CERBERUS SOFTWARE LTD v MR J A ROWLEY [1999] UKEAT 1023_98_1407

EMPLOYMENT APPEAL TRIBUNAL
BAILII case number: [1999] UKEAT 1023_98_1407Case No Appeal No. EAT/1023/98Venue 58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS
Between
CERBERUS SOFTWARE LTDAPPELLANTMR J A ROWLEYRESPONDENT
Before
Mr Justice MorisonLord Gladwin of CleeDate 14 July 1999
[1]APPEARANCES For the Appellants MR M DINEEN (of Counsel) Blatch & Co Solicitors 7 Salisbury Road Totton Hampshire SO40 3HW For the Respondent THE RESPONDENT IN PERSON MR JUSTICE MORISON (PRESIDENT) : This case raises an interesting point of law: what is the legal effect of an employer's contractual entitlement to terminate a contract of employment summarily on payment of monies in lieu of notice.[2]The facts are in short compass. The applicant was employed by the respondents from 1 March 1994 to 26 June 1996, when he was summarily dismissed. He complained that he had been dismissed without good cause and brought an application before the Employment Tribunal claiming damages for wrongful dismissal [breach of contract]. He was contractually entitled to 6 months' notice. The Employment Tribunal upheld his complaint, and there is no appeal against that decision. This appeal is against the Tribunal's award of compensation. The applicant obtained alternative employment at a higher rate of pay from 1 August 1996, some five weeks into his notice period. Were the employers liable to pay 6 months pay in lieu of notice or were they entitled to take advantage of the employee's mitigation of his loss? That was the question which gives rise to this appeal.[3]There is no doubt that, in the normal course of events, the damages to which a wrongfully dismissed employee is entitled is the loss of the remuneration package which he would, but for his dismissal, have received during the period of notice, less any earnings or other employment related benefits which the employee actually received during that period. By that measure, the employee is put into the position he would have been in had his employers terminated the employment without breach, namely on full notice; it being assumed that the employers would have performed the contract in the way most favourable to themselves.[4]The question in this case must be answered primarily by reference to the proper interpretation of the terms of the contract of employment. In the course of argument counsel referred to three reported decisions: one from the House of Lords; two from the Court of Appeal. In the end, we have not been persuaded that these cases bear directly on the point at issue, but they appear to establish a line of authority which causes some concern to the members of this Court. The Lay Members have considerable experience of employment relations.[5]Clause 18 of the contract provides:
"Employment under this contract shall continue unless and until determined by the Employer under Clause 17 above and Appendix 1 or by either party giving to the other not less than six months notice of termination. Notice may only be given as to expire at the end of a monthly pay period. It is agreed that the Employer may make a payment in lieu of notice to the Employee. The Employee shall not be entitled to any other benefit other than pay or money in lieu of such benefits in respect of any period for which he has been paid in lieu of notice."
Clause 17 is concerned with disciplinary procedures, and neither it nor Appendix 1 has any application to the facts of this case.[6]The Employment Tribunal concluded that the respondent employer:
"has failed to satisfy the tribunal that there was any conduct on the part of the Applicant which justified his summary dismissal without notice. When he was dismissed on 26 June 1996, therefore, the Applicant was entitled to 6 months' notice expiring at the end of a monthly pay period, i.e. on 31 December 1996."
The tribunal then said this at paragraph 8 of their Extended Reasons:- "The Applicant obtained alternative employment ... from 1 August 1996, but the Tribunal rejects the Respondent's claim that the Applicant is under a duty to mitigate his loss by giving credit for his earnings from his new employers. Where, as in this case, the contract of employment expressly provides that the employment may be terminated by the employer on payment of a sum in lieu of notice, a summary dismissal is a lawful act rather than being a breach of contract. In such circumstances, the duty to mitigate damage, including the obligation to give credit for actual earnings, does not arise because the claim for payment in lieu of notice is a claim for a sum due under the contract rather than for damages for wrongful dismissal: Abrahams v Performing Rights Society [1995] IRLR 487." Accordingly, the tribunal did not take account of the employee's substitute earnings during the period from the beginning of August to the end of December 1996.[7]The employers appealed. It was their contention that the contract did not give the employee the right to require a payment in lieu of notice; rather the employer had the option to make such a payment if he wished. The employer, thus, had three choices: to give notice, to give no notice but pay monies in lieu of notice or give no notice and make no payment. In the second case the employee would have been lawfully dismissed (not in breach of contract) and the employee would be entitled to the monies without deduction, but in the third case the employers would have wrongfully dismissed the employee and the normal rules as to calculation of damage and mitigation of loss would apply. The employers in this case, it was argued, had taken the third option, and the benefits the employee received from his other employment were to be taken into account.[8]On the employers' behalf, Mr Dineen, in an able and sustained argument, submitted that this case could be distinguished from the Abrahams decision since in that case the employee had a right to be paid monies in lieu of notice; whereas in this case the employee had no right to such a payment, as the employers had a choice or sole discretion whether to make one or not. He further submitted that this case was closer to the facts in Gregory v Wallace [1998] IRLR 387 . He said that this case fell into category (2) of the four categories referred to by Lord Browne-Wilkinson in Delaney v Staples [1992] ICR page 483 .[9]For his part, Mr Rowley, in person, submitted that the tribunal's decision was correct. He said it was his understanding that he would either be given notice or, if he was dismissed without notice, he would have the security of a payment in lieu paid to him 'up front' and without regard to his actual losses. Decision[10]The question at issue in the Delaney case was whether a payment in lieu of notice represented 'wages' within the meaning of the Wages Act. Could an employee claim as an unlawful deduction from wages an employer's failure to pay a week's pay in lieu of notice? The employee had been given a cheque for the relevant amount but it had been stopped when the employers thought that they had discovered that their employee had broken the contract. The ratio of the judgment is to be found at page 492G: monies in lieu of notice would not on the facts of that case constitute wages within the meaning of the Wages Act.[11]But in giving the judgment on behalf of the Committee, Lord Browne-Wilkinson, said, in a passage which is technically obiter ,:
"The phrase "payment in lieu of notice" is not a term of art. It is commonly used to describe many types of payment the legal analysis of which differs. Without attempting to give an exhaustive list, the following are the principal categories. (1) An employer gives proper notice of termination to his employee, tells the employee that he need not work until the termination date and gives him the wages attributable to the notice period in a lump sum. In this case (commonly called "garden leave") there is no breach of contract by the employer. The employment continues until the expiry of the notice: the lump sum payment is simply advance payment of wages. (2) The contract of employment provides expressly that the employment may be terminated either by notice or, on payment of a sum in lieu of notice, summarily. In such a case if the employer summarily dismisses the employee he is not in breach of contract provided that he makes the payment in lieu. But the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work to be done under the contract of employment. (3) At the end of the employment, the employer and the employee agree that the employment is to terminate forthwith on payment of a sum in lieu of notice. Again, the employer is not in breach of contract by dismissing summarily and the payment in lieu is not strictly wages since it is not remuneration for work done during the continuance of the employment. (4) Without the agreement of the employee, the employer summarily dismisses the employee and tenders a payment in lieu of proper notice. This is by far the most common type of payment in lieu and the present case falls within that category .... the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work done under the contract of employment."
[12]It seems, therefore, that apart from the first category, payments in lieu of notice are not wages within the meaning of the Wages Act, since wages are monies earned by reason of performing services under the contract and in none of those cases was the employment relationship in existence in respect of the period for which the payment was made.[13]We have not found this categorisation easy to follow. In the first place, none of us has ever encountered a position where the employer makes an advance payment of salary to an employee on garden leave: category (1). We assume that what was contemplated was a payment net of tax, because otherwise the payment would indicate that the employment relationship had terminated. The essence of garden leave is that, in theory, it enables the employer to keep an employee away from his place of work during his notice period whilst at the same time keeping the contract of employment in existence, thus preserving the covenants in restraint of trade. So long as the employment contract remains in existence the employee cannot take another job for a competitor. Provided that the employer does not repudiate the contract, the covenants against competition post employment, may remain enforceable. Against that background, it is our experience that no employer would want to make a one-off payment in advance of garden leave; on the contrary, the employer will wish to make monthly payments of wages in exactly the same way as when, and as if, the employee was working. We find it difficult to understand, in any event, how a payment would be expressed to be "in lieu of notice" when notice was given and the employee was still employed.[14]In relation to category (3), it is not clear how the employment has come to an end. Reference is made to a summary dismissal. A summary dismissal followed by a payment in lieu of notice would appear to fall within category (4). The alternative suggestion that there is both a summary dismissal and no breach of contract must be on the basis that the employee has consented or agreed to it; in which case it is difficult to perceive a distinction between this category and category (2). In category (2) the contract provided for this type of dismissal; in category (3) the parties made an ad hoc agreement to the same effect. In any event, an agreed termination would not be a dismissal.[15]It is category (2) which has given rise to difficulty and to the two cases [and others] in the Court of Appeal. The Court has accepted that the exercise by the employer of a contractual provision entitling him to dismiss summarily, on payment of monies in lieu of notice, would be a lawful termination of the contract. If the dismissal is not wrongful, then the covenants in restraint of trade will remain extant and the monies in lieu of the notice which the employer was not contractually obliged to give, is, presumably, a debt, or perhaps, some kind of liquidated damages although there has been no breach. It is doubtful if the existence of a promise to pay monies in lieu of notice is essential to the proposition that where a contract permits the employer to terminate the contract summarily the employer does not break the contract when he exercises that right. Section 86 of the Employment Rights Act 1996 provides for statutory minimum periods of notice, calculated by reference to the employee's years of service. This protection for employees has been in existence since 1963. It was designed to protect employees from an abuse of the employer's superior bargaining position at the commencement of the employment relationship. Employment at will has unattractive consequences for the employee, although such a position is familiar in other jurisdictions. This statutory protection was one of the first in a line of statutes designed to protect employees from exploitation and unfairness at work. In many ways it lies at the heart of the code of statutory protection. Section 86(3) provides:
"Any provision for shorter [ than the statutory minimum ] notice in any contract of employment with a person who has been continuously employed for one month or more has effect subject to subsection (1) and (2) [ the statutory minima ]; but this section does not prevent either party from waiving his right to notice on any occasion or from accepting a payment in lieu of notice."
[16]As we understand this provision, where there is an applicable statutory minimum period of notice, any contractual provision will be modified so as to give effect to the statutory minimum. However, the parties would be free to agree to accept no notice, on an ad hoc basis, and an employee could accept monies in lieu of notice. It seems to us that it would be inimical to the protection which this section was designed to achieve if the employer could insist on putting into the contract an entitlement lawfully to terminate it summarily on payment of monies in lieu. The employee is entitled to insist on at least the statutory notice, which, if not given, will result in an action for damages. In other words, without deciding the point, and without reference to other authorities, the category (2) case would infringe the statutory protection whereas the category (3) case would not. As we understand the position, employers want the option of a lawful summary dismissal so that the restrictive covenants apply without the employee being on the premises, or on garden leave, whilst under notice.[17]In the absence of authority we would have concluded that Lord Donaldson of Lymington MR was correct when he stated the position to be:
"If a man is dismissed without notice, but with money in lieu, what he receives is, as a matter of law, payment which falls to be set against, and will usually be designed by the employer to extinguish, any claim for damages for breach of contract, i.e. wrongful dismissal. During the period to which the money in lieu relates he is not employed by the employer."
[18]In this case, it seems to us that the parties could readily have agreed, on an ad hoc basis, to a termination of the contract on payment of monies in lieu of notice. It is the experience of the Lay Members that such is a regular occurrence. Paying money in lieu has advantages for both parties: for the employer, he does not have to continue to employ a person who might be a reluctant worker under notice and who might have access to sensitive information which has only a limited shelf life; for the employee he receives the money gross (it costs the employer no more than the salary and PAYE and NIC) and may not have to pay tax on it, and he receives the money 'up front' on departure or shortly thereafter so that the employer is giving up a right to pay less damages were the employee to obtain alternative employment during the notice period. But that, it seems to us, is a different situation from the employer requiring the employee effectively to give up his statutory right to a minimum period of notice by insisting on a clause to that effect in the contract of employment. In the former case, if there is a dismissal rather than a consensual termination of the contract, the contract is broken but full compensation is paid. In the second case, it would appear that the contract is not broken because the giving of a notice was not required by the contract[19]However, it seems to us that it cannot now be argued, short of the Court of Appeal or House of Lords, that an employer breaks the employment contract by exercising a contractual right to terminate it without notice but on payment of monies in lieu. We would hope that in due course the Court of Appeal will have the opportunity to re-visit this point having regard to the purpose and intention behind section 86 of the Employment Rights Act 1996 .[20]In this case, the outcome of the appeal does not depend upon whether the employers were or were not entitled lawfully to terminate the contract without notice. As we read the contract the employer had two choices, where he was not entitled to bring the contract to an end through misconduct: namely, either to give notice, or to give no notice but pay monies in lieu of notice. We reject the submission that there was a third choice. Nothing in the contract suggests that that is so; and there would be no need to imply such a term [indeed, it would not be appropriate to imply any term which permitted a party to a contract to commit a serious breach of its terms]. The obvious interpretation of the contract is that by clause 18 the employee was being given the protection of a notice period or, otherwise, a payment 'up front' regardless of any mitigation. If the employer chose to give no notice, then the employee was entitled to be paid in lieu. It is known to be the case that it is more difficult to find alternative employment whilst out of work than whilst in work. Payment in lieu, with the concomitant implication that the employee would have all his money in hand during what would have been his notice period, would be regarded as a palliative to the disadvantage of seeking other employment whilst unemployed. Had the employer wished, he could have made no mention of the right to terminate without notice, leaving the employee with his common law rights.[21]Thus, whether or not the employer broke the contract by the summary dismissal itself, he was in breach by not paying monies in lieu of notice, which is what he had promised to pay in the event of such a termination. The monies in lieu of notice mean monies without deduction for mitigation. Either the monies in lieu were claimable as monies due under the contract or as damages for breach of contract. If the claim was truly for damages for breach, then he was entitled to be put into the position he would have been in had the breach not been committed: namely to receive the whole of his monies in lieu of notice without deduction. In neither event would the employer have been entitled to receive the benefit of the employee's mitigation of his damage; because the employer had promised to pay the whole sum and the breach was the non-payment of the sum due.[22]It seems to us, therefore, that there is neither merit nor legal support for the appellant's case and the appeal will be dismissed.