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Last year, we noticed an increase in the number of client enquiries about gender-neutral documents. This reflects a wider discussion about sex and gender in society. While the UK’s national anthem changes according to the monarch, in 2018 Canada’s Senate approved altering the words of O Canada to make the English language version gender-neutral (replacing “in all thy sons command” with “in all of us command”).

Why do it? As the European Parliament states, the purpose of gender-neutral language is to avoid word choices which may be interpreted as biased, discriminatory or demeaning by implying that one sex or social gender is the norm. In other words: let’s be inclusive. Let’s not hurt people’s feelings. Let’s be nice to each other.

The only question is, then: how to do it?

What do clients mean by gender-neutral? Our experience is that some say gender-neutral, but on enquiry have turned out to mean “gender-specific”. In the old days it was almost certain that your senior employees would be men; a contract would be drafted accordingly, and then the ladies would be given a metaphorical pat on the head by including in the boilerplate the reassurance that references to the male gender should be interpreted to include the female. Those days are (or should be!) well and truly gone.

Others truly mean gender-neutral. This may be because they want to tailor their documents to an employee who prefers that, or simply to ensure that template documents can be rolled out across the workforce with the minimum of amendments.

Those who are non-binary (such as my favourite character in Billions, Taylor – and if you don’t know what I’m talking about, the next series has a breach of their post-termination restrictions as a major plot point, making it a must for employment lawyers who don’t want to switch off …) may prefer to use third person pronouns (they, their and them). Others may still have a personal preference for gendered pronouns, while others may simply say, “Hey, I don’t really mind.” Above all, it’s important to find out the person’s own preference and to recognise that simply because someone does not correct the use of he or she, doesn’t mean that they wouldn’t prefer something else. For some, they may not feel comfortable raising the subject.

Pronoun preference is not “one size fits all”, and what works for one non-binary person may not work for another. If your intent is to be inclusive, you must take account of the individual’s views.

When not referring to those who consider themselves to be non-binary, I dislike using the third person pronoun (they, their, and them) for a single known person. However, I am on the wrong side of history on that one. Respected dictionaries including the Oxford English dictionary and Merriam-Webster’s dictionary have recognised “they” as a singular pronoun as grammatically correct for years, and there are examples as far back as the 16th century of its use in that format.

My opinion is that it works when you do not know the identity of the person (“an employee must report any concerns to their line manager”) but not necessarily when you do (“Rachel should report any concerns to their line manager”, when you know that Rachel is female and wishes to be referred to as such). That leaves a grey area around a contract, for example, which defines Rachel as “the Employee” and then says “The Employee should report any concerns to their line manager”.

Of course, technology is your friend here. “Find and replace” can result in some obvious mistakes (“tshe Employee”, or “tthey Employer”). But the increasing automation of documents, including Practical Law’s FastDraft templates, make it easy to pick an option at the beginning of the process and create a bespoke contract.

After seeking customer feedback, Practical Law Employment has adopted “we” and “you” in their standard documents when referring to employer/company and employee.

Sadly for the employment lawyer and his, her or their targets, however, many clients don’t want to instruct us to produce individual contracts for every employee at every level and just need a template suitable for use for most new hires.

Gender-neutral drafting in practice means avoiding gender-specific pronouns, and avoiding nouns that might appear to assume that a person is of a particular gender (if you are still using “chairman”, for example, the 21st century would like a word. And it’s “chair”).

The Office of the Parliamentary Counsel has provided drafting guidance for those drafting legislation, which includes advice on gender-neutral drafting. It is government policy that primary legislation should be drafted in a gender-neutral way, so far as it is practicable to do so.

The alternative to using they, their and them is to use “he or she” and so on throughout. Those who do not use he or she are excluded from this formulation, and it can become clunky to refer repeatedly to both options.

Alternatively, a gender-neutral approach can be taken by repeating the employee’s name (“Rachel’s notice period”) or referring back to a defined term (“the Executive’s employment”).

A third option is to reword the document to avoid the need for a pronoun entirely. Sometimes that’s easier than others, so it may be necessary to use a combination of the above two techniques to avoid something that sounds too repetitive.

The final option open to lawyers, if not legislation-drafters, is the simplest: to move away from the third person entirely. After all, there aren’t many situations nowadays in which it is acceptable to talk about yourself in the third person without sounding like an anachronism or a pre-schooler with an imaginary friend. Why, then, do we go to this in legal documents involving people?

An employment contract is a relationship between an individual and another, who may also be an individual. We put personal service at the heart of the tests for employment status and we protect individuals from discrimination because of protected characteristics, so why not use “you”? It’s simple, it’s easy to understand, and it’s truly inclusive.

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If you think #metoo conduct is the preserve of the entertainment sector, think again. It is prevalent in all sectors. That is why industry bodies and regulators in the likes of law, charities and construction have issued their members with guidance on dealing with sexually inappropriate conduct.

Financial services are not immune. Far from it. The Financial Conduct Authority (FCA) has made it clear that sexual harassment matters. The FCA’s interest in allegations and findings of sexual harassment or other sexual misconduct about individuals who work for the firms it regulates is part of the its broader focus on culture within the UK financial services industry.

Just as the law in the area of sexual misconduct isn’t new, neither is the FCA’s interest in it. Banks and building societies that are already subject to the FCA’s Senior Managers and Certification Regime (SMCR) have been taking a more holistic view of misconduct for some time, recognising that non-financial misconduct (including sexual harassment and other sexual misconduct) can have regulatory implications. What is new is that the issue has received considerably more public attention following the publication of a letter written by the Executive Director of Supervision at the FCA, Megan Butler, to the Women and Equalities Committee in September 2018, which has been followed by speeches on this topic made by other senior representatives of the FCA. These statements have emphasised the interest that the FCA is taking in relation to “poor personal misconduct, including allegations of sexual misconduct”.

It therefore comes as no surprise then that allegations of sexual misconduct are not only parked in HR’s forecourt. There is an additional layer of rules that need to be considered in conjunction with employment law. We find ourselves being asked with increasing regularity how allegations and findings of sexual harassment or other sexual misconduct impacts firms and individuals from a regulatory perspective too.

FCA-only authorised firms

While the banks, building societies and insurers are already living in the SMCR world, for FCA-only authorised entities the spotlight on individual accountability and overall culture will be further intensified following the implementation of SMCR on 9 December 2019. From this date, these firms will join those already subject to SMCR and be turned into mini-regulators with responsibility for assessing the fitness and propriety of their Senior Managers and Certified Persons, as well as assessing potential breaches of the FCA’s Code of Conduct for almost all employees as and when issues arise. The FCA has made it clear that firms’ responsibilities in relation to these matters will extend to allegations of sexual harassment or other sexual misconduct.

Even before transition at the end of the year for FCA-only authorised firms, allegations of sexual misconduct should be considered in the light of the fitness and propriety requirements that apply to approved persons and the FCA’s Statement of Principle and Code of Practice for Approved Persons (APER).

Fitness and propriety and personal characteristics

While in the past firms will have viewed allegations of sexual misconduct as “HR issues”, this isn’t the case now and it is certainly not the FCA’s view. Even though this type of misconduct may not at first glance appear as relevant to the FCA’s traditional areas of regulation in the same way as financial misconduct, it is misconduct which the FCA expects firms to consider from a regulatory perspective. For example, under SMCR, one of the factors to be considered when assessing the fitness and propriety of an individual is their “personal characteristics”. This has led to firms having to take a more holistic view of an individual’s suitability to perform a particular role, and including poor personal conduct into the mix. This can be a challenge for employers because while the FCA is clear that sexual misconduct should be considered from a fitness and propriety perspective, its guidance has been less clear on the action firms should take in relation to individuals who are potentially implicated in these situations. Developing a robust and consistent approach to assessing fitness and propriety in these situations is an issue with which banks and building societies are still grappling, almost three years after SMCR came into force for them.

As a general rule of thumb, we suggest applying the following principles:

  • The same allegation may be treated differently and have different consequences depending on the context, so it is important to assess allegations of sexual misconduct on a case by case basis and make an informed assessment based on the specific facts.
  • The role that an individual performs may be critical, particularly where the allegations involve an abuse of power by a senior individual over a more junior individual. Inappropriate sexual conduct in this context could well undermine supervisory responsibilities, thereby calling into question competence and capability and potentially integrity to carry out the role.
  • The more serious the misconduct, the more likely it will impact on fitness and propriety and, in particular, on an individual’s honesty and integrity.
  • Carefully record the outcome and thought processes involved in reaching any decision and the rationale for it.
  • Ensure that outcomes are fed into the appropriate channels for the purposes of regulatory references.

Breach of APER and the FCA’s Code of Conduct

From the starting point that sexual misconduct can fall within the scope of the Code of Conduct, the next question firms will need to answer is which (if any) of the Conduct Rules have potentially been breached. The FCA’s general and specific guidance relating to the Code of Conduct does not specifically refer to how conduct such as bullying, harassment and sexual misconduct should be interpreted under the Code of Conduct. However, the FCA’s guidance in this area is not intended to be exhaustive and, as a result, firms are left to come to their own views about which of the Conduct Rules may be engaged by sexual misconduct. The rules that are most likely to be relevant are Individual Conduct Rule 1 (acting with integrity) and Individual Conduct Rule 2 (acting with due skill, care and diligence).

For FCA-only authorised entities, the activities that fall within the scope of APER are narrower than the activities that will fall within the scope of the Code of Conduct from December 2019 onwards. APER applies to the performance by an approved person of their controlled functions or in relation to the carrying on of regulated activities, whereas the Code of Conduct applies to a much broader scope of conduct, including unregulated activities. In light of this narrower scope, it is less likely that sexual misconduct could fall within the scope of APER.

What is clear though is that the FCA expects firms to consider whether the conduct falls within the scope of APER or the Code of Conduct and, if not, to record the reasons why. While firms may conclude for a variety of reasons that some (but not necessarily all) allegations of sexual misconduct which concern events that took place outside of work fall outside the scope of APER or the Code of Conduct, it will be important for firms’ records to show how these decisions were reached and that a robust process was following in reaching them.

Linking tolerance of sexual harassment to a poor culture

We can now say categorically that the FCA is interested in allegations and findings of sexual misconduct, and that such misconduct (as well as other forms of non-financial misconduct) may form the basis for an adverse finding in relation to an individual’s fitness and propriety and potentially also their compliance with the Code of Conduct.

Addressing the Women and Equalities Committee in relation to their work on sexual harassment in the workplace on behalf of the FCA, Megan Butler felt confident in making a link between a culture where sexual harassment is tolerated and one “which would not encourage people to speak up and be heard, or to challenge decisions”. For the FCA, tolerance of sexual harassment is not only “a driver of poor culture” but also a barrier to ensuring that firms retain their best talent and make the best business decisions and risk decisions. These broader topics are also an increasing focus for the FCA, and we expect to hear more from the FCA on them over the coming months.

FCA toolkit to tackle sexual misconduct

  • Fitness and propriety. Sexual misconduct may have an adverse impact on an individual’s honesty, integrity and reputation for the purposes of assessing their fitness and propriety. Interestingly, findings of discrimination and harassment more generally may also have a similar impact on an individual’s fitness and propriety.
  • Code of Conduct. Sexual misconduct can amount to a breach of the FCA’s Code of Conduct in certain circumstances. If a breach of the Code of Conduct is established, that breach must be reported to the FCA (within seven days in the case of Senior Managers). Whether sexual misconduct can amount to a breach of APER is less clear-cut, given its narrower scope (only relevant to FCA-only authorised firms).
  • Regulatory references. If a disciplinary sanction has been imposed on an individual in relation to sexual misconduct (or if an individual resigns when allegations have been made) this is something that a firm is likely to need to include on any regulatory reference provided in respect of that individual, regardless of what (if any) decision is taken about that individual’s fitness and propriety or compliance with the Code of Conduct or APER (if applicable).
  • Whistleblowing. In addition to using a firm’s internal whistleblowing procedures to report allegations of sexual misconduct, the FCA has expressly invited individuals to raise such allegations directly with it through its whistleblowing procedure. The FCA said in Megan Butler’s letter that it would be particularly interested in any reports that indicated that a firm was “systematically mishandling allegations or incubating a culture of sexual harassment”. Of course, fully in scope firms also have obligations under the regulatory whistleblowing regime.
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In relation to unlawful discrimination claims, it had become well established under the old law that there was a two-stage test:

  • The claimant had first to establish the facts from which, in absence of any explanation to the contrary, a tribunal could reasonably conclude that unlawful discrimination had taken place.
  • If that was established, the burden of proof then switched to the respondent to show that there was some adequate non-discriminatory explanation as to why the events in question had occurred.

It was also well established that the tribunal was entitled to have regard to all the evidence in deciding whether the claimant had established the prima facie case at the first stage and was not confined to considering the claimant’s own version of events. These principles had been laid down in a succession of significant cases (Igen Ltd v Wong [2005] EWCA Civ 142; Laing v Manchester City Council [2006] ICR 1519; Madarassy v Nomura International plc [2007] EWCA Civ 33; Hewage v Grampian Health Board [2012] UKSC 37).

For many years it was accepted, or assumed, that the same, or essentially the same, test was to be applied to cases brought under the Equality Act 2010 (EqA 2010), in relation to the test under section 136(2). However the cat was thrown among the pigeons in August 2017 by the decision of the EAT in Efobi v Royal Mail Group Ltd [2018] ICR 359. The EAT held that the slightly different wording of section 136(2) of the EqA 2010 meant that it was no longer the case that the claimant had any burden of proving anything in the first stage of the test. The tribunal merely had to consider the facts. On that basis, the EAT held that the tribunal had misdirected itself and applied the wrong test. The EAT also went on to hold that, even if its interpretation of section 136 were wrong, it would have allowed the appeal in any event. It therefore remitted the case to a differently constituted tribunal for reconsideration of certain specific facts and inferences on very narrowly prescribed lines.

In the interval between the EAT decision and the appeal, the Court of Appeal had the chance to consider the question of the proper construction of section 136(2) in Ayodele v Citylink Ltd [2017] EWCA Civ 1913. The Court of Appeal held that, despite the new wording, Parliament had not intended in enacting section 136 of the EqA 2010 to introduce a new test. The burden of proof still remained on the claimant at the first stage to prove a prima facie case, as explained in the old authorities (referred to above) and in accordance with the opinion of the Advocate General in Meister v Speech Design Carrier Systems GmbH (Case C-415/10) EU:C:2012:8. The Court of Appeal therefore concluded that the EAT in Efobi had been wrong to hold otherwise.

Efobi in the Court of Appeal

With “normality” thus restored, it would not have been unreasonable to assume that the claimant in this case (E) would have thrown in the towel and conceded that the EAT had been in error in remitting the matter to the tribunal for further consideration, but not a bit of it. The respondent (RMG) therefore had to press ahead with the remainder of its appeal in relation to the EAT’s conclusion that, even if it were wrong on the construction of section 136, the matter should be still be remitted as it had directed.

The facts

E, a black Nigerian, was employed by RMG but wanted to move into a different department. To that end he made a great many applications, all of which were unsuccessful. On a few occasions he had reached the interview stage and in certain instances RMG had not appointed at all. He suspected RMG of institutional racism and made a complaint to the tribunal alleging direct and indirect discrimination with regard to 22 of his unsuccessful applications. The tribunal dismissed his claims on the basis that he had failed to show that there was a sufficient factual basis for concluding that the recruitment process had been marred by racial discrimination. E appealed in relation to the direct discrimination claim only. As noted above, the EAT allowed that appeal.

Held

In the light of the decision of the Court of Appeal in Ayodele, the principal ground on which the EAT had allowed E’s appeal (its own erroneous construction of section 136) could not stand and E sensibly conceded that point. Nevertheless, the EAT had gone further in its criticisms of the tribunal’s rejection of the claim and E strongly resisted RMG’s appeal against the resulting remission. Sir Patrick Elias, with whom Underhill and Baker LJJ agreed, observed that the additional criticisms had occupied only three paragraphs of the EAT’s judgment, that it was not straightforward to disentangle its reasoning from its erroneous analysis of the burden of proof and, partly as a result, that it was not entirely clear what errors in the original decision the EAT had been trying to identify.

The tribunal manifestly had enough evidence to be entitled to find that E had failed to discharge the burden that rested on him at the first stage to establish a prima facie case. The assertion that the tribunal had focussed purely on the evidence adduced by E was unsustainable, given that it had placed heavy reliance on RMG’s evidence about the suitability of E’s CV and the role of external recruiters. It was not seriously contended that the external recruiters had discriminated and yet the posts for which they had been responsible and the exercise they were carrying out were essentially the same as those involving internal recruiters, so that there was no basis for inferring that the failures of E’s applications in the latter case were for race related reasons.

The onus at stage one was on E to adduce the information supporting his case. Insofar as this was in the hands of RMG, E could have requested that it be provided voluntarily or obtained an order from the tribunal. He did neither. It was only on the first day of trial that he made an application for witness orders (which the tribunal unsurprisingly rejected). Tribunals frequently seek to assist litigants in person to mitigate the disadvantages under which they operate, but that has to be done with care lest the tribunal is perceived to be losing its impartiality. Tribunals are not exercising an inquisitorial function. Still less are employers obliged to assist a litigant with his or her case, possibly to their own detriment, and it is therefore not legitimate for a tribunal to draw adverse inferences against an employer who has failed to do so.

E’s case could not succeed given that he had not adduced evidence which enabled the tribunal to identify the characteristics of the appropriate comparator. E’s disappointment was understandable, but without any information about those who were appointed, such as their skills and experience, it was impossible for the tribunal to infer a prima facie case of discrimination, particularly where there was a large pool of candidates and where E had also been rejected by external recruiters.

The tribunal had ample justification for its conclusion that E had not discharged the burden on him at the first stage. Strictly speaking, the issue of whether RMG had discharged the burden on it at the second stage therefore did not arise. The allegations of discrimination were mere assertions unsupported by the necessary factual foundation. It was impossible for the tribunal to identify a particular comparator with whom he could be compared and in any case there was plenty of evidence to support the tribunal’s decision. The factors identified by the EAT, and relied on by E, did not overcome the core problem of the lack of evidence about relevant comparators or demonstrate any error by the tribunal.

The Court of Appeal therefore allowed the appeal and restored the tribunal’s decision (Royal Mail Group Ltd v Efobi [2019] EWCA Civ 18). RMG had also sought (in the alternative) to appeal the prescriptive terms under which the case had been remitted, but in the circumstances this issue did not arise. This is perhaps a pity, because it might have led to useful guidance on the proper lengths to which appellate courts should go to restrict the scope of investigations they have ordered to be remitted. Nevertheless this judgment is a satisfactory conclusion to a saga that began eighteen months ago with a Quixotic digression in the EAT.

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At the end of 2018, the government announced the Good Work Plan, which develops its response to the Taylor Review. It describes the plan as “the biggest package of workplace reforms for over 20 years”. This blog considers some of the more eye-catching proposals aimed at tackling “one-sided flexibility” in the working relationship, including the proposals to align the different tests of employment status, abolish the Swedish derogation for agency workers and introduce a new right for workers to request a more stable contract.

The issue of employment status was a critical area of focus in the Taylor Review and has been subject to consultation, as well as considerable judicial scrutiny, in the past year. The Taylor Review proposed that:

  • The definition of “worker” should be consistent across legislation.
  • The title of “worker” should be renamed to “dependent contractors”.
  • There should be greater emphasis on the element of control in the working relationship, rather than personal service, to avoid the misuse of substitution clauses by employers.

Notwithstanding the promise of wide-sweeping reform, the detail is currently lacking. The government states that it will “legislate to improve the clarity of the employment status tests, reflecting the reality of modern working relationships”. It is unclear whether the government agrees that greater emphasis should be placed on control and conversely less on personal service. In the light of the nuanced analysis regarding personal service provided by the Court of Appeal in Pimlico Plumbers Ltd and another v Smith [2017] EWCA Civ 51, it is arguably more difficult for employers to rely on substitution clauses and the government may seek to codify this position in legislation.

The government also explains that it will seek to reduce any differences in the tests in the employment law and tax systems to an “absolute minimum”. It does not provide any indication as to how it will seek to align the three-tier test in employment law with the two-tier test in tax where the intermediate category of “worker” is not incorporated. Such an aim seems fraught with tension. HMRC will inevitably want a test with a relatively low threshold to capture as many employees as possible within the charge to income tax, whereas businesses, as well as some workers, will want to retain flexibility as working practices modernise in response to a more digitalised economy. It seems likely the systems will remain disjointed for some time.

Some practitioners will welcome the government’s proposal to abolish the Swedish derogation, whereby there is presently no right under the Agency Worker Regulations 2010 (SI 2012/93) (AWR 2010) to equal pay for an agency worker if they have a permanent contract with a temporary work agency under which they are paid between assignments. This will mean that all agency workers will have a right to equal pay after the 12-week qualifying period has passed. This raises the issue of the extent to which hirers may now seek to shorten the length of assignments. No doubt more attention will be paid to the anti-avoidance provisions in the AWR 2010. The repeal is expected to come into force from 6 April 2020, so recruitment businesses and hirers will need to revisit their pay between assignment models with some urgency.

The government has also put forward proposals which seek to address the exploitation of “zero-hour” workers. It proposes to introduce a right for all workers to request “a more predictable and stable contract” after 26 weeks of service, to which the employer must respond within three months. The enforcement process is not made clear, although it is suggested that the right will be analogous to the right to request flexible working. Consequently, one assumes that a worker may only complain to an employment tribunal if the employer fails to consider the application in a reasonable manner and rely on certain statutory grounds if the application is refused, and that only one request can be made within a 12-month period. This suggests that scrutiny of an employer’s decision is likely to be relatively restricted.

The Good Work Plan is a helpful indicator that the government does not propose to roll back employment rights significantly following Brexit. However, at present it is difficult to see how employment rights, particularly those addressing “one-sided flexibility”, will be substantially progressed by way of legislation in the coming months and years.

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The long running saga of whether Uber drivers are workers has been decided in the Court of Appeal and a split court has granted permission to appeal. This blog analyses the differing approaches in the Court of Appeal and the arguments that are likely to be advanced before the Supreme Court.

The facts

The Uber business model (involving drivers signing up to an app which allows customers to use their services as a taxi) will be well-known to readers. The key issue in the ET and EAT was the extent to which the various agreements between drivers and Uber (all of which were carefully drafted to create the impression of an “arms-length” commercial transaction) reflected reality. In the ET it was held that they did not and the EAT upheld this as a permissible decision on the facts.

The judgment of the Court of Appeal

The Court of Appeal split and judges with significant employment experience fell either side of the divide. The majority included Bean LJ, with Underhill LJ in the minority. The two issues were:

  • Are Uber drivers “workers” within the meaning of the legislation?
  • When are they working? (That is, are they working when the app is switched on or when they accept fares?)

The majority accepted that the drivers were workers and also that the ET was correct in holding that once the app was switched on in the relevant territory, a driver was working. They essentially endorsed the reasoning below, stating that the ET had been correct to find that the contractual documents did not reflect reality. The majority endorsed the suggestion that ETs should be “realistic and worldly wise” in assessing such documents. Indeed the majority spoke of “the air of contrivance and artificiality which pervades Uber’s case”. As to the working period they held that, as a driver was required to accept 80% of allocated fares or risk sanction, it was permissible for the ET to find that “drivers waiting for a booking were available to [Uber] and at its disposal”.

Underhill LJ’s essential disagreement with the approach of the majority was whether Autoclenz Ltd v Belcher and others [2011] UKSC 41 allowed the rejection of the written documents. He said:

“There is nothing in the reasoning of the Supreme Court that gives a tribunal a free hand to disregard written contractual terms which are consistent with how the parties worked in practice but which it regards as unfairly disadvantageous (whether because they create a relationship that does not attract employment protection or otherwise) and which might not have been agreed if the parties had been in an equal bargaining position.” (Paragraph 120.)

Underhill LJ was also far more forgiving of Uber’s written documents stating “[they] do indeed show some egregiously ugly pieces of corporate-speak, tendentious definitions and lawyerisms. But, again, the question is whether these various offences against good English actually conceal a different reality.” (Paragraph 137.)

Underhill LJ finally considered that drivers could only be said to be working when they had actually accepted a fare as opposed to signalling their availability so to do by switching on the app.

Arguments on further appeal

It seems likely that great store shall be placed by Uber on the powerful dissenting comments of Underhill LJ. The likely arguments before the Supreme Court appear to be:

  • Uber relied on the decision of the Supreme Court in Secret Hotels2 v IRC [2014] UKSC 16 as showing a different approach to the importance of contractual documents compared with Autoclenz. Plainly this is an issue that the Supreme Court shall be asked to address and whether the fact that a tripartite agreement existed involving two commercial parties was a reason not to follow Autoclenz or if Hotels2 can be ignored as not being an employment decision.
  • Uber sought to draw an analogy with the decided minicab discrimination cases. Underhill LJ considered that the uniformity of the extended definition of employment in discrimination cases and the definition of worker meant that such analogies were persuasive.
  • The importance of the statutory regime as regards the regulation of private hire vehicles, and that fact that it was Uber and not the drivers who held such a licence, to the issue of whether the drivers work for Uber is also likely to be the subject of close consideration.
  • That the ET, EAT and Court of Appeal have been seduced into seeking to avoid the drivers being the subject of a bad bargain as a result of a perceived abuse of bargaining power by Uber. Consideration shall need to be given whether this is an issue for protective legislation and not judicial expansionism.

Outcome

The outcome of the appeal is difficult to predict, but some intuitive force may be felt to exist in Underhill LJ’s point that a protective approach towards those in a weaker bargaining position ought not to lead to a ready discounting of otherwise relevant documents. It remains to be seen whether the Supreme Court shall share his concerns in that regard.

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Does an employer directly discriminate against its employee because of his or her age by ceasing PHI payments prior to the employee reaching the greater of age 65 or their state pension age?

The employment tribunal (ET) in Whitham v Capita Insurance Services Ltd ET/2505448/12 answered this question with an emphatic yes. However, the EAT in Smith v Gartner UK Ltd UKEAT/0279/15/LA has seemingly given a different impression. The point was not properly ventilated in Smith v Gartner and, further still, the EAT’s discussion in respect of a claim under section 39(2) of the Equality Act 2010 (EqA 2010) is strictly obiter. The law is therefore in a state of flux and an appellate decision is required to settle the issue.

This blog is limited to the question of direct age discrimination. Be aware that such cases frequently lead to other arguments such as unlawful deduction from wages and indirect discrimination.

Legal background

An employer is prohibited from discriminating against an employee as to the terms of his or her employment, or in the way that it affords access or does not afford access to the employee to opportunities for promotion, transfer or training or for receiving any other benefit, facility or service (section 39(2)(a) and (b), EqA 2010).

Direct age discrimination occurs where because of age, A treats B less favourably than A treats or would treat others (section 13(1), EqA 2010). Age is the only protected characteristic where a prima facie act of direct discrimination can be justified. An employer has a defence if it can show that its treatment of the employee was a “proportionate means of achieving a legitimate aim” (section 13(2), EqA 2010). However, the defence is limited; an employer can only justify direct age discrimination if the “legitimate aim” relied on is of a public interest nature rather than a purely individual reason particular to the employer’s situation (such as cost reduction) (see Seldon v Clarkson Wright and Jakes (a partnership) [2012] ICR 716).

On 6 April 2011, the government abolished the default retirement age. However, it is not unlawful for employers to cease to offer benefits (including PHI) to employees at the point when they reach the greater of age 65 or state pension age (paragraph 14, Schedule 9, EqA 2010).

The differing approaches: Whitham and Smith v Gartner

In Whitham the ET held that Mr Whitham had been directly discriminated against on the grounds of his age when Capita stopped paying him benefits under a PHI scheme once Mr Whitham reached the age of 55 because the insurer would no longer pay out under the terms of the scheme. The ET found that such an act was inherently discriminatory and fell within the first category of direct discrimination as set out in Amnesty International v Ahmed [2009] ICR 1450. The employer’s decision could not be justified as it related purely to cost. Further, Capita had in operation a different scheme which would have continued to pay benefits until age 65 years. It did not include Mr Whitham within this scheme on the basis that, as Mr Witham was not “actively at work”, he was not eligible to join. The ET found that this was indirect age discrimination as a provision, criterion or practice (PCP) of not allowing employees access to a more favourable PHI scheme unless they were actively at work put employees aged 45 and above at a particular disadvantage as they were more likely to suffer from ill health.

The EAT in Smith v Gartner took a different approach to the issue of direct age discrimination. Note that this was an appeal from an ET’s decision to strike out the claim on the basis that it had no reasonable prospect of success and, further still, the decision by the ET was made following written submissions only. The legal arguments were therefore unlikely to have been properly ventilated. In this case, PHI payments were stopped when Ms Smith reached the age of 60. However, the precursor to this is important:

  • Ms Smith’s contract of employment contained the following term: “all benefits offered are subject to the rules in force at that time”.
  • Ms Smith was provided with a Guide to Company Benefits which stated that “Gartner provides Permanent Health Insurance to all employees, subject to your terms and conditions of employment … this insurance is provided to you at no expense”.
  • In 2007 an email was sent to all employees under the heading “Income Protection (Disability Insurance)” in which it was said that the age limit for benefits would “increase in line with legislation and the Gartner UK pension plan”.
  • Gartner did not transfer Ms Smith to a different scheme operated by UNUM which covered employees until they reached the age of 65.
  • Gartner stopped Ms Smith’s payments on her reaching the age of 60 as her cover did not extend beyond 60 years of age.

Importantly, Ms Smith’s claim focused around the argument that she had a contractual right to receive income payments from her employer (as opposed to an obligation on the employer to simply put in place a PHI policy) until her retirement (unlawful deductions from wages pursuant to section 13 of the Employment Rights Act 1996). Further, Ms Smith did not bring a claim under section 39(2) of the EqA 2010. The manner in which her age discrimination complaint was put before the ET was linked to her complaint that Gartner had failed to make contractually owed payments. Ms Smith then sought to introduce a complaint under section 39(2) of the EqA 2010 in her appeal.

A large proportion of the judgment is dedicated to Ms Smith’s unlawful deductions from wages claim. The direct discrimination complaint was dealt with swiftly by the EAT who held that, having found that Gartner was not contractually obliged to make payments itself but was only contractually obliged to put in place a policy of insurance, it followed that Gartner did not fail to make those payments on a directly age discriminatory basis. The EAT also addressed the section 39(2) point (again very briefly) and held that Gartner did not directly discriminate against Ms Smith because of age in respect of the difference in treatment between the policy Ms Smith was benefiting from and the new UNUM policy. The EAT held that the difference in treatment arose as a result of the insurance company having different policies and treating the claimant in accordance with the rules of the policy under which she was already a beneficiary.

Conclusion and comment

Smith v Gartner is open to challenge for a number of reasons.

First, the argument in respect of age discrimination was not properly ventilated at first instance, nor it seems, on appeal. Further, the EAT’s comments in respect of age discrimination and section 39 of the EqA 2010 are strictly obiter.

Second, an employer is not permitted to discriminate in the way it affords access to employees for receiving benefits under section 39 of the EqA 2010. The only exception to this is found in paragraph 14 of Schedule 9 to the EqA 2010, which allows employers to cease to offer benefits (including PHI) to employees at the point when they reach the greater of age 65 or state pension age. The fact that the restriction in the policy was operated by an insurer should not be determinative. The obligation is on the employer to ensure that any policy it chooses (and thereby any benefit that an employee is afforded access to) is not discriminatory. As the ET put it in Whitham: “The issue can be decided by asking the following simple question: ‘But for his age, would the claimant still be in receipt of PHI payments?’ The answer is clearly in the affirmative … the age-related payment is inherently discriminatory”.

Third, the EAT’s reasoning in Smith v Gartner that the only difference in treatment arose as a result of the insurance company having different policies is also unsatisfactory. The judgment leads to a lacuna in the law; an employee faced with such a situation will not be permitted to bring a claim for discrimination in the provision of services under section 29 of the EqA 2010 against the insurer as paragraph 20 of Schedule 3 to the EqA 2010 contains an exception in that section 29 of the EqA 2010 does not apply to the provision of a relevant financial service (which includes PHI products) if the provision of insurance is in pursuance of arrangements made by an employer to its employees as a consequence of the employment. A lacuna in protection is surely not in keeping with the spirit and nature of the EqA 2010.

To conclude, employers seeking to rely on Smith v Gartner in adopting similar policies to those in the cases discussed should proceed with caution. In my opinion the preferred view is that which was expressed by the ET in Whitham, however a decision of the appellate courts addressing the age discrimination point in detail is needed.

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There are some phrases which make an employment lawyer’s heart sink, and pride of place amongst them undoubtedly goes to “but it was just office banter”. Usually a signal that something offensive has indeed gone on within the workplace, it might be thought that short shrift is likely to be given to such a defence by the employment tribunal. In fact, background context is key, and a culture of “banter” can, in the right circumstances, help to explain potentially discriminatory conduct and protect an employer from a discrimination claim. Such was the outcome at both first-instance and appeal to HHJ Stacey in Evans v Xactly Corporation Ltd UKEAT/0128/18.

In this case, the claimant was a sales representative for the respondent. He worked in an office environment in which there was culture of banter. He suffered from type 1 diabetes and hyperthyroidism. He also had some links to the travelling community about which only one colleague was aware. He began work in January 2016 but was part of a sales team which collectively failed to hit their targets. In December 2016 he was dismissed for poor performance.

Although the claimant did not have the length of service to claim for unfair dismissal, he did bring claims relating to discrimination on the basis of disability and/or race, including claims for discrimination arising from disability, direct discrimination, harassment, and victimisation. These claims arose from various occasions during his employment during which he was called a “salad dodger”, “fat Yoda”, “Gimli”, and “fat ginger pikey” by his colleagues. He alleged that he was disciplined and eventually dismissed for raising such treatment as an issue.

The tribunal dealt simply with the claims for discrimination, as while the claimant was indeed disabled as a result of his type 1 diabetes, he had failed to adduce evidence that this and/or his hyperthyroidism had a real impact on his weight. Therefore, any claims which sought to rely on insulting comments made about his weight could not arise from or be connected to his disability and failed.

This left the claimant’s allegations of race-related harassment, however, which is covered by section 26 of the Equality Act 2010. In order to succeed in such a claim, an individual must show that they have been subjected to unwanted conduct relating to a protected characteristic, and that the unwanted conduct had the purpose or effect of violating the victim’s dignity; or creating an environment that is intimidating, hostile, degrading, humiliating or offensive to them.

In considering this test, the tribunal first determined that the respondent’s office culture was one where teasing and banter was common. Indeed, the claimant himself would often reply in kind, referring to a close colleague as a “fat paddy” and a female colleague as a “pudding”. This behaviour appeared to be accepted and treated as normal within the office, and in a memorable turn of phrase, the employment tribunal described it as “indiscriminatingly inappropriate”.

In fact, the only person who had been reprimanded for their behaviour in this context was the claimant, who had been warned for trying to hug and cuddle the co-worker whom he had called a “pudding”. It was also considered relevant that the claimant only reported the comments in November 2016, after the performance process had begun. In those circumstances, the first instance tribunal held that harassment within the meaning of section 26 was not established.

On appeal, the EAT confirmed that the first-instance tribunal was best placed to make findings of fact about the context and office culture, and was then fully entitled to conclude that the comments complained of did not amount to harassment as defined within section 26. Comments such as “fat ginger pikey” were plainly “derogatory, demeaning, unpleasant and potentially discriminatory”, but that did not mean that the test for harassment was made out. In that connection, both tribunals cited the EAT judgment in Richmond Pharmacology v Dhaliwal UKEAT/0458/08, in which Underhill P pointed out that “dignity is not necessarily violated by things said or done which are trivial or transitory, particularly if it should have been clear that any offence was unintended.”

When applying the statutory wording of section 26, the EAT therefore confirmed the following:

  • The comments were not unwanted since the claimant was such an active participant in the culture of banter.
  • They did not have the purpose of violating the claimant’s dignity or creating an intimidating environment for him.
  • Nor did they have the effect of violating the claimant’s dignity or creating an intimidating environment for him, as he was not offended.
  • In any event it would not have been reasonable for him to have considered his dignity was violated or the environment was intimidating given the particular circumstances and all the context and material facts relevant to the claim.

Of course, employers should not feel that such an office culture is acceptable or non-problematic, or that this decision gives the green light to offensive behaviour within the workplace. The factual background of this matter, with only very tenuous potential links made to protected characteristics and clear evidence that the claimant was a willing participant in the behaviour, will certainly not always be duplicated when the “banter defence” is deployed. It is still, by far, the safest route for employers to ensure that their workplace environment is professional, respectful and free of offensive comments, however well intended.

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In Timis v Osipov [2018] EWCA Civ 2321, the Court of Appeal confirmed that employees who have been dismissed for making a protected disclosure can bring a claim against an individual co-worker for the detriment of dismissal, and a claim for vicarious liability against the employer, in addition to an unfair dismissal claim. 

While it is difficult to argue against the Court of Appeal’s reasoning, the decision creates some anomalies, and will raise interesting tactical questions for claimants and respondents alike. 

 Facts 

Mr Osipov was dismissed from his role as CEO of International Petroleum Ltd after he made a series of protected disclosures. His dismissal was carried out by a non-executive director (NED), Mr Timis, on the instruction of another NED, Mr Sage. He successfully claimed automatically unfair dismissal against the company. He also sought to claim that, by their conduct in relation to his dismissal, the two NEDs had subjected him to a detriment, contrary to section 47B of the Employment Rights Act 1996 (ERA 1996), and that the company should be vicariously liable for their conduct. 

The employment tribunal and EAT upheld his claims, holding that both the two NEDs and the company were jointly and severally liable for the losses flowing from Mr Osipov’s dismissal (which totalled approximately £1.75 million). 

The NEDs appealed the decision to the Court of Appeal. One of their grounds of appeal was that since the detriment in question amounted to a dismissal, section 47B did not apply and Mr Osipov’s only redress was against the company for unfair dismissal under Part X of the ERA 1996. 

Court of Appeal decision 

The Court of Appeal upheld the EAT’s decision, finding that once the decision had been taken to make co-workers personably liable for whistleblower detriment, it would be “incoherent and unsatisfactory” if they were not similarly liable where the detriment amounted to dismissal. This has the consequence that the employer will be vicariously liable for the detriment leading to dismissal under section 47B(1B). All that is excluded by section 47B(2) is a claim against the employer in respect of its own act of dismissal. 

 Consequences 

The decision confirms that liability in whistleblowing claims is similar to that for unlawful discrimination under the Equality Act 2010, namely that individuals are not protected from liability for the consequences of the most serious detriments to which they subject others. Accordingly, claimants will consider whether they should be pursuing claims against individuals as well as the employer in cases where dismissal is the issue. Generally, the employer will have more financial resources. However there could be occasions where the directors may have deeper pockets, such as where the employer is insolvent (as in this case), or in the case of a start-up company. 

From a tactical point of view, claimants may wish to pursue a claim for detriment rather than (or in addition to) an unfair dismissal claim, as the former can give rise to compensation for injury to feelings and the employer may therefore be vicariously liable for a higher sum than it would be in an unfair dismissal claim alone. There may also be occasions where an unfair dismissal claim would fail, for example where the dismissing manager can persuade the tribunal that the principal reason for dismissal was not the disclosure, whereas a detriment claim may still succeed. 

This decision will also have significant implications for individuals who are involved in disciplinary processes. Where an employee alleges that their dismissal was as a result of having blown the whistle, they will be able to claim for all losses flowing from the dismissal not only from the employer but also from the individuals involved in the decision-making process. In this case the NEDs were covered by the company’s D&O liability insurance. Employers may wish to check whether their own policies cover non-executive directors as well as executive directors, and will need to consider how those who are not officers should be protected. Training is essential, and employers will want to ensure that all employees and office holders responsible for decision making are supported with HR and legal advice when making decisions which could give rise to a substantial financial risk, both to the employer and to themselves. 

When facing whistleblowing claims, employers will also need to consider whether employees will need to take their own legal advice as there may be a conflict of interest; will the employer ever be able to argue that they are not vicariously liable and the employee was effectively “on a frolic”? 

We wait to hear whether the case will be appealed to the Supreme Court. 

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Internal investigations are increasingly being conducted by companies not only on regulatory grounds but also in response to employment issues such as whistleblowing and discrimination allegations. In SFO v ENRC [2018] EWCA Civ 2006, the Court of Appeal has significantly widened the scope of legal professional privilege in the context of an internal company investigation. It will now be easier for the employer to assert privilege over employees’ witness statements and other documents generated in an investigation.

Privilege: legal background

The principles of legal privilege were addressed in Three Rivers DC v Bank of England (No 6) [2004] UKHL 48. In Three Rivers v Bank of England (No 5) EWCA Civ 474, the Court of Appeal considered the scope of legal advice privilege and decided that only communications between client and lawyer were privileged. In the corporate context, only employees tasked with seeking and receiving such advice could be considered to be the “client”; communications between lawyers and other employees would not attract privilege.

This has had two practical consequences of particular importance to employment advisers:

  • It has given rise to the “client group” model often used in investigations, whereby a small team is set up exclusively to instruct, communicate and deal with the lawyers.
  • It has meant that investigative interviews with employees outside the group would not attract privilege.

The House of Lords held in Three Rivers (No 6) that litigation privilege would only protect communications between parties or their lawyers and third parties where:

  • The litigation was proceeding or in contemplation.
  • The communications were for the sole or dominant purpose of that litigation.
  • The litigation is adversarial, not investigative or inquisitorial.

SFO v ENRC: the facts

In December 2010, ENRC received from a whistleblower allegations of corruption and fraud within a wholly owned subsidiary in Kazakhstan. By March 2011, ENRC’s general counsel formed the view that it was “on the SFO’s radar” and should upgrade its dawn raid procedures. ENRC’s audit committee instructed solicitors to investigate the allegations, and in April 2011, the solicitors warned that adversarial proceedings could occur from the internal investigation. In May 2011, ENRC engaged forensic accountants to undertake a books and records review to assess its exposure to liability under bribery legislation.

In August 2011, the Serious Fraud Office (SFO) contacted ENRC in relation to the whistleblower’s allegations which had, by this time, been reported in the media. The SFO referred to its self-reporting guidelines, but noted that it was not at that stage carrying out a criminal investigation. Various meetings took place, at which the SFO gave no assurance that it would not prosecute. ENRC in turn gave assurances that it was investigating, but eventually the SFO lost patience and began proceedings in 2013.

During the solicitors’ investigations, statements were compiled from the evidence given by employees and ex-employees. Documents were generated by the review of books and records, and reports prepared by the forensic accountants. ENRC sought to resist disclosure of these documents, including witness statements, on the ground of privilege.

Judgment of Andrews J at first instance

Andrews J found that none of the documents were covered by litigation privilege, as at the time they were created, litigation between ENRC and the SFO was a mere possibility rather than a likelihood. Further, the judge held that the documents had not been created for the dominant purpose of litigation, but rather to avoid it.

The Court of Appeal

In the unanimous judgment of the court (Sir Brian Leveson, Sir Geoffrey Vos and McCombe LJ), the appeal was allowed and the claim to litigation privilege was upheld.

Litigation privilege

The Court of Appeal analysed the requirement that proceedings be in reasonable contemplation by interrogating the facts in some detail, noting the dates set out above in particular. The court considered that “the whole sub-text of the relationship between ENRC and the SFO was the possibility, if not the likelihood, of prosecution if the self-reporting process did not result in a civil settlement.” (Paragraph 93.)

While noting that it was not conclusive, the court said that it was wrong of Andrews J to have disregarded the view taken by ENRC’s solicitors and their “oft-repeated advice” that there was a serious risk of prosecution and/or regulatory intervention (paragraphs 93 and 95). When the SFO specifically makes clear to the company the prospect of its criminal prosecution and legal advisers are engaged to deal with that, the court considered there is a clear ground for contending that criminal prosecution is in reasonable contemplation (paragraph 96).

The fact that a party anticipating possible prosecution will need to make further investigations before it can say that proceedings are likely does not in itself prevent proceedings being in reasonable contemplation (paragraph 98). The court was sensitive to the realities faced by corporate bodies, in particular large ones: “An individual suspected of a crime will, of course, know whether he has committed it. An international corporation will be in a different position, but the fact that there is uncertainty does not mean that, in colloquial terms, the writing may not be clearly written on the wall.”

For these reasons, the court found that Andrews J was wrong to suggest a general principle that litigation privilege cannot attach until either a defendant knows the full details of what is likely to be unearthed or a decision to prosecute has been taken. The fact that a formal investigation has not commenced will be one part of the factual matrix but will not necessarily be determinative (paragraph 100).

The court accordingly found that at the time the documents were created, proceedings were reasonably in contemplation in April 2011 and certainly by August 2011. The court then turned to consider whether the documents were created for the dominant purpose of litigation.

The court reminded itself that the exercise of determining dominant purpose is one of fact and the court must take a realistic and commercial view of the facts. Moreover, there may be a duality of purpose. The key question in the ENRC appeal was whether it would be reasonable to regard ENRC’s dominant purpose as being to investigate the facts to see what had happened and then deal with compliance and governance, or to defend the proceedings in contemplation (paragraph 104).

Noting that regulatory and compliance regimes provide a “stick” to enforce legal standards, the court thought that an investigation for “compliance” and “governance” purposes could, where there is a clear threat of criminal investigation, be “brought into the zone where the dominant purpose may be to prevent or deal with litigation.” (Paragraph 109.). The need to investigate allegations of fraud and corruption was a subset of the dominant purpose of defending contemplated proceedings.

The court said that it was in the public interest that companies should be prepared to investigate allegations from whistleblowers or journalists, prior to going to a prosecutor such as the SFO, without losing the benefit of privilege for the work product and the consequences of their investigation (paragraph 116). Otherwise the temptation may be to not investigate at all.

The fact that the solicitors prepare a document with the ultimate intention of showing it to the other side does not deprive the preparatory legal work of litigation privilege. Thus iterations of a response to a claim or discussions of a letter would nevertheless attract privilege (paragraph 102). Even if litigation was not the dominant purpose of the investigation at its very inception, the court accepted as sufficient that the evidence showed that it swiftly became the dominant purpose (paragraph 111).

Not only were proceedings in reasonable contemplation, but the first instance judge ought to have held that the documents were brought into existence for the dominant purpose of resisting or avoiding those or some other proceedings (emphasis added) (paragraph 113).

Legal advice privilege

The court held that legal advice privilege was not the central issue in the case but still addressed the “forceful” arguments made, including by the Law Society as intervener. It began its discussion of this issue by identifying what Three Rivers (No 5) had actually decided: that communications between an employee of a company and its lawyers could not attract legal advice privilege unless that employee was tasked with seeking and receiving such advice on behalf of the client (paragraph 123).

It noted that the 19th century authorities were decided when the concept of privilege was in its infancy, and further that most of these authorities concerned small businesses or individual litigants. In a modern multinational corporation, the information on which legal advice is sought is unlikely to be in the hands of the main board or the client group. If the multinational corporation cannot claim privilege over communications between its lawyers and employees outside the client group, it will be disadvantaged as compared to smaller companies or individuals. The court considered that this anomaly could not be justified and that basis of privilege should be applicable to all clients, whatever their size or reach (paragraph 127). Moreover, English law was out of step with other common law jurisdictions, which was undesirable given the international context in which business operates (paragraph 129).

The court was clear that, it if had been open to it to depart from the House of Lords decision in Three Rivers (No 6), it would have done. Although it remains good law until overturned by the Supreme Court, a clear signal has been given of the judicial receptiveness to challenges to the narrow definition of “client” for the purposes of legal advice privilege.

The SFO has now confirmed that it will not be appealing to the Supreme Court. Accordingly Three Rivers (No 6) remains the authoritative statement of the law on legal advice privilege.

Conclusion

While the test of litigation privilege has been significantly widened by the Court of Appeal’s decision, any employer hoping to assert privilege will need to consider their position carefully:

  • Each case turns on its own facts. The court will judge claims to privilege in the light of the facts as a whole. Companies must therefore take bespoke advice and regularly update the advice as matters progress.
  • The views formed by the company’s legal advisers should be taken into account by the court, though they will not be conclusive.
  • It is optimal to consider privilege at the outset of an investigation, and then maintain a clear documentary trail to assist in supporting assertions of privilege.
  • The fact that the company needs to conduct further enquiries before it can say with certainty that litigation will follow does not prevent proceedings being in reasonable contemplation.
  • It may be arguable that privilege applies to documents even though the litigation was not in contemplation until a short time after their creation.
  • In relation to the dominant purpose test, privilege will extend to documents for the purpose of avoiding proceedings as well as actively litigating those proceedings.
  • Privilege may exist over documents that are intended to be shown to the other side including for the purpose of settlement.
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Look no further than this press release from BEIS on 1 October 2018 to gauge the government’s enthusiasm for highlighting that it has been thinking about policy and issues other than Brexit over the last couple of years:

“The government has announced plans to ensure that tips left for workers will go to them in full. While most employers act in good faith, in some sectors evidence points towards poor tipping practices, including excessive deductions being made from tips left by customers. New legislation, to be introduced at the earliest opportunity, will set out that tips must go to the workers providing the service.”

In case you missed it, the Prime Minister also made reference to the plan at the Conservative Party Conference.

No timescale beyond the earliest opportunity has been given for the intended legislation, nor any hints as to how it will be framed. The proposal has however taken all of the two years since the Brexit vote and the closing of a consultation into tips, service charges and troncs. So a reminder of the legal status of tips and service charges and the proper treatment of them by employers seems timely.

A very simple proposition, namely that you reward good service by giving an amount directly to the person who has provided it, has become rather complex. It was perhaps relatively easy when restaurant bills were settled in cash (I refer throughout to the restaurant context, though the principles will be applicable to all service industries). Any amount in excess of the restaurant’s own charge went, you assumed or hoped, to the waiter or waitress who served you or perhaps into a tronc to be split amongst all the waiting staff (or all staff to include the kitchen workers) in proportions already agreed. But then cheques (does any restaurant still accept payment by cheque?) and credit and debit card payments came along and everything got a bit more complicated. In order to achieve the intended result, someone had to make the split between the employer’s bill and the intended gratuity, and do it honestly.

“Assume that an employer refused to hand over a tip to his employees. Could the customer enforce payment or recover the amount he had added as a tip? I believe he could: certainly he should be able to do so. A tip is paid upon the understanding that it will be distributed to the staff and, if nothing is said to the contrary, it will be taken to have been accepted on that basis. The law in those circumstances would not be forced to stand by and allow the employer to use the tip for any other purpose than for which it was given. It would either be recoverable as money had and received or, which I believe to be the better view, because the employer failed to carry out his duty as agent.”

That apparently unobjectionable passage, assuming no distinction between cash and card payments, is taken from the dissenting judgment of Aldous LJ in the Court of Appeal in Nerva v RL&G Ltd [1996] IRLR 461. But the majority decided that there is a critical difference between paying in cash and paying by card; that payments distributed by the employers to the appellant waiters in respect of tips added voluntarily by customers paying their restaurant bills by cheque or credit card counted as part of the employees’ statutory minimum remuneration.

Sums which are paid by cheque or credit card, unlike cash tips, are payments made by the employers to the employee. They become the property of the employers and it is the employers who thereafter pay an equivalent amount to the worker, with the employers’ own money. That the money had been paid to the employers in the belief that they would pass it on to the employees and that there was a contractual term providing that they would do so was of no consequence in deciding whether cheque and credit card tips counted against minimum remuneration.

Leave to appeal to the House of Lords was refused, so the European Court of Human Rights hosted the next and final round in the fight in 2002. The waiters lost again:

“The ruling of the UK High Court and Court of Appeal that tips included in cheque and credit card payments were the property of the employers and could be used by them to discharge their statutory obligation to pay the applicant waiters a minimum level of remuneration did not amount to a breach of the applicants’ right under Article 1 of Protocol No 1 to the European Convention on Human Rights to the peaceful enjoyment of their possessions.”

The dissenting opinion of Judge Loucaides echoed the sentiments of Aldous LJ in the Court of Appeal, but he was similarly outvoted:

“I do not think that it can seriously be disputed that in giving the tips the customers intended that they would be specifically handed over in full to the waiters independently of and on top of their salary. I do not think that it can reasonably be assumed that when a customer gives a tip in a restaurant in any form (cash, credit card or cheque) he wants the tip to become the absolute property of the owner of the restaurant.”

So you thought you were rewarding good service, but instead you were contributing to the employer’s obligation to pay a minimum wage. This controversial and very unappealing treatment of tips unambiguously intended for workers thereafter remained the position in law until amendments made to the National Minimum Wage Regulations were introduced from 1st October 2009 (National Minimum Wage Regulations 1999 (Amendment) Regulations 2009/1902 (SI 2009/1902)).

It had already by then been held in Annabel’s (Berkeley Square) Ltd v Revenue and Customs Commissioners [2009] ICR 1123 that a service charge paid by the customer to an employer but then given to a troncmaster for independent distribution under the tronc system was not “paid by the employer” and so did not count towards the employer’s NMW obligation.

Also in October 2009, BIS issued a voluntary Code of Practice on Service Charges, Tips, Gratuities and Cover Charges. This encouraged much greater transparency in this area which was no doubt very welcome, given the level of public misunderstanding and confusion over tipping. But I suspect it has been all too rarely adopted. Different examples of disclosure were provided in the Code to assist any employer who wished to be transparent:

  • “Ten per cent of any discretionary service charge or card tip which you choose to pay is retained by the business to cover the charges we incur in processing your payment, card fraud losses and administration costs in distributing sums to staff.  Twenty per cent of the discretionary service charge or card tip is retained by the business [this includes deductions for breakages, till shortages and walk-outs] and 70 per cent is shared between the staff.” OR
  • “For every £1 received in card tips, the staff keep 70p, 10p covers business costs and administration and 20p goes to the business [this includes deductions for breakages, till shortages and walk-outs]. All cash tips go to the staff.” OR
  • “For every £1 received in card tips, 90p is shared amongst the staff and 10p covers administration, processing and business costs [this also includes deductions for breakages, till shortages and walk-outs]. All cash tips go to the staff.”

I don’t recall having seen too many of these disclosures in the menu or on the bill, which the Code suggested (naively?) as suitable locations for them, in any of the establishments I eat in, but maybe I should get out more. One of the key mischiefs of employers that the proposed legislation will address is the deduction by employers from service charge or tip payments made by credit card of an amount to reflect administration or card costs. This area of abuse is therefore one where intervention must be anticipated.

At the end of the consultation process, the government announced it was considering whether the Code should form the basis of the proposed legislation by being put on a statutory footing. We must wait to see if this happens, but in meantime the best way to ensure your waiter or waitress gets his or her tip is the old way: to pay it (or the whole bill) in cash, declining to pay any optional or discretionary service charge and rendering the question which is the title of this blog redundant.

Hardwicke Stephen Lennard
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