Developments in UK Labour and Employment Law — Looking Back at 2006

January 5, 2007

2006 has seen significant developments in UK labour and employment law with more to come in 2007. In this Briefing we will look back over some of the highlights of 2006. Please contact us for a copy of our Client Alert identifying key developments to watch out for in 2007.

Highlights of 2006

2006 saw key developments in many areas of UK labour and employment law. Highlights include:

Who is Entitled to Protection under UK Employment Law?

The law has struggled to keep pace with the increasing globalisation of business and the increasing use of alternatives to the traditional employee workforce, with the increasing use of agency workers and consultants. The application of UK employment law to such workers, and to employees whose responsibilities cross international borders, has proven complex to determine.

In January 2006, in the case of Lawson -v- Serco, Botham -v- Ministry of Defence and Crofts and others -v- Veta Limited, the House of Lords (the UK’s Supreme Court of Appeal) gave valuable guidance on the territorial scope of the UK laws which protect employees against unfair dismissal.

The House of Lords confirmed that only those whose employment was in Great Britain could claim protection against unfair dismissal. Employees who travel constantly as part of their work (such as airline pilots and cabin crew) will enjoy unfair dismissal protection if based in Great Britain. Protection will only be extended to employees working abroad in exceptional circumstances.

In March 2006, the Court of Appeal (second only to the House of Lords as an appellate court in the UK) demonstrated the willingness of the UK courts to imply an employment relationship contrary to the wishes of the parties (in this case, in connection with an agency worker). In Cable & Wireless ("C&W") -v- Muscat, Mr. Muscat was supplied to C&W by an employment agency. The agency did not engage Mr. Muscat directly, but contracted with a service company established by Mr. Muscat to provide his services to the agency. There was no written agreement between Mr. Muscat and C&W. Nevertheless, the Court of Appeal held that an implied contract of employment existed directly between Mr. Muscat and C&W. Thus Mr. Muscat was able to claim unfair dismissal against C&W on termination of the agency arrangements. With careful drafting of their arrangements, it should be possible to reduce the risk that an employment contract will be implied against the wishes of the parties.

Extension and Development of UK Discrimination Laws

Arguably the most significant development in UK discrimination law for over 30 years came in October 2006, when the UK introduced protection against age discrimination for the first time, in the form of the Employment Equality (Age) Regulations 2006 (the "Age Regulations").

The Age Regulations protect employees regardless of their age or the size of their employer and supplement existing UK anti-discrimination laws which protect employees and candidates for employment against unlawful discrimination at all stages of the employment relationship. Particular areas of risk arise in relation to any severance/redundancy plans, employee benefits plans, pay scales, pension schemes, retirement arrangements and recruitment procedures which should be reviewed to ensure compliance. UK law now provides protection against discrimination on a number of grounds including age, gender, marital or civil partnership status, sexual orientation, gender reassignment, colour, race, nationality, ethnic or national origin, religion, belief, pregnancy, maternity leave and disability. Please contact us for a copy of our Client Alert on the Age Regulations.

In addition, 2006 saw a number of important court decisions in the field of UK discrimination law:

In May, the Court of Appeal issued two important decisions. In the case of Miles -v- Gilbank, the Court of Appeal upheld an award of injury to feelings of £25,000 in favour of an employee who had suffered a vicious campaign of discrimination throughout her pregnancy. The Court upheld the decision to make a senior manager personally liable for 100% of the award, even though some of the discriminatory acts had been carried out by other managers, since the senior manager had deliberately fostered a culture of discrimination. This case serves as a warning to those who engage in or permit unlawful discrimination in the work place and/or encourage others to do so.

In the same month, the Court of Appeal in Redfearn -v- Serco t/a West Yorkshire Transport Service confirmed that UK anti-race discrimination laws do not protect employees who are dismissed or otherwise penalised for acting in a way that is racially discriminatory.

In August, in the case of Aziz -v- Crown Prosecution Service, the Court of Appeal upheld a finding of a tribunal that, in the absence of a satisfactory explanation, a court could infer race discrimination from the fact that a company breached its own disciplinary code. As a consequence, employers should guard against implementing UK employment policies and codes of practice which are unduly onerous and/or inappropriate for their business, as departing from those policies and codes of practice may attract liability.

Finally, the first appellate decision on religious discrimination laws introduced in December 2003 came out in August. The Employment Appeal Tribunal ("EAT") (an initial appellate court in many employment cases from which appeal lies to the Court of Appeal) confirmed in the case of Mohmed -v- West Coast Trains Limited that, in cases of religious discrimination, as in many other discrimination claims, once a claimant has proved facts from which an inference of unlawful discrimination could be drawn, then the burden shifts to the employer to provide an explanation untainted by discriminatory factors.

Business Sales and other Transfers of Undertakings

2006 saw a review and overhaul of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (as amended) ("TUPE"), with the introduction, in April, of the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE 2006"). TUPE 2006 continues to protect and transfer the employment and associated rights of employees who work in a business, part of business or other undertaking which transfers from a "transferor" (typically the seller of a business) to a "transferee" (typically the buyer of a business).

Most significantly, TUPE 2006 relaxes the protection afforded to employees in insolvency situations to encourage the "rescue" of failing businesses but extends the coverage of protection afforded to employees who are subject to outsourcing or other service provision changes as well as introducing rules which compel a "transferor" to provide employee liability information concerning transferring employees to the "transferee". Please contact us for a copy of our Client Alert on TUPE 2006.

2006 also saw a number of interesting court decisions in the field of TUPE. In June, the House of Lords delivered its judgment in the case of Celtec -v- Astley. Following a ruling of the European Court of Justice ("ECJ") (responsible for interpreting European laws) concerning the correct interpretation of the European Directive from which TUPE 2006 derives, the House of Lords confirmed that an undertaking will transfer automatically on the date on which responsibility for carrying on the undertaking passes to the transferee, regardless of any contrary agreement or arrangement between the parties. Careful analysis is therefore needed to ensure that the parties to a transfer of a business or other undertaking are aware of the impact of TUPE 2006 upon the actual date of transfer of employees and associated liabilities.

What is an economic, technical or organisational reason entailing changes in the workforce (an "ETO reason") and why is it significant? An employee who is dismissed in connection with the transfer of an undertaking will be automatically entitled to unfair dismissal protection unless dismissed for an ETO reason. Certain changes to employment terms and conditions are permitted in connection with a transfer of an undertaking if made for an ETO reason. In the case of London Metropolitan University -v- Sackur, the EAT confirmed that, in order for an employer to establish an ETO reason, that reason must entail a change in either the numbers or functions of the employees implicated. Essentially, it may be difficult to envisage circumstances in which an ETO reason exists outside a redundancy or restructuring exercise.

In April 2006, the EAT delivered a troubling decision in the case of G4S Justice Services (UK) Limited -v- Anstey. The claimants had been dismissed for misconduct prior to date upon which the undertaking in which they worked was transferred to G4S under TUPE. The claimants lodged an internal appeal against their dismissal, which was conducted after the date of transfer if the undertaking by the transferor (i.e. the predecessor to G4S). The employees were reinstated and automatically transferred, together with all associated liabilities, to G4S. This case highlights the importance of ensuring careful drafting of any contract governing an arrangement to which TUPE 2006 may apply.

Protection against Unfair Competition

The UK courts will protect an employer against unfair competition from a current or former employee, although express restrictive covenants are usually required in order to restrain the activities of a former employee post-employment. 2006 saw two interesting cases concerning the scope of an employees duties while still employed.

In March, in the case of Meadowstone (Derbyshire) Ltd v Kirk and Hill, the EAT considered the duties of a director regarding the disclosure of confidential information in connection with a proposed management buy-out. The EAT concluded that, by disclosing confidential information to a potential investor in the circumstances, the directors had acted in the best interests of the company and had not breached their obligations of confidentiality.

In December, in the case of Helmet Systems Ltd -v- Tunnard, the Court of Appeal held that a senior salesman had not breached his employment duties by taking steps to set up a competitive business, while still employed. Prior to resigning, Mr Tunnard developed an idea for a product which was competitive with Helmet System’s offering, obtained some limited funding, commissioned concept drawings from a design consultancy and approached a potential financial backer. Mr Tunnard did not form a company, or accept any investments in his company, until after his resignation. The Court of Appeal held that Mr. Tunnard did not commit a breach of his duties to Helmet Systems under these circumstances. Had Mr. Tunnard been a director of Helmet Systems, or had he been employed in a product development role, the court’s decision might have been different. With careful drafting, an employment contract can improve the protection afforded to an employer against unfair competition by current and/or former employees.

When is a "Whistle-Blower" Entitled to Special Protection?

By way of background, an employee dismissed or subjected to some other detriment may recover significant compensation if protected as a "whistle-blower". According to the courts, an employee who complains about a breach of his or her own contract of employment may be protected as a "whistle-blower".

In December, the Court of Appeal confirmed that a "whistle-blower" will only be entitled to protection under the "whistle-blowing" legislation if, as a matter of fact, he or she is dismissed or subjected to some other detriment because of the act of "whistle-blowing" as distinct from behaviour associated with the act of "whistle-blowing". In Bolton School -v- Evans, Mr. Evans was subjected to disciplinary action for hacking into a computer system in order to demonstrate its vulnerability to attack. Mr. Evans received a disciplinary warning for hacking into the computer system but was not penalised for raising concerns about the vulnerability of the system. As such, it was held that Mr. Evans was not entitled to protection under the whistle-blowing legislation.

Bonuses and Remuneration

In November, the Court of Appeal delivered a favourable judgment for employers who provide discretionary bonuses in the case of Commerzbank AG -v- Keen. The Court of Appeal rejected the argument advanced by Mr. Keen, namely that consumer protection laws protect employees against the operation of unreasonable contract terms contained in a bonus scheme. The Court of Appeal also confirmed that a court should only interfere with the award of a discretionary bonus where the employer’s discretion had been exercised irrationally or perversely, and warned employees that they must overcome a very high hurdle to succeed in such a claim.

The lawfulness of "rolled up" holiday pay ( the practice of including (or "rolling-up") an element of holiday pay into an employee’s hourly wages) has vexed the courts ever since the introduction of European laws governing the right to a minimum period of paid annual leave. In Clarke -v- Frank Staddon Limited, the Court of Appeal was bound to apply a ruling from the European Court of Justice that rolled up holiday pay is unlawful because it financially incentivises employees not to take annual leave. Fortunately, the European Court of Justice held that payments made prior to the date of its judgment could be offset against holiday payments due in respect of holiday taken by the employee.

Redundancies and Workforce Restructurings

In October, in the case of Keeley -v- Fosroc International Limited, the Court of Appeal confirmed that enhanced redundancy payment provisions contained in a staff handbook were apt to be incorporated into the terms of employees’ contracts of employment. As a result, Mr Keeley could claim damages for his employer’s failure to pay him an enhanced redundancy payment. Employers wishing to ensure that enhanced redundancy terms remain non-contractual must consider carefully how and to what extent those terms are documented and/or communicated to employees.

Employers who fail to engage in the necessary information and consultation on a collective redundancy or restructuring exercise in the UK may be ordered to pay a protective award to each employee who faces redundancy or is made redundant as a result of the collective exercise. Protective awards may be up to, and often are set at, 90 days remuneration. In December, in the case of Cranswick County Foods PLC -v- S Beall and others the EAT confirmed that, when calculating the amount due to employees, any remuneration which is actually received by employees during the period covered by the protective award should be disregarded. Thus employees will often benefit from double recovery in respect of the period covered by the protective award.

Health and Safety

In January, the Court of Appeal in Hawley -v- Luminar Leisure Limited upheld a decision that a nightclub exercised sufficient control over the actions of an agency doorman to render the nightclub vicariously liable for a violent assault carried out by the doorman on a member of the public while at work. Whilst the nightclub had not instructed the doorman to assault members of the public, the actions of the doorman were sufficiently connected with his job to give rise to vicarious liability in the circumstances. This case serves as a warning to companies which engage security staff directly or via contractors. The risk of vicarious liability can be minimised by careful drafting of the contract governing the relationship between the parties.

In May in Barker -v- Corus (UK) plc and other appeals, the House of Lords introduced the concept of proportionate damages for victims of asbestos-related illnesses where more than one employer exposed the claimant to the risk of contracting the illness. Following significant criticism of the case by claimants and their representatives (in particular with regard to the difficulty in recovering damages from past employers who may become insolvent), the Government has included provision in the Compensation Act 2006 making negligent employers jointly and severally liable in such cases. 


2006 has seen significant changes in UK Labour and Employment law. 2007 likely will be another significant year as the Courts and employment tribunals grapple with TUPE 2006 and the Age Regulations and the Legislature introduces key provisions of the Companies Act 2006 and policies which promote the rights of working parents. We will continue to keep clients appraised of all key developments which may affect their UK businesses as and when they arise.  

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn attorney with whom you work, James A. Cox, our UK Labour and Employment Partner (+44 (0)20 7071 4250, [email protected]) or Daniel Pollard (+44 (0)20 7071 4258, [email protected]) in the firm’s London office, or Gibson Dunn’s Labor and Employment Practice Group Co-Chairs Eugene Scalia in Washington, DC (202-955-8206, [email protected]) or Deborah Clarke in Los Angeles (213-229-7903, [email protected]).  

Gibson Dunn’s UK Labour and Employment Practice has been recently strengthened by the arrival of English solicitor Daniel Pollard.  Daniel has experience advising on all aspects of UK employment law, having previously worked at another major US law firm in London, and is also able to offer business immigration advice.  Daniel joins English qualified partner James Cox in the UK Labour and Employment Practice. 

© 2007 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.