benefit is discharged if the insurer refuses to pay out under the PHI scheme. Employers should also consider including an express right to terminate for incapacity even where the employee may be entitled to or is already in receipt of PHI benefits, although they should bear in mind that such clauses require careful drafting and may be difficult to enforce. And, given the EAT’s comment on the relevance of the contractual position to the fairness of the dismissal, employers considering dismissal of an employee on PHI should seek advice, and always take care to follow a fair process. These points are equally applicable in relation to the right to company sick pay.

Vicarious liability – employer liable for employee’s malicious and criminal disclosure of personal data

The Morrisons case hit the headlines when the Court of Appeal decided that Morrisons was vicariously liable for the criminal actions of an employee who had maliciously disclosed the personal data of nearly 100,000 Morrisons’ employees on the internet.

The employee in question had worked for Morrisons as an internal auditor and his duties included providing sensitive payroll data to the company’s external auditors. Aggrieved by an unrelated disciplinary decision, the employee took a copy of the data on a USB drive, then published it on the internet and sent it to several newspapers, with the intention of damaging Morrisons’ reputation. The employee was convicted of various criminal offences in relation to his actions and sentenced to eight years in prison. A number of affected Morrisons staff whose data had been published brought a claim against Morrisons, alleging that it had breached the Data Protection Act 1998. The High Court rejected this claim, but held that Morrisons was vicariously liable for the actions of its rogue employee.

Morrisons’ appeal against this decision was unsuccessful. The Court of Appeal held that there was a sufficient connection between the employee’s role and his wrongful conduct; it did not matter that the employee had not been at work when he had published the data. The Court expressed concern that the employee’s intention had been to harm Morrisons, but followed existing case law authority which established that a wrongdoer’s motive is irrelevant to determining vicarious liability.

Although the court applied established legal principles on vicarious liability, this decision has caused concern for employers. This is because Morrisons was held liable despite the fact that the employee had set out to do it harm, and that Morrisons itself was found not to have been to blame for any data protection breach. Given individuals’ increased awareness of their rights in relation to their personal data under the General Data Protection Regulation (GDPR), including the right to bring a claim for damages, employers may well worry that this decision could prompt claims by staff and customers in the event of data breach caused by a rogue employee.

Morrisons has said that it plans to appeal the decision to the Supreme Court. In the meantime, employers can try to reduce their risk by ensuring that their data protection policies are carefully drafted and that they are rigorously applied in practice. In addition, following the recommendation of the Court of Appeal in this case, employers should consider taking out cyber insurance that covers not just system failures and employee negligence, but also actions by dishonest or malicious employees.

Notice of termination – notice sent by post takes effect when employee has read it, or has had a reasonable opportunity to read it

In Newcastle upon Tyne Hospitals NHS Foundation Trust v Haywood, the Supreme Court considered when notice of termination of employment that is sent by post starts to run.

The employee was dismissed by the Trust by reason of redundancy. Under her employment contract, she was entitled to 12 weeks’ notice of termination, but the contract did not specify how notice was to be given. On 20 April, the Trust sent a dismissal letter to the employee’s address. However, the Trust was aware that the employee was away on holiday at that time. The employee returned from holiday and read the letter on 27 April. Under the pension scheme of which the employee was a member, she would be entitled to an unreduced early retirement pension if she remained an employee when she turned 50. The employee’s 50th birthday was on 20 July. The question of when notice began to run was therefore important in this case because, if the employee’s 12 weeks’ notice only began to run on 27 April, she would still be employed on 20 July and would accordingly be entitled to the unreduced pension.

The Supreme Court held that notice began to run on 27 April, stating that – in employment cases – notice only takes effect when it has actually been received by the employee and the employee has either read or had a reasonable opportunity of reading it. In the Supreme Court’s view, an employer wishing to avoid situations such as that in the present case could either make express alternative provision in the employment contract or ensure notice of termination was received in sufficient time to allow the employment to terminate on a specified day.

Following this case, employers wishing to terminate an employee’s employment by a specified date in order to avoid triggering liability for a significant benefit should take care to ensure that they serve notice sufficiently far in advance that the employee will have read it – or at least had reasonable opportunity to read it – in time for it to expire before the benefit trigger date. While we would not necessarily recommend amending the contracts of existing employees, it would be worth considering whether to include in contracts for new hires specific provision as to when notice sent by post will begin to run.

Other legal developments

There have also been some significant employment law developments away from the courts and tribunals in 2018, which we consider below.

EU General Data Protection Regulation (GDPR) and UK Data Protection Act 2018 (DPA 2018)

On 25 May 2018, the GDPR came into effect, along with the DPA 2018, which supplements the GDPR with an extra layer of UK specific rules. Many of the principles applicable to the processing of personal data remain the same as under the previous law (the EU Data Protection Directive, which was implemented in the UK by the Data Protection Act 1998). However, the GDPR and DPA 2018 have really upped the ante in terms of compliance requirements for employers – for example:

  • More detailed privacy notices to inform employees about how you process their personal data, including a requirement to identify what legal basis you are relying on for the various types of data processing you carry out (and, for certain types of personal data, this has been tricky, as employers are no longer able to rely on employee consent as their legal basis for processing).
  • Enhanced individual rights, with a reduced timeframe for responding and an increase in the amount of information you must include when you respond to Subject Access Requests, as well as new rights such as the right to be forgotten.
  • Increased documentation requirements, including a mandatory record of processing detailing how you process personal data, and an “appropriate policy” as an additional safeguard for processing special category data under the DPA 2018.
  • Mandatory reporting of personal data breaches to the ICO, unless the breach is unlikely to result in a risk to the rights and freedoms of individuals – and notification of breaches to affected individuals if the breach gives rise to a high risk.

These changes were well publicised and many employers were caught up in a flurry of activity in the run-up to the GDPR’s entry into force, as they tried to get their data protection house in order and put in place essential compliance documentation. After all that, employers could be forgiven for thinking the hard work was over. However, in practice, the GDPR and DPA 2018 affect numerous everyday HR activities on an ongoing basis and employers need to take care to have data protection in mind across their HR practices.

Our hugely popular GDPR seminar series continues throughout January 2019. The latest instalment, Practical GDPR for HR professionals: what will change in your day job?, explains how the GDPR and DPA 2018 will affect everyday HR activities and provides detailed guidance on responding to Subject Access Requests and reporting personal data protection breaches.

Taxation of termination payments

On 6 April 2018, the law on the taxation of termination payments was changed so that, for all terminations taking place after that date, income tax and National Insurance Contributions (NICs) must be paid in relation to any payment in lieu of notice, (regardless of whether there is a contractual right to pay in lieu, or not).

An employer making a “relevant termination payment” to an employee (i.e. any payment or benefit which compensates that employee for the ending of their employment, excluding any statutory redundancy payment), is required to apply a statutory formula to calculate the element of such a termination payment that constitutes “Post-Employment Notice Pay” (PENP) as defined in the legislation. Broadly speaking, PENP equates to the basic salary the employee would have received during any unworked period of notice. PENP is always subject to tax and NICs but any remaining balance of the termination payment, over and above PENP, can be paid tax-free up to £30,000.

The change to the law was intended as a simplification measure, to ensure that payments in lieu of notice were treated the same for tax purposes regardless of whether there is a contractual pilon clause. However, employers have so far found it tricky to get to grips with the operation of the necessary statutory formula and are finding that it applies in some unexpected situations, such as when settling potential claims from employees dismissed for gross misconduct. In order to avoid the risk of an unexpected tax charge causing a deal to fall through just as a settlement agreement is ready to be signed, employers must be careful when making a settlement offer that they specify that it may be subject to tax and NICs under the PENP legislation.

EEF members can access support on the preparation of settlement agreements – including a helpful spreadsheet that we have developed to conduct the PENP calculation for them. All the member needs to do is insert the relevant numbers!

So, how can EEF help?

As ever, EEF are here to help our members navigate the compliance challenges thrown up by recent legal developments.

We are offering an employment law ‘spring clean’ to help you ensure that your handbook, policies and procedures are up-to-date and compliant as we head into 2019. This also includes consideration of whether any updates to policies are required as a result of the GDPR and DPA 2018.

For more information on how we can help, call our HR team on 0808 168 5874 or email [email protected].

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