NORTH LANARKSHIRE COUNCIL v APPELLANTS (RESPONDENTS) [2007] UKEAT 0036_06_2303

EMPLOYMENT APPEAL TRIBUNAL
BAILII case number: [2007] UKEAT 0036_06_2303Case No Appeal No. UKEATS/0036/06Venue 52 MELVILLE STREET, EDINBURGH, EH3 7HF
Between
NORTH LANARKSHIRE COUNCILAPPELLANTS (RESPONDENTS)MR J MCDONALD FIRSTFIRST RESPONDENT (FIRST CLAIMANT)MR C THOMSON(SECOND RESPONDENT (SECOND CLAIMANT)
Before
Lady SmithDate 23 March 2007
[1]APPEARANCES For the Appellants MR J A PEOPLES QC Instructed by: North Lanarkshire Council Legal Services P O Box 14 Civic Centre Motherwell ML1 1TW For the Respondents MRS R BLAIR Legal Executive Messrs Thompsons Solicitors Berkeley House 285 Bath Street Glasgow G2 4HQ SUMMARY Incorporation into Contract Implied Term/Variation/Construction of term Claimants employed as chargehand drivers of "hit squads". At start of their contracts, though they worked 2½ hours overtime each week, it was not contractual overtime. Just over a year after the start of their contracts, a new contract was agreed which incorporated the overtime as contractual overtime. Claimants argued that overtime had become contractual prior to the new contracts. Circumstances in which the Tribunal held that by one week prior to the new contracts, the overtime had become contractual and in which the Employment Appeal Tribunal held that the Tribunal had erred in law in so holding. THE HONOURABLE LADY SMITH INTRODUCTION The respondents presented a claim to the Employment Tribunal in which they alleged that they had suffered unauthorised deductions from wages. The issue which gave rise to the claim was that of whether certain overtime hours regularly worked were contractual or non-contractual. The resolution of the issue had implications not only for determining the extent of the claimant's relevant contractual entitlement but for the calculation of certain compensatory payments that might be due under a "red circling" agreement that had been entered into.[2]The Tribunal found:
"…on 17 February 2004 both claimants in these proceedings were employed under a contract of employment in which there was an implied term of entitlement to payment for 2.5 hours overtime in each working week, and an obligation on the part of the claimants to work said overtime."
They continued the proceedings to allow for "implementation of a negotiated agreement incorporating reference to an agreement in these terms".[3]The respondents (to whom I propose to refer as claimants) were represented before the Tribunal by Mr S Foley of T & G Scotland and by Mrs R Blair before this Tribunal, and the appellants (to whom I propose to refer as respondents) were represented by Ms C Pender before the Tribunal and by Mr Peoples QC before this Tribunal. Background Facts[4]The claimants were employed as chargehand drivers in charge of the respondents' "hit squads" whose job it was to attend to emergency road repairs, environmental repairs and suchlike. They were both appointed in terms of contracts which provided a date of appointment of 10 February 2003 at which time "hit squad" working was introduced as a new way of working. When appointed they were both asked to extend their working day by 15 minutes in the morning and 15 minutes at the end of the day. The purpose of the extension at the start of the day was to enable the claimants to carry out the requisite first line servicing on their vehicles so that they were ready to start work when the rest of the squad arrived. The purpose of the extension at the end of the day was to enable the chargehands to attend to the necessary end of the day documentation.[5]The 15 minute extensions were not written into the contracts of employment which were offered to the claimants and accepted by them.[6]The claimants worked the extra half hour each day. They received premium payments at normal overtime rates for doing so. The claimants thought that they had to work the extra 2½ hours per week.[7]The respondents approach was, however, that whilst overtime was considered at the time of the interviews, no guarantees as to overtime were given. It was unclear how these new posts would work and they wanted to retain flexibility over hours. When it was suggested to their Area Cleaning Manager, who gave evidence before the Tribunal, that the second claimant would have been disciplined if he had failed to work the 2½ hours overtime, she did not agree; she observed that the failure would be "noted". The same issue was raised with the Area Manager who had interviewed the first claimant and he indicated that he would not have been disciplined if he had failed to carry out the overtime working. He thought that he would have had "the right to go back and talk about it" with the first claimant. He too spoke of the intention to keep arrangements flexible. He thought that the overtime working was not contractual, voluntary or ad-hoc but rather "routine" overtime. The system was seen to be working satisfactorily, on the basis of the claimants working the extra 2½ hours per week, after a year.[8]In 2004, the respondents sought to achieve harmonisation of the terms and conditions under which employees at all their highway depots worked. For historical reasons, there were differences between them. They negotiated with the unions and agreement was reached in 2004. The claimant's entered into new contracts of employment incorporating the new terms with start dates of 23 February 2004. It was part of that agreement that the half hour per day for the claimants was to be regarded as contractual overtime meaning that whilst it amounted to additional working hours for which a premium was paid, it was contractual, not voluntary. It also meant that holiday pay, sick pay and pensions would all, thereafter, be calculated on a basis which took the overtime payments into account. Further, it was part of that agreement that any employees who, as a result of the harmonisation agreed, would lose out, in the sense that they would be in a worse financial position, would have the benefit of "red circling" for a period. That is, they would receive their prior remuneration for a fixed period.[9]When the relevant calculations were carried out on the basis that the claimant's 2½ hours weekly overtime prior to 23 February 2004 was not contractual, it could be demonstrated that they had not lost out and so were not entitled to "red circling". The Tribunal's Judgment[10]The Tribunal found that at the commencement of the contracts of employment the overtime arrangements were not contractual. At paragraph 25, it is stated:
"….as at the date of the commencement of the contract, it was not the intention of the respondents to regard the arrangements as contractual …………… we could see there were good reasons for this - the uncertain nature of the requirement in the new situation, the seasonal nature of the job, and how much actual overtime would be required in practice to meet the requirement. If we were looking at this scenario in the spring of 2003, some two or three months after the initiation of the contracts, then we are in no doubt the applications would fail."
It was, however, persuaded that there came a time when the overtime arrangements did become contractual. At paragraph 26, it states:
"… After more than a year, the arrangements were clearly seen to be working well. The pattern had settled down; no changes had been found to be necessary. Nothing arose which called any part of the arrangements into question, so that these remained in place perhaps as result of inertia as much as anything else."
The Tribunal then set itself, as the issue it had to determine, the following question:
"Had the circumstances changed so much from the time that the contract was originally struck to suggest that if an officious bystander were to put forward that there ought to be an express provision in the agreement relative to this additional overtime, would both parties have no difficulty in agreeing to that fact."
In answering it in the affirmative and then determining that a variation of the contract so as to render the overtime contractual was implied, the Tribunal appears to have been influenced by a number of factors: that in the new contract agreed in 2004, the respondents described the overtime arrangement as contractual; there was no change in the practical arrangements for the work; that the fact that the respondents had not previously calculated holiday pay, sick pay and pension on a basis which included the overtime payment was to be seen as an earlier failure on their part; that any failure of the second claimant to work the overtime would have been "noted"; that the Area Manager felt he would have had the right to "go back and talk about it" if the first claimant had not worked the overtime. Then, at paragraph 30, it states:
"Our view therefore is that these arrangements had become contractual. Precisely when this event took place is difficult to say, because of the seasonal nature of the employment. We would have thought that it would be reasonable to regard the overtime as contractual after a period of one complete year, when the maintenance cycle over a 12 month period would be complete. This would take us to February 2004."
The Tribunal then pronounced an order under reference to 17 February 2004, declaring that as that date there was:
"an implied term of entitlement to payment for 2.5 hours overtime in each working week and an obligation on the part of the claimants to work said overtime."
There is no explanation of the reason for specifying the 17 th rather than any other date in February. The Appeal[11]For the respondents, Mr Peoples submitted that it was plain that the Tribunal had erred. It had accepted that the overtime arrangement was not contractual at the outset of the contract. There was then nothing in the decision that identified a point between the original contract and the new contract at which variation by mutual agreement occurred. The factors relied on by the Tribunal did not support or give rise to an inference of there having been such agreement.[12]At the core of the Tribunal's approach appeared to be its application of an "objective bystander" test, as set out at paragraph 27. It was an erroneous approach. He was not aware of any authority in which the objective bystander test had been approved as appropriate for use in case where the issue was whether a contract had been varied as opposed to whether a term fell to be implied at the start of the contract as, for instance, a matter of necessity, as discussed by Lord Wilberforce in the case of Liverpool City Council v Irwin [1977] AC 235. The objective bystander test had been misused by the Tribunal.[13]Mr Peoples also referred to the cases of Quinn &c v Calder Industrial Materials Ltd [1996] IRLR 126 and McGowan v Readman [ 2000] SCCR 898 as examples of cases where the implication of contractual terms had been discussed in a manner which demonstrated that there was no room for the implication of a term as a variation of the claimants' contracts that the 2½ hours weekly overtime had become contractual in the claimants' cases at any point prior to their entering into their new contracts of employment in February 2004. He also referred to Tarmac Roadstone Holdings Ltd v Peacock [1073] IRLR 157 and Gascol Conversions Ltd v Mercer [1974] IRLR 155 as examples of cases where overtime had been regularly worked but was not held to have been contractual.[14]For the claimants, Mrs Blair indicated that they relied on the judgment of the Tribunal. Discussion[15]I am readily satisfied that this appeal should be upheld.[16]Mr Peoples rightly drew attention to the fact that in this case the question was not one of whether there could be implied into the claimants' contract from the outset that the overtime in question was contractual – there was a clear finding that at the stage it was not – but whether, at some stage, the contract was varied so as to include a term that the overtime was contractual.[17]The circumstances in which terms may be implied into a contract are more limited than the Tribunal, in its "officious bystander" question seemed to think. As was explained in the Liverpool City Council case, they are limited to: where a term is implied by law, where parties have entered into contract and some circumstances arise for which they have not made express provision but from those terms which they have agreed a term to deal with the unforeseen circumstances can properly be implied, and where a contract is unworkable without the implication of a term and its absence can be explained on the basis that it was so obvious that if the point had been mentioned then the "officious bystander" would say that the parties must have agreed to it. These are, though, tests which have, in the reported authorities only been applied to the construction of parties' original contracts, not to the question of whether parties have varied their contract.[18]It is trite that just as a contract can only be entered into by agreement of the parties to it, it can only be varied by the agreement of those parties. It is not enough to say, as the Tribunal did here, that if the parties were asked if they would agree to a variation by an officious bystander, then they would probably have agreed to it. Indeed, to put the issue thus seems to involve an acceptance that absent the intervention of the officious bystander, no agreement to vary can be said to have been reached. If parties expressly agree to vary a contract in, say, a January, it cannot be the case that they will be held to have varied it earlier just because if one had asked the other to do so in the previous September, he would have agreed to it. Yet that is the implication of the Tribunal's approach here.[19]The Tribunal's approach also bears hallmarks of having decided that there had been a variation because the overtime working had been habitual throughout a period of a year. But that would not, of itself, have been enough to give rise to the implication of a term into a new contract, let alone to lead to the conclusion that there had been a variation. In the case of McGowan v Readman , a practice of making enhanced redundancy payments was held not to be enough for contractual implication. At p.905C, Lord McFadyen said:
"I do not feel able, in the absence of any other factor pointing to BSC's acceptance of a contractual obligation to pay at least the enhanced basic payment in each case, to infer from the mere fact that it was regularly paid that such a contractual obligation was accepted."
In similar vein, it was not enough that the claimants in the case of Quinn & c v Calder Industrial Materials Ltd [1996] IRLR 126, on the basis of a past practice of paying enhanced redundancy payments, expected to receive such payments; it was necessary to that the employers had agreed to be bound by them and no such agreement arose "merely from the repeated acting upon" (Lord Coulsfield at para 8 ) the terms of a policy document which covered the enhanced redundancy payments.[20]Did the Tribunal make such findings in fact as entitled them to infer that the parties had in fact agreed to the overtime becoming contractual i.e. on the claimants' side to their being required, without option, to work an extra 15 minutes at the beginning and end of every day and on the respondents' side, to their being bound to arrange the "hit squad" work so as to commit themselves, without option, to continuing to employ the claimants for an extra 15 minutes, at overtime rates, at the beginning and end of each working day? I do not see that they did. The factors relied on by them simply do not amount to evidence of any such agreement having been reached. The fact that the overtime became contractual overtime in the new contract simply indicates that that is the agreement that was entered into at that time, not that any such agreement had been entered into at any earlier date. The fact that the practical "on the ground" arrangement did not change does not infer any agreement that parties had both agreed that they had become bound to commit to the arrangement as a permanent feature of the claimants' contracts of employment. The Tribunal seem to have recognised that the significant change (for the better from the claimants' point of view) that was brought about in respect of sick pay, holiday pay and pension under the new contract was a problem for it but to dispose of it as they did by, in effect, saying that these were benefits that should have been conferred on the claimants sooner, simply will not do. Those features remained, rather as indicators that contractual overtime was not a feature of the claimants' contracts of employment prior to 23 February 2004. Then I do not see that the responses of the two area managers to being questioned as to whether or not the claimants would have been disciplined if they had not turned up to work the overtime amount to evidence that the respondents agreed to vary the contracts any sooner than 23 February 2004. On the contrary, their answers pointed the other way.[21]In all the foregoing circumstances, it is plain that the Tribunal fell into error and that the appeal should be allowed. Disposal[22]I will pronounce an order upholding the appeal and this issue being the only matter which was the subject of the claimants' complaints, dismissing them.