UK Employment and Labour Law — Quarterly Executive Summary (May 2008)

May 15, 2008

Welcome to the second Quarterly Executive Summary of 2008, in which we highlight key developments in UK Employment and Labour Law over the first quarter of 2008. 

We would first of all like to take this opportunity to welcome a new attorney to Gibson Dunn’s London Employment & Labour law department. Steven Cochrane joined the firm in April and has experience in the broad range of UK employment and labour law issues. 

A summary of cases and developments is provided below. 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, Daniel Pollard or Steven Cochrane in Gibson Dunn’s London office.


Employer Liable for Employee’s Suicide.  The House of Lords finds an employer liable under the Fatal Accidents Act 1976 for the suicide of an employee suffering from severe depression resulting from an injury caused by a workplace accident.

The Fatal Accidents Act 1976 ("FAA") provides that dependants of an individual who dies as a result of any wrongful act, negligence or default by another party can bring a damages claim against that party in respect of the loss of financial support resulting from the death of the individual.

In Corr (Administratix of the Estate of Thomas Corr (deceased) v IBC Vehicles Ltd, Mr. Corr (the deceased individual) has been employed as an engineer.  In 1996 he was involved in a serious workplace accident which resulted in serious injury requiring prolonged reconstructive surgery to his ear.  Mr. Corr remained disfigured and suffered from tinnitus and severe headaches as well as post-traumatic stress disorder and depression. Sadly, following the accident, Mr. Corr’s mental illness worsened to the extent that 6 years following the accident he committed suicide.

The deceased’s widow made a claim under the FAA that, as a dependant, she was entitled to recover the financial losses attributable to her husband’s suicide.

The High Court found that Mr. Corr had suffered severe depression as a result of the accident but that he knew what he was doing, and the consequences of his actions, at the time he committed suicide. The High Court therefore rejected the claim on the basis of the suicide being a voluntary act or an act so far removed from the original accident that the two could not be connected. 

However the House of Lords upheld the Court of Appeal’s decision that as Mr. Corr’s depression was the result of the accident, it followed that the suicide was a foreseeable consequence as well.  It was recognised by the court that suicide was a well known risk of severe depression.

This case shows that employers may be held liable for death of an employee — however unforeseeable that death is — if it resulted from some foreseeable damage caused by an accident at work. On the same basis an employer could potentially find itself liable for a suicide resulting from workplace stress.  Whilst most claims will be covered by an employer’s compulsory liability insurance, line managers should be trained to look out for the warning signs and an employee assistance plan considered.    

Important Changes to Sex Discrimination LegislationThe Sex Discrimination Act 1975 has been amended so that from 6 April employers can potentially face claims from  employees who witness harassment and also from employees who experience repetitive harassment by third parties such as clients or customers.  From October 2008, employees on maternity leave will be entitled to non-pay benefits during the full 52-week period of maternity leave and not just the first 26 weeks of their "ordinary maternity leave". 

Following successful judicial review proceedings brought by the Commission for Equality and Human Rights, amendments have been made to the Sex Discrimination Act 1975 ("SDA") to harmonise it with the EU Equal Treaty Directive. These changes came into force on 6 April 2008 and were effected by the Sex Discrimination Act 1975 (Amendment) Regulations 2008 ("Amendment Regulations").

The main changes are:.

(i) Widening Sexual Harassment

The Amendment Regulations have widened the protection afforded by the harassment provisions of the SDA by replacing the phrase ‘on the grounds of her sex’ with the phrase ‘related to her sex’.  This means that it will no longer be necessary to show that harasser’s conduct was motivated by the victim’s sex but merely related to it. One of the consequences of this change is that an employee witnessing harassment (for example, a man who witnesses a woman being harassed by her manager during a meeting) can now bring a claim for harassment — although the witness would need to show that their dignity was violated and that the harassment they witnessed created an intimidating, hostile and degrading, humiliating or offensive environment for him or her. 

Employers should ensure that their policies are fully up to date and take account of this wider definition and ensure that line managers and personnel departments are fully appraised of the heightened risks.

(ii) Harassment by Third Parties

Employers will now face liability where they fail to protect an employee from harassment by third parties during the course of their employment. This applies where the employer is aware that the employee has been harassed on at least two occasions by a third party (but not necessarily the same third party) and have failed to take "reasonably practicable steps" to prevent the third party from doing so. This change is of particular significance to employers in service industries (for example hotel, catering and professional services). 

Anti-harassment policies should be changed to ensure that complaints by employees concerning behavior by third parties are appropriately addressed.

(iii) Non-pay Benefits to Be Provided for the Full Maternity Leave Period

The Amendment Regulations also provide a significant extension to employee’s maternity rights by removing much of the current distinction between ordinary maternity leave (the first 26 weeks of maternity leave) and additional maternity leave (the subsequent 26 weeks of maternity leave).  The effect of this is that women must be afforded the same terms, conditions and non-pay benefits during additional maternity leave as during ordinary maternity leave. 

This change will apply to women whose expected week of childbirth begins on or after 5 October 2008 so employers have a ‘grace period’ within which to ensure that their policies are compliant with the changes. 

The Amendment Regulations also clarify existing case law which held that women absent on maternity leave are entitled to payment of any discretionary bonus relating to their period of compulsory maternity leave (i.e. the two weeks following childbirth).

Employers will need to review and amend their maternity policies.

Homophobic ‘Banter’ in the Workplace Cannot Be Harassment of an Employee Known to Be Heterosexual.  Heterosexual employees do not have the right to bring a claim for discrimination if they are "teased" for being homosexual if it is known that they are not.

The Employment Equality (Sexual Orientation) Regulations 2003 ("Sexual Orientation Regulations") prohibit discrimination (direct or indirect), victimisation or harassment in the workplace on grounds of sexual orientation.

In English v Thomas Sanderson Blinds Ltd, Mr. English’s claim for harassment by colleagues on grounds of sexual orientation failed by virtue of the fact that the claimant was not (nor was he perceived to be) homosexual.

Mr. English had worked for his employer for 9 years.  Following the termination of his employment, he brought a claim in the Employment Tribunal that he had been harassed in breach of the Sexual Orientation Regulations.  The basis of Mr. English’s claim was that his colleagues had continually ‘ribbed’ him about being gay.  The Employment Appeals Tribunal ("EAT") ruled that because the Sexual Orientation regulations only prohibit harassment on the grounds of sexual orientation, the ‘banter’ experienced by Mr. English was not covered.

Notably the EAT commented that they believed that UK law was out of sync with the EC Directive which prohibits harassment related to sexual orientation (a prohibition which the EAT thought would have covered Mr. English’s situation).  The Sexual Orientation Regulations are likely to be amended so as to prohibit sexual orientation related harassment in line with the EC Directive.  Indeed, this has recently happened in the context of Sex Discrimination where the harassment prohibition now refers to unwanted conduct that is related to an employee’s sex (see above). 

Dismissals Ahead of Business Sale Automatically Unfair Even If Buyer Not Known.  Under the UK "TUPE" regulations, employees will be treated as being unfairly dismissed and entitled to compensation in the event that they are terminated as part of "slimming down" ahead of a business sale even if the buyer has yet to be identified.

The Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE") implement the Acquired Rights Directive in the UK.  TUPE provides that when an employee is dismissed because of a transfer (e.g. the sale of a business or the "outsourcing" of a service) or a reason connected with that transfer, such dismissal will be automatically unfair unless the employer can demonstrate that the dismissal was for an "economic, technical or organisational" ("ETO") reason.

In CAB Automotive Ltd v Blake (and others), the EAT held that in a situation where an administrator was "slimming down" a business in order to make it more attractive to potential buyers, an Employment Tribunal could view the reason or principal reason for dismissal as being connected to the potential TUPE transfer, even where a specific buyer has yet to be identified (it not being accepted that the seller had an ETO reason of its own).

Mr. Blake was employed by RDS Automotive Interiors Ltd ("RDS").  After RDS went into administration, the administrator dismissed (by reason of redundancy) any employees who were not required to resource existing contracts and, subsequently, RDS’s assets were transferred to CAB Automotive Ltd ("CAB").  Mr. Blake and the other dismissed employees brought claims of unfair dismissal against both RDS and CAB.

The Employment Tribunal held that the administrator’s intention in dismissing the employees was to ensure that the business would be in the best possible shape for sale.  For this reason, the dismissals were connected with the transfer, notwithstanding that no specific buyer had not yet been identified.  However, the Employment Tribunal found that the administrator’s intention in effecting the dismissals was not an ETO reason and so the dismissals were automatically unfair.  The EAT agreed with the Employment Tribunal’s decision. 

This case is of particular relevance for buyers of insolvent businesses in which redundancies have been effected by the insolvency practitioner.  In such situations, there is a real risk to the buyer that such dismissals will be deemed automatically unfair under TUPE.  In the absence of indemnities from the insolvency practitioner (which are rarely given) the buyer would be well advised to factor the cost of any potential unfair dismissal claims into its financial model — or, if practical, manage dismissals post-acquisition.

Expired Warnings Can Now Be taken into Account.  The Court of Appeal holds that employers can refer to "expired" disciplinary warnings when considering the dismissal of an employee.  In order to fairly dismiss an employee for misconduct it is usually necessary to give the employee a series of warnings (save in cases of very serious misconduct) and a warning is usually expressed to expire after a stated period.

In Airbus UK Ltd v Webb, Mr. Webb was employed by Airbus UK Limited ("Airbus") as an aircraft fitter and had been given a final written warning for misuse of company time after he was caught washing his car during working hours.  As is common practice this warning was stated to remain on his personnel file for one year.  A month after the expiration of the written warning, Mr. Webb was found watching television during working hours and was summarily dismissed. None of his colleagues were dismissed as none of them were in receipt of any previous warnings.

The Court of Appeal rejected Mr. Webb’s claim for unfair dismissal and decided that Airbus had acted reasonably notwithstanding the fact that it had considered an expired disciplinary warning when deciding whether to dismiss Mr. Webb.  The Court of Appeal distinguished an earlier authority which, oddly, suggested that no weight could be placed on expired warnings.

This decision provides scope for employers to draw upon previous similar misconduct when deciding whether or not to dismiss an employee for subsequent misconduct, despite the fact that the previous misconduct was subject to an expired warning.  While it remains unreasonable for employers to rely on expired warnings as the principle reason for dismissal, they will be able to take into account previous expired warnings.  Employer’s should ensure that there is nothing inconsistent with this in their employee handbooks. 

ABI and NAPF Statement on Executive Contracts and Severance RevisedThis influential guidance is published on behalf of institutional investors and is aimed at preventing "rewards for failure".  UK listed companies who disregard it face the prospect of their directors’ remuneration being voted down by shareholders.  Whilst the general principles remain unchanged there have been a number of subtle changes of emphasis. 

The Association of British Insurers ("ABI") and the National Association of Pension Funds ("NAPF") whose members are leading institutional investors in UK have revised their joint statement (first published in 2003).  The joint statement is a statement of best practice outlining shareholders’ expectations in the context of boards negotiating executive services agreements and severance arrangements.  The joint statement applies to those companies on the UK Listing Authority’s Official List.  Whilst the statement does not formally apply to companies listed on AIM it tends to be considered by them and has also had an indirect influence on private company remuneration in the UK.  The statement was last revised in 2003.

The recently revised joint statement does not include any significant new obligations but contains a few minor additions and also ‘firms up’ on some principles which were already present in the 2003 edition.  The main changes/emphasised issues can be summarised as follows:

  • Companies should disclose key elements of directors’ contracts on their corporate website and summarise them in their annual remuneration/compensation report;

  • The policy in relation to executive termination (including the approach to mitigation) should be set out in the annual remuneration/compensation report;

  • No director should be entitled to discretionary (e.g. bonus) payments where their contract is terminated by reason of poor (corporate) performance;

  • The constituent parts of any directors’ severance payments should be fully disclosed in a company’s directors’ remuneration report, which should also justify the total value and the elements included (new provision);

  • Remuneration Committees ought to consider retaining their discretion to claw-back bonuses where performance achievements are found to have been misstated (new provision);

  • Contracts should never provide additional compensation for severance as a result of a change of control;

  • The ABI and NAPF do not support contractual provisions for pre-agreed sums to be paid on severance (i.e. a liquidated damages or severance payment), preferring phased payments subject to a duty to mitigate; and

  • Guarantee pensions with limited or no abatement on severance or early retirement are no longer acceptable (except where they are generally available to all employees). Where possible, such provisions (even where applicable to all employees) should be amended and discontinued going forward (new provision).

Employers Must Apply for a License to Obtain "Work Permits" under the New Points Based System.  After October 2008 any employers wishing to employ foreign nationals under tier 2 of the new points based system (which replaces the current work permit scheme) must be registered as "licensed sponsors" and must meet stringent standards in relation to record keeping, reporting and compliance. 

On February 29, a new points based system ("PBS") was launched by the Home Office. The PBS will be rolled out in phases and consolidates the existing immigration system.

Tier 1 (which replaces the Highly Skilled Migrants Programme) was launched on 29 February 2008 and is being rolled out worldwide in phased basis, starting with India from 1 April 2008). Tier 2 replaces the existing work permit scheme and will be introduced in around October 2008.  The main changes relevant to employers are:

  • Employers who wish to employ foreign nationals must register as licensed sponsor. Employers will be required to decide which employees are eligible.

  • Employers will complete an on-line application form and generate their own "Certificate of Sponsorship" to prospective employees.

  • Employers must maintain supporting documentation relating to the foreign national employee’s eligibility and their full contact details.

  • Extensive reporting duties (including where the employee fails to take up the employment, is absent for 10 days without permission or changes their contact details).

  • Employers’ procedures and records are likely to be inspected by the  U.K Border & Immigration Agency — either as part of the initial licensing application or during routine checks.  

The new system places the responsibility on employers to determine a foreign national’s eligibility to receive a certificate of sponsorship.  Employers who issue certificates to employees who are not eligible face the risk of fixed penalty fines of up to £10,000 and risk having their license withdrawn. 

It is crucial that employers become familiar with the eligibility requirements and, in the event of any uncertainty, seek legal advice. 

Gibson, Dunn & Crutcher LLP

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]), Daniel E. Pollard (+44 (0)20 7071 4257, [email protected]) or Steven F.C. Cochrane (+44 (0)20 7071 4275, [email protected]) in the firm’s London office, or any member of Gibson Dunn’s Labor and Employment Practice Group.

© 2008 Gibson, Dunn & Crutcher LLP

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