Secretary Of State For Employment v Thompson [1994] UKEAT 313_94_0912

EAT
Secretary Of State For Employment v Thompson
[1994] UKEAT 313_94_0912 · 1994-12-09
MR JUSTICE MUMMERY (PRESIDENT) This appeal concerns the calculation of compensatory notice pay payable to an employee of an insolvent employer out of the National Insurance Fund by the Secretary of State for Employment under S.122(3)(b) of the Employment Protection (Consolidation) Act 1978.The facts are undisputed. Mr Thompson was Manager of design engineering at Swan Hunter Ltd of the Swan Shipbuilding and Engineering Group Ltd at Newcastle-upon-Tyne from 7th August 1967 until 28th May 1993 when Swan Hunter became insolvent and Mr Thompson's employment was terminated without notice.On 21st June 1993, Mr Thompson obtained new employment as a Senior Ship Surveyor with LLoyds Registry at Fenchurch Street in London. On his move to London he lived in a flat in Greenwich, leaving his wife and two sons living at their house in Wallsend.Mr Thompson made a claim for compensatory notice pay under S.122 of the 1978 Act. The material parts, as amended, provide as follows:-
"(1) If on an application made to him in writing by an employee the Secretary of State is satisfied - (a) that the employer of that employee has become insolvent; and

(aa) that the employment of the employee has been terminated; and

(b) that on the relevant date the employee was entitled to be paid the whole or part of any debt to which this section applies,the Secretary of State shall, subject to the provisions of this section, pay the employee out of the National Insurance Fund the amount to which, in the opinion of the Secretary of State, the employee is entitled in respect of that debt....

(3) This section applies to the following debts:-

(a) ...(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) ..."The Secretary of State paid the sum of £177.88 to Mr Thompson. The sum was calculated on the basis that Mr Thompson's length of service entitled him to 12 weeks' notice at the rate of £412.86 a week. His gross claim therefore amounted to £4,954.32. The net amount that was in fact paid to him was the result of making the following deductions.

(1) £4.605.59 - gross earnings with Lloyds Registry during the notice period

(2) £ 111.60 - unemployment benefit.Those two sums made a total income of £4,717.19 which was then deducted from the gross sum claimed of £4,954.32 to produce a figure of £237.13. There was then deducted from that tax of £59.25 which Mr Thompson would have had to pay during the relevant period.

The dispute

Mr Thompson disputed the calculations of the Secretary of State. He did not dispute the basic principles that the claim against his employer for 12 weeks' notice pay at the rate of £412.86 a week was a claim for damages for breach of his contractual right to receive the statutory notice or that he was under a duty to mitigate his loss by seeking available Social Security payments and similar employment and that deduction should accordingly be made in respect of benefits which he received from those sources during the 12 week notice period.Mr Thompson's complaint was that the calculation made by the Secretary of State was legally erroneous for the following reasons:-

(1) London Allowance

His salary with Lloyds Registry included a London Allowance of £3,260 attributable to the higher cost of working in London. This element, he contended, should not have been included in his gross income for the 12 week notice period. It is not part of his pensionable salary and would be removed if he was sent to work in another part of the country.

(2) Private medical insurance benefits

At Swan Hunter Mr Thompson and his wife had the benefit of private medical insurance. At Lloyds Registry there was private medical insurance provided only for him. The calculations made by the Secretary of State did not take this element into account. Mr Thompson contended that the taxable benefit of the private medical insurance should have been added to his gross claim of £4,954.32 and there also should have been included in the sum deducted from the gross claim the value of taxable benefit of private medical insurance attaching to his new employment with Lloyds Registry.

(3) New job expenses

The gross earnings of £4,605.59 had in fact been diminished by expenses incurred in the notice period and that had not been reflected in the size of the sum deducted by the Secretary of State from the gross claim. Too much had accordingly been deducted from the gross claim. Although Mr Thompson accepted that he had incurred no expenses in obtaining his new job (eg, expenses of interviews, medical examination and relocation) because he had been reimbursed for those expenses by his new employer, he did incur expenses during the notice period in the form of travelling expenses in going to see his family at Wallsend.

The Proceedings

A summary of the proceedings is required for an understanding of how the issues are presented on this appeal.(1) In his Originating Application presented on 29th November 1993, Mr Thompson claimed an adjustment of compensation for his insolvent employer's failure to give him proper statutory notice; to take account of the inclusion of the London Allowance in his gross earnings with Lloyds Registry, the less advantageous position regarding free private medical insurance and the additional expenditure incurred by him in living away from home.(2) In his Notice of Appearance the Secretary of State disputed liability to make any further payment to Mr Thompson in respect of notice pay and put him to proof of the extent of any further entitlement. The Secretary of State's reasons for his position were more fully explained in written representations made to the Tribunal for the purpose of the hearing held at Middlesborough on 7th February 1994. Neither party appeared or was represented at the hearing. In particular, the Secretary of State submitted that the calculations made by him correctly treated the London Allowance element in Mr Thompson's new job as earnings which would have to be mitigated against the notice payment.(3) In extended Reasons notified to the parties on 15th February 1994, the Industrial Tribunal unanimously decided that the Secretary of State should pay to Mr Thompson a further sum calculated as follows:-(a) By adding to the gross claim of £4,954.32 the taxable benefit of the private medical insurance enjoyed by Mr Thompson in his employment with Swan Hunter;(b) By deducting from the gross claim the taxable benefit of the private health insurance attaching to Mr Thompson's employment;(c) By deducting from his gross earnings of £4,605.59 during the notice period the proportion of that sum representing his London Allowance, together with any expenses incurred by him in obtaining his new job.

(4) The Tribunal's conclusion was reached by reasoning that -

"...the net gain to Mr Thompson in his new job with Lloyds Registry in London is his salary less the additional cost of working in London, in respect of which the London Allowance has been granted as the estimated compensation. ..."
The Industrial Tribunal cited a passage from the speech of Lord Bridge in Westwood v. Employment Secretary [1985] ICR 221 to support that conclusion, as well as reinforcing the further decision that
"Mr Thompson should be allowed to deduct the expenses he incurred in acquiring his new job."
As already indicated the Tribunal also found in Mr Thompson's favour on his argument in respect of private health insurance benefits in his two employments.(5) The Secretary of State appeal by Notice of Appeal dated 29th March 1994. He also sought a review of the decision which was granted on 26th August 1994. At the review hearing Mr Thompson attended in person and the Secretary of State was represented by Counsel. In extended Reasons notified on 14th September 1994, the Tribunal revoked its earlier decision on the matter of private health insurance on the ground advanced on behalf of the Secretary of State that the taxable benefits of private medical insurance were benefit in kind and did not form part of Mr Thompson's remuneration for the purpose of calculating a week's pay. The Tribunal also revoked its earlier decision on the question of Mr Thompson's expenses, as Mr Thompson informed them that his expenses incurred in obtaining the new job had been reimbursed by Lloyds Register. The Tribunal refused to revoke its earlier decision in respect of the London Allowance, though it accepted that it
"..formed part of Mr Thompson's remuneration from his employment with Lloyds Register in London ..."

and again cited a passage from Lord Bridge's speech in the Westwood case -

"A plaintiff who has suffered damage need only account by way of mitigation for the net gain accruing to him of a kind properly to be taken into account, and which he would not have received but for the tort or breach of contract giving rise to his damage. ..."
(6) By Notice of Appeal dated 25th October 1994, Mr Thompson appealed against the Tribunal's variation of its earlier decision in his favour. Mr Thompson did not attend the hearing of the appeal nor was he represented. He did, however, make a written submission.Mr Robert Jay, who did not appear as counsel before the Tribunal, represented the Secretary of State. He has assisted the Appeal Tribunal by making full submissions on all aspects of the appeal.

Conclusions

In our judgment, the Secretary of State's appeal on the London Allowance point should be allowed and Mr Thompson's appeal on the private medical insurance and expenses points should be dismissed.

The reasons for our decision are as follows:-

(1) The London Allowance point

Swan Hunter was liable to pay Mr Thompson damages for loss of earnings suffered by Mr Thompson as a result of their breach of contract in failing to give him the 12 weeks statutory notice. Mr Thompson was under a duty to mitigate that loss. By way of mitigation he was bound to account for "the net gain accruing to him of a kind properly to be taken into account" as described by Lord Bridge in the Westwood case. The net gain accruing to him, which he would not have received but for the breach of contract, was the remuneration paid to him during the notice period in the form of salary by Lloyds Register. The salary for his new employment included a London Allowance. That allowance is an element of enhancement to his salary. It is received by him as part of his remuneration from that employment. Although the higher cost of working in London is the reason for the making of a London Allowance, that fact does not affect the character of the sums paid in the hands of Mr Thompson as earnings, which he must bring to account for the purposes of determining the amount which Swan Hunter was liable to pay him in damages and which the Secretary of State in turn was bound to pay him in pursuant to the 1978 Act. The passage quoted by the Tribunal from the speech of Lord Bridge in the Westwood case emphasises the duty "to account for net gain". In our view, however, the Industrial Tribunal misinterpreted and misapplied that section to the facts of this case. The passage cited from Lord Bridge's speech was in a very different context. The question in that case was whether the Secretary of State was entitled to deduct from the notice payment the full amount of the unemployment benefit and earnings related supplement received by the employee during the notice period. The House of Lords held that there should only be deducted from the gross sum claimed the net gain to the employee in the benefits received. The sum in that case was not the actual benefit received during the 12 weeks notice period but "the lesser sum received as supplementary benefit after the premature expiry of the employment benefit and earnings related supplement period occasioned by the wrongful dismissal" (221G). The deduction was limited to the 12 weeks supplementary benefit paid after the unemployment benefit period had expired. The reason for this was that the receipt of the two classes of benefit were not pure gain to the employee. If the employer had fulfilled his obligation to pay wages in lieu of notice, the employee would not have been entitled to those benefits during the notice period and would, therefore, have been able to claim them up to 12 weeks later than the dates on which they in fact ended. The decision therefore turned on the scheme of the benefits in question. The employer's breach had obliged the employee to claim unemployment benefit and earnings related supplement to which he only had limited entitlement and he received less than if the employers had given him notice. The reference in Lord Bridge's speech to "net gain" was in the context and scheme of statutory unemployment and supplementary benefits. The real relevance of the Westwood case to the present case is that it confirmed the legal position that an employee dismissed without the minimum statutory notice to which he was entitled may recover damages for breach of contract, but is under a duty to mitigate those damages. It was also decided , on a point not directly relevant to the present case, that unemployment benefits were to be deducted in mitigation of damages due to an employee wrongfully dismissed. They are deductible because they are a substitute for earnings for the unemployed and, unless deducted, would lead to a windfall in the form of double compensation for the employee during the period of notice. The particular observations of Lord Bridge were concerned with the special position regarding state benefits. The effect of the employer's breach of contract was that the employee received the benefits 12 weeks earlier than he would have done if he had received the notice to which he was entitled. So they were exhausted 12 weeks earlier than would otherwise have been the case. In those circumstances the employee suffered a loss which was not too remote to be taken into account in deciding what should be deducted for benefits received.

(2) Private medical expenses

The Tribunal's legal reasoning on this point is correct. Damages for breach of contract, in the form of failure to give the required notice, are damages for loss of remuneration which would have been paid during the notice period. If, in discharge of the duty to mitigate, the employee has received remuneration from another source that will reduce the amount of remuneration which he has lost as a result of the breach of contract. We agree with the Tribunal that the benefit of private medical insurance with Swan Hunter and Lloyds Register was a benefit in kind. Neither benefit forms part of the calculations to be made in respect of the gross claim and the income which is to be deducted from it. The reasoning in S & U Stores Ltd v. N Wilkes [1974] ICR 645 at 649 (a case on the calculation of a redundancy payment) is in point. Payment in kind does not count as part of a week's pay for the purposes of the statutory provisions and should not be regarded as part of the remuneration which Mr Thompson would have received had be remained in the employment of Swan Hunter or as part of the remuneration which he in fact received during his employment by Lloyds Register in the notice period. See section 49, (50)(1) and S.51 and Schedule 3 to the 1978 Act.

(3) Expenses

The Secretary of State accepts that a wrongfully dismissed employee is entitled to set off against any earnings in his new job deducted from the damages claimed by him reasonable expenses of travelling and advertising incurred in obtaining that new job: see the Westwood case (supra) at 221F. Before the Tribunal, Mr Thompson accepted that, as regards those expenses, he had been reimbursed by Lloyds Register. There were no deductions to be made in respect of them. In his written submissions lodged on this appeal he contends that there should be deducted from the amount received by him in his new employment during the period of notice what he describes as "ongoing expenses" incurred by him for housing and visiting home at Wallsend. He submitted that these costs should be regarded as expenses incurred in obtaining a new job and that the Tribunal were wrong in ignoring the ongoing expenses and disruption associated with the new job. He gives a breakdown of the expenses incurred, later amended in a letter dated 29th November 1994. He considers that these should be offset against his gross salary for the 12 week notice period.In our view, Mr Thompson's submissions are wrong. They lose sight of the purpose of the mitigation calculations. The purpose of the calculations is to determine what deduction should be made from the compensation for failure to give him 12 weeks' notice. The claim is for loss of remuneration which he would have been paid during that period if he had been given notice. The remuneration received from other sources in that period must be deducted from that claim, since otherwise he would receive double pay. Money which he has spent to secure alternative remuneration is an expense incurred by him in mitigating the loss and should be allowed. That rationale does not extend to ongoing expenses incurred in connection with the new job. They are too remote to be regarded as expenses in the mitigation. The expenses now claimed by Mr Thompson are not expenses incurred in obtaining a new job. They are expenses which he has suffered because he has chosen to take a job which involves him living in London and leaving his family in Wallsend. They are not relevant to mitigation.For those reasons, the Secretary of State's appeal is allowed and Mr Thompson's appeal is dismissed.