UK Employment and Labour Law — Quarterly Executive Summary (July 2007)

July 18, 2007

Welcome to the second Quarterly Executive Summary of 2007, in which we highlight key developments in UK Employment and Labour Law over the past three months. 

A headline summary of cases and developments is provided below. A more detailed explanation and analysis is available by clicking on the appropriate link. For further details concerning cases and developments discussed in this Quarterly Executive Summary or for assistance on any UK Employment or Labour law matter, please contact James Cox or Daniel Pollard in Gibson Dunn’s London office.


  • TUPE May Apply on Stock Deal. The "TUPE" Regulations protect the rights of employees on the transfer of an undertaking (commonly a business sale or outsourcing). We report on a significant Court of Appeal decision which unusually applies the TUPE Regulations in connection with a share purchase. Click for details

  • Sick Pay for Disabled Employees. The Court of Appeal confirms that, in normal circumstances, an employer will not be obliged to continue to pay sick pay to a disabled employee who exhausts their contractual entitlement. Click for details

  • Pressurised Settlement Negotiations. We report two decisions of the House of Lords and Court of Appeal which are essential reading for anyone involved in pressurised settlement negotiations with employees. Click for details

  • Compromise/Separation Agreements. We examine a recent case which may require employers to revise their standard form UK compromise/separation agreement. Click for details

  • Restrictive Covenants Update. We report one case which evidences the recent trend towards greater enforceability of non-compete covenants in an employment context and another which will make it more difficult for a former employer to hold a new employer liable for inducing a breach of a non-compete by a former employee. Click for details

  • Legislation Update. The ban on smoking at work and in other public places in England came into effect on 1 July 2007, the current immigration rules are to be replaced with a single points based system during the course of 2008 and the full implementation of increased holiday/vacation pay is delayed. Click for details

Set out below are details of the key cases and legal developments appearing in this Quarterly Executive Summary.

TUPE May Apply on Stock Deal. The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") implement the European Acquired Rights Directive in the UK and protect the rights of employees on a transfer of an undertaking (commonly the sale of a business or outsourcing of activities) from a transferor (i.e. the seller of a business or client on an outsourcing) to a transferee (i.e. the buyer or incoming service provider). TUPE requires prior communication and, on occasion, consultation with employees affected by a TUPE transfer and automatically transfers to the transferee the employment contracts and associated rights, powers, duties and liabilities (except certain pension related liabilities) of employees working in an undertaking when that undertaking transfers. In addition, TUPE obliges a transferor to supply information to a transferee concerning transferring employees and provides enhanced protection for employees who face dismissal, changes to terms of employment or changes to working practices.

Conventional wisdom is that TUPE will not operate in connection with a disposal of shares. However, In Millam v The Print Factory (London) 1991 Ltd the Court of Appeal found that TUPE was capable of applying in connection with a share acquisition when, having acquired a new subsidiary (Fencourt), a holding company (McCorquodale) integrated that subsidiary’s business into its own. In the case in question, the process of integration was held to constitute a transfer of an undertaking with the effect that the employment of Mr Millam (who was employed by Fencourt at the time it was acquired by McCorquodale) transferred to McCorquodale under TUPE. As a result, Mr Millam was entitled to bring a claim against the Print Factory when it subsequently acquired the business and assets of McCorquodale (but not Fencourt) under a further TUPE transfer. This case highlights the importance of obtaining appropriate indemnity protection for those acquiring companies and businesses. 

Sick Pay for Disabled Employees. Employees who suffer from a long-term medical condition may well be protected by the Disability Discrimination Act 1995. Whilst certain types of disability discrimination will be lawful if objectively justified, employers must ensure that adjustments are made, where reasonable in all the circumstances, to remove or minimise the impact on a disabled employee of any provision, criterion or practice which places that disabled employee at a disadvantage in comparison with others (the, so called, "duty to make reasonable adjustments").

In O’Hanlon v HM Revenue & Customs, the Court of Appeal considered whether an employer should adjust its sick pay policy by extending sick pay for a disabled employee on sickness absence. Mrs O’Hanlon argued that, as a disabled employee, HMRC should continue to pay her sick pay even though she had exhausted her entitlement under the HMRC sickness policy. In essence, Mrs O’Hanlon argued that a disabled employee on sickness absence should be treated differently and more favourably than a non-disabled employee in similar circumstances. The Court of Appeal disagreed. The Court confirmed that an employer will normally be justified in treating a disabled employee in the same manner as a non-disabled employee when paying sick pay. However, an employer who fails to "make reasonable adjustments" which would allow a disabled employee to return to work from sickness absence may still face a successful claim of disability discrimination.

Pressurised Settlement Negotiations. As the stakes in employment and labour disputes become higher, and the pressure to resolve those disputes becomes greater, employers must take care to ensure that undue pressure is not placed on employees during settlement negotiations. We consider two recent cases which highlight the risks facing employers in such circumstances:

In St Helens Borough Council v Derbyshire the Council faced a claim from over 500 female school catering staff arguing that their remuneration should be equalised with male employees undertaking work of equal value. 38 claimants (the "Claimants") elected to reject a settlement proposed by the Council and proceeded to trial. Shortly before the trial, the Council wrote to all catering staff, including not only the Claimants but also colleagues who had previously settled their claims warning that, if the Claimants succeeded in their claims, the Council might not be able to afford to continue to provide school meals to all children and that job losses might follow. The House of Lords confirmed that the Council’s actions amounted to unlawful victimisation of the Claimants, in breach of the UK Sex Discrimination legislation. The Council’s letter had caused the Claimants distress and strained their relationships with their colleagues who had already settled with the Council. As such it went beyond what an "honest and reasonable employer" might consider to be a legitimate means of defending or attempting to settle the litigation in question. The outcome might have been different had the Council written in similar terms solely to the Claimants legal representatives, without copying either the Claimants or their colleagues on the communication.

In Sandhu v Jan de Rijk Transport Ltd, the Court of Appeal considered the circumstances in which an employer’s conduct in settlement negotiations could render an apparent resignation ineffective. Mr Sandhu was summoned to a meeting with his employer at which he was told that his employment was to finish. Mr Sandhu was presented with a letter, which he signed, stating that his employment would terminate by agreement on a date some three and a half months later. Mr Sandhu subsequently claimed that he had been unfairly dismissed. An employer who unfairly dismisses an employee may be ordered to reinstate or re-engage that employee but more usually will be ordered to pay appropriate compensation of up to £69,900 or approximately $140,000. Mr Sandhu’s employer sought to argue that his employment had terminated by mutual agreement. The Court of Appeal confirmed that, in order for a resignation to be effective, it must be freely given or, alternatively, the result of a genuine agreement reached following negotiation and discussion between the parties. The Court indicated that a resignation tendered during a meeting under threat of dismissal was unlikely to be viewed as effective and binding. As a consequence Mr Sandhu was treated as dismissed and was allowed to pursue his unfair dismissal claim against his former employer. Had Mr Sandhu resigned under a negotiated compromise agreement on which he had received independent legal advice, then he would have been prevented from pursuing his claim.

Compromise/Separation Agreements. One of the few ways in which an employee can validly release an employer or former employer from statutory employment claims (such as unfair dismissal or unlawful discrimination) is by entering into a written agreement known as a Compromise Agreement, having previously taken independent legal advice on the terms and effect of that agreement. When drafting compromise agreements, employers are well advised to obtain a warranty from departing employees confirming that all relevant facts and circumstances have been disclosed to the employer (in particular that there are no grounds justifying dismissal for cause). One recent case contains useful guidance on how a Compromise/Separation agreement should be drafted if an employer wishes to avoid making payment to an employee who is guilty of misconduct. Employers will be reviewing their template Compromise/Separation Agreements as a result.

In Collidge v Freeport Plc, the High Court allowed Freeport Plc to avoid its obligation to pay severance to Mr Collidge under a compromise agreement when it was subsequently discovered that he had been guilty of gross misconduct which would have entitled the Company to dismiss him summarily "for cause". As an express condition of payment under his Compromise Agreement, Mr Collidge warranted that there were no circumstances of which he was or should have been aware which could have led to his summary dismissal. In fact, Mr Collidge was aware of his misconduct and had not therefore satisfied the conditions for payment. Accordingly, Freeport Plc was able to withhold payment yet still enforce the remaining terms of the compromise agreement.

Restrictive Covenants Update. Restrictive covenants operate as a restraint of trade and are therefore generally unenforceable under English law as a matter of public policy. In certain circumstances, a restrictive covenant which is proved to be reasonable in the interests of the parties will be enforced by the courts provided that it affords no more than adequate protection of the party in whose favour it is imposed. As a result, a party seeking to enforce a restrictive covenant must demonstrate that the covenant: (i) protects a legitimate business interest of that party (e.g. confidential information and/or customer connections); and (ii) does so in a manner which is no more than adequate to protect that interest. Covenants which do not protect a legitimate business interest or which do so in a manner which is excessive are unenforceable.

Furthermore, an employment contract may permit an employer to place an employee on Garden Leave, most commonly during the employee’s notice period. Garden leave is so called because the employee continues to be paid during the Garden Leave period but is assigned no duties, required to remain away from the workplace and is prohibited from taking on other work and so, with nothing better to do with their time, the employee is imagined to sit at home in their garden waiting for the period of leave to end. Garden Leave is considered to be a form of restrictive covenant. It is often argued that, in order to be enforceable, the duration of a non-compete clause should be reduced by any prior period of Garden Leave served by the employee.

We report two decisions below which consider the enforceability of restrictive covenants and the scope and extent to which a new employer can be held liable for inducing a breach the terms of a contract of employment between a new hire and their former employer.

In Extec Screens and Crushers v Rice the High Court considered whether a non-compete covenant was enforceable in circumstances where the period of that covenant was not reduced by a prior period of Garden Leave. Mr Rice’s employment contract allowed his employer, Extec, to place him on Garden Leave for up to three months during his notice period and also contained a further 8 month post-employment non-compete. Mr Rice argued that the 8 month non-compete clause was unenforceable because the period of the non-compete was not reduced by any period of prior Garden Leave. The Judge disagreed, finding that the aggregate period of Garden Leave and Non-Compete (11 months) amounted to a reasonable restraint of Mr Rice’s activities. Accordingly, the restriction was deemed to be reasonable and enforceable. This is one of a number of recent cases which demonstrate a recent trend towards greater enforceability of non-compete covenants in an employment context. 

In Mainstream Properties Limited v Young and others the House of Lords considered the circumstances in which a third party (in this case a financial backer but often a new employer) is liable for the tort of wrongfully inducing an employee to breach his contract of employment with his previous employer. The House of Lords affirmed the decision of the Court of Appeal which held that, in order to be guilty of the tort of inducing a breach of contract a party must act with the object or purpose of inflicting harm on the injured party, mere recklessness was not sufficient. It will now be much more difficult for a former employer to hold a new employer liable for inducing a breach of a non-compete by a former employee.

Legislation Update. Key legislative developments over the last quarter comprise:

Smoking Ban. With effect from 1 July 2007, England has joined Scotland and Wales in banning smoking in enclosed or substantially enclosed workplaces and other public places. Although there are certain narrow exceptions these are unlikely to apply to most employers. As the ban applies to "substantially enclosed" spaces this may encompass some outside "smoking shelters" and will also cover shared company vehicles. There are criminal sanctions not only for employees who smoke but also for employers who fail to stop employees from smoking or who fail to display no smoking signs. Employers should ensure that smoking rooms are closed, that ash trays are removed, that "no smoking" signs are prominently displayed and that staff are made aware of the ban. We can help produce an appropriate no smoking policy for your staff handbook if required. 

Timetable for New Immigration System. As part of a major review of the current immigration rules, which have developed in a piecemeal fashion with over 80 routes of entry, the Government announced in February 2005 that it was going to introduce a single points based system. The first tier, for "highly skilled workers" (broadly those who would currently use the Highly Skilled Migrant Program) will come into effect at the beginning of 2008. The second tier for "skilled workers" (broadly those who would currently use the Work Permit Scheme) will come into effect from September 2008. The new system is to be welcomed if it achieves its aim of streamlining the application process. However, there will almost certainly be "teething" during the early stages and the detailed scoring criteria have yet to be published which means the extent of any substantive changes unclear. 

Also due to come into force in early 2008 are new rules aimed at preventing immigrants from working illegally. These will introduce tougher penalties for employers who illegally employ workers or who are negligent in performing the appropriate pre-employment checks. 

Update: Additional Annual Leave Delayed. The Government is in the process of increasing the minimum holiday entitlement from 4 weeks (20 days) each year to 5.6 weeks (28 days for most full time employees) each year. This is being implemented in two stages to allow employers time to adjust. The first stage of the increase, to 4.8 weeks (24 days for most full-time employees) will take place on 1 October 2007. We reported in the first Quarterly Executive Summary that the second stage of the increase to 5.6 weeks (28 days for most full-time employees) was to come into affect on 1 October 2008. However, it has recently been announced that this will not now come into affect until 1 April 2009. The increased entitlement has the effect of ensuring that all workers are given time off in respect of the eight or so bank/public holidays enjoyed in the UK. 

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details concerning cases and developments discussed in this Quarterly Executive Summary or for assistance on any UK Employment or Labour law matter, please contact the Gibson Dunn attorney with whom you work, James A. Cox (+44 (0)20 7071 4250, [email protected]) or Daniel Pollard (+44 (0)20 7071 4257, [email protected]) in the firm’s London office, or any member of Gibson Dunn’s Labor and Employment Practice Group.  

© 2007 Gibson, Dunn & Crutcher LLP

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