Constructive dismissal: case study

Phillip Chivers of Osborne Clarke concludes a series of articles on constructive dismissal with a case study that looks at a situation in which a number of employees threaten to claim constructive dismissal over the non-payment of a bonus. 

SmallorderCo Ltd is an online retailer with about 100 employees. For the last three years, in December, it has given its employees a Christmas bonus, equating to approximately a week's pay. There is no mention of the bonus in the employees' contracts or other documentation relating to their terms of employment. When the company paid the bonus previously, it included a note in the employees' payslips telling them that it was "pleased to be able to give you a Christmas bonus this year".

SmallorderCo Ltd has had a difficult year financially.  It had to make redundancies in the summer and may have to consider further redundancies in the new year if things do not improve. The company's directors make a decision not to pay the Christmas bonus this year. As there is nothing in writing about the Christmas bonus in the employees' contracts, the directors are confident that this will not be a problem. They send a note to all staff saying that they are sorry but they cannot pay the bonus this year.

The employees are disappointed that they will not be getting the bonus but most understand that, in the current economic climate, and particularly as other staff have lost their jobs, the company has no choice. However, a handful of employees have objected and are saying that the employer cannot withdraw the bonus. They are threatening to claim constructive dismissal.

Must SmallorderCo Ltd pay the bonus?

There is no express written term in SmallorderCo Ltd's employment contracts that gives its employees a right to receive a Christmas bonus. Therefore, to have the grounds for a constructive dismissal claim, the aggrieved employees would need to be able to demonstrate that the payment of the bonus is an implied term of their contracts on the basis that it has become contractual through custom and practice. This would not be straightforward. Claims of this nature depend on the particular facts of the case, but the employees would need to be able to demonstrate that they had a legitimate expectation that SmallorderCo Ltd would make the payment on the basis that this practice was fair (ie not arbitrary), well known to the employees and certain.

In this case, the comparatively short period over which the bonus has been paid, and the reference to "this year" in the note accompanying the payments, suggests that the employees may have some difficulty arguing that the term has become contractual through custom and practice.

However, the risk for the company if it does not pay the bonus is that the employees may assert that they have a contractual right to it and that its non-payment constitutes a sufficiently serious breach of contract to entitle them to resign and claim constructive dismissal. In the current economic climate, resigning for this reason seems an unlikely and extreme reaction. A more likely scenario is that the employees will not resign but will bring unlawful deduction of wages claims for the non-payment of the bonus, or claims for breach of contract in the civil courts. They could also bring claims in an employment tribunal for a declaration of their employment particulars under s.1 of the Employment Rights Act 1996 (see the Written statement of employment particulars section of the XpertHR employment law manual for more details).

How might this situation have been avoided?

SmallorderCo Ltd could have avoided this situation by making it absolutely clear from the outset, when it made the bonus payments previously, on what basis it was making the payments. It should have set out in writing when it made the payments that the bonus was entirely discretionary and the fact of its payment did not confer a contractual right on employees to receive similar payments in future.

Some employers insert "entire agreement clauses" into their employment contracts confirming that the written content of the employment contract constitutes the entirety of the employees' contractual rights. Had SmallorderCo Ltd included a clause like this, it would be more difficult for its employees to argue that the terms outside their written agreements have contractual force.

What should SmallorderCo Ltd do now?

SmallorderCo Ltd has two options. It could either maintain that the bonus is not a contractual right and refuse to pay it, taking the risk that some aggrieved employees may bring claims. Alternatively, it could pay the bonus. If it takes this course, this will amount to a further year for which the employees receive a bonus. This, in itself, would make for a stronger argument that the bonus payment is contractual. The fact that the company has backed down on this issue may have consequences if it attempts to make other changes going forward. If SmallorderCo Ltd adopts this option, it should consider at least inserting some wording to suggest that the payment is discretionary in an attempt to avoid a repeat of this situation next year.

SmallorderCo Ltd decides to take a risk and not pay a Christmas bonus, given that the majority of staff appear to have accepted that it will not be paid. To sweeten the situation, and as a gesture to reward employees for their hard work, the directors decide to put some money into a Christmas party fund. The party goes ahead at a local bar. One of the managers, Brian, drinks too much, and tells one of his employees, Geoff, who has performed particularly well during the year, that he thinks that he (Geoff) should have got the bonus. Brian says he will see if he can "pull some strings" to make sure that Geoff gets the bonus. This exchange is witnessed by some other employees. The following week, after having received his pay, with no bonus, Geoff reminds Brian about their conversation and asks when he will get the bonus. Brian's recollection of the conversation is vague.

Is Geoff entitled to the Christmas bonus?

It is highly unlikely that Geoff would be entitled to the bonus as a result of the conversation he had with Brian in the bar.

In Judge v Crown Leisure Ltd [2005] IRLR 823 CA, the employee resigned and claimed constructive unfair dismissal because of the employer's failure to increase his salary to the same level as a colleague's. He referred to a conversation that he had had at an office Christmas party during which his boss had explicitly promised that his salary would be increased to this effect.

The employment tribunal found that the employee's boss had given nothing more than "words of comfort" and an assurance that he was committed to achieving parity with the colleague. The Court of Appeal agreed that the statement made by the employee's boss did not amount to a contractual promise to increase his salary to the same level as his colleague's because it was too vague and uncertain to amount to a binding contractual promise. Therefore, the employer's failure to bring about parity did not amount to a fundamental breach of contract.

In Geoff's case, Brian's statement is unlikely to be found to amount to a contractual promise to pay a bonus. To be a legally binding and enforceable contractual commitment, there must be some certainty as to what is being agreed. There is no reference here to Brian agreeing to pay the bonus; he simply refers to "pulling some strings". This is too vague and uncertain to amount to a binding contractual promise.

How can SmallorderCo Ltd prevent this kind of situation recurring?

As well as making clear that any bonuses that it pays in future are discretionary, SmallorderCo Ltd should specify that decisions on whether or not a bonus will be paid and to whom, can be decided only at a certain level of management (for example at director level). This will make clear to all staff who has the authority to authorise and sanction bonus payments.

The company should also raise with Brian his conduct at the party and remind him of his position and responsibilities within the business and the standards of behaviour expected of him and other staff at social functions. It could consider whether or not it would be appropriate to take disciplinary action in the circumstances, given that Brian is a manager and he could have compromised the company's position by his comments to Geoff. SmallorderCo Ltd should also send out a reminder to all staff, in advance of future company social events, of the standard of conduct that it expects of them.

The next topic of the week article will be the first in a new series on the implications of the Queen's Diamond Jubilee holiday for employers and will be published on 9 January.

Phillip Chivers (phillip.chivers@osborneclarke.com) is a senior associate at Osborne Clarke.

Further information on Osborne Clarke can be accessed at www.osborneclarke.com.