Appeal No. UKEAT/0026/01

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 14 May 2001
Judgment delivered on 21 September 2001

Before
MS RECORDER COX QC
MR P DAWSON OBE
MRS J M MATTHIAS

(1) MR S TITCHENER 
(2) MR G WHITE 
(3) MRS S KING 
(4) MR R SINCLAIR	APPELLANTS

THE SECRETARY OF STATE FOR TRADE & INDUSTRY	RESPONDENT

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellants	MR ANDREW SHORT
(of Counsel)
Messrs Rowley Ashworth 
Solicitors
Kennedy Tower
St Chad’s Queensway
Birmingham
B4 6JG	
For the Respondent	MR TIM WARD
(of Counsel)
Treasury Solicitors
Queen Anne’s Chambers
28 The Broadway
London
SW1H 9JS	

MS RECORDER COX QC

1	This is an appeal by the four named Appellants against the Decision of an Employment Tribunal in Sheffield that the Respondent had correctly applied Section 186 of the Employment Rights Act 1996, in line with relevant authority, in making payments to the Appellants in respect of arrears of pay owed by their former, insolvent employer.  The Employment Tribunal had some 151 Originating Applications presented to it in March 2000 under section 188 of the 1996 Act, the Applicants all making similar claims against the Respondent and querying the amounts paid to them.  The Respondent resisted all the claims and it was agreed between the parties that four of the Applicants (the present Appellants), being members respectively of the four trade unions involved, were to be regarded as test cases.  The Decision of the Tribunal, promulgated on 10th November 2000, was that those parts of the Originating Applications concerning the substantive issue dealt with at the hearing held on 25th October were dismissed.  Other claims made in those Applications were dealt with subsequently and do not concern us.

2	Curiously, given the importance of the substantive issue, the Respondent did not appear and was not represented below.  Nor had details of the payments actually made to each Appellant been provided by the Respondent, in accordance with Orders made by the Tribunal.  Nevertheless, the Tribunal felt able to proceed with the one aspect of the complaints which is now the subject of this appeal, namely whether the Respondent had correctly applied section 186 of the 1996 Act, and no point arises on their decision so to proceed.  No evidence was heard below.  On the hearing of this appeal both parties were represented by counsel, from whom this Appeal Tribunal received considerable assistance.  No issue arose as to the sums actually paid to each Appellant and we therefore proceeded to hear the appeal on the substantive point.

The Issue

3	The issue which arises on this appeal is whether, in making payments to each Appellant, pursuant to an application under section 182 of the Employment Rights Act 1996, in respect of arrears of pay owed by his/her former, insolvent employer, the Respondent has correctly calculated the payments made.  At the time of the payments made in this case there was a statutory cap of  £220 in respect of any one week (the figure is currently £240).  The Respondent took the weekly, gross pay figure for each Appellant, applied the statutory cap and then deducted from that figure amounts due by way of national insurance contributions and any relevant benefits to be recouped pursuant to Regulations.  The Appellants contend that the Respondent should have made all appropriate deductions from the gross figure first, in order to determine the sum that was payable to the employee by the insolvent employer, before applying the statutory cap.  This would have meant that an increased sum was paid to each Appellant and is therefore an approach which is more advantageous to employees.   In Mr. White’s case, for example, he would have received an additional £108.15 from the Fund.  The Employment Tribunal rejected the Appellants’ contention, albeit with some hesitation, holding that it was bound by the decision of this Appeal Tribunal in Morris v Secretary of State for Employment [1985] ICR 522.  The Appellants appeal from that decision.

The Factual Background

4	The Appellants were originally employed by Bryan Donkin Foundry Ltd.  They were all made redundant, at the direction of the Receiver, but there was a failure to carry out proper consultation beforehand.  An Employment Tribunal, in the case of AEEU and other Unions v Bryan Donkin Foundry Ltd. (Case number 2801077/99), subsequently made a Declaration to that effect and held that the employees were entitled to a protective award under the provisions of section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992.  Since the employer was insolvent, as defined by section 183 of the Employment Relations Act 1996 (“the 1996 Act”), the Appellants made claims for various payments to the Respondent under section 182 of the Act, one of which was for a protective award.  The Respondent calculated the payments due, under the relevant statutory provisions, by applying the statutory cap of £220 at the start of the calculation.  Relevant deductions were then made from that capped figure, so that the actual sum paid to each person was less than £220 in respect of each week.

The Statutory Provisions
 
5	The relevant sections of the Act implement Council Directive 80/987/EEC on the approximation of the laws of the Member States relating to the protection of employees in the event of insolvency of their employer.  They are contained in Part XII and are as follows:

Section 182  Employee’s rights on insolvency of employer
“If, on an application made to him in writing by an employee, the Secretary of State is satisfied that –
the employee’s employer has become insolvent,
the employee’s employment has been terminated, and
on the appropriate date the employee was entitled to be paid the whole or part of any debt to which this Part applies,
the Secretary of State shall, subject to section 186, pay the employee out of the National Insurance Fund the amount to which, in the opinion of the Secretary of State, the employee is entitled in respect of the debt.”

Section 184  Debts to which this Part applies  
“(1)  This Part applies to the following debts -
any arrears of pay in respect of one or more (but not more than eight) weeks,………
   (2)  For the purposes of subsection (1)(a) the following amounts shall be treated     as arrears of pay ………
remuneration under a protective award under section 189 of the Trade Union and Labour Relations (Consolidation) Act 1992.”

Section 186  Limit on amount payable under section 182
“(1)  The total amount payable to an employee in respect of any debt to which this Part applies, where the amount of the debt is referable to a period of time, shall not exceed -
£240 in respect of any one week, or
in respect of a shorter period, an amount bearing the same proportion to £210 as that shorter period bears to a week.”

Section 188   Complaints to industrial tribunals
“(1)  A person who has applied for a payment under section 182 may present a complaint to an industrial tribunal –
that the Secretary of State has failed to make any such payment, or
that any such payment made by him is less than the amount which should have been paid.”

The relevant Articles in Directive 80/987/EEC, on the approximation of the laws of the member states relating to the protection of employees in the event of the insolvency of their employer, are as follows:

“Having regard to the Treaty establishing the European Economic Community, and in particular article 100 thereof……Whereas it is necessary to provide for the protection of employees in the event of the insolvency of their employer, in particular in order to guarantee payment of their outstanding claims, while taking into account the need for balanced economic and social development in the Community;…………

Article 1 
(1)	This Directive shall apply to employees’ claims arising from contracts of employment or employment relationships and existing against employers who are in a state of insolvency within the meaning of article 2(1).

Article 3
(1)	Member states shall take the measures necessary to ensure that guarantee institutions guarantee, subject to article 4, payment of employees’ outstanding claims resulting from contracts of employment or employment relationships and relating to pay for the period prior to a given date.

Article 4
(1)	Member states shall have the option to limit the liability of guarantee institutions, referred to in article 3.

(2)	When Member states exercise the option referred to in paragraph 1, they shall: ………..
…..in the case referred to in article 3(2), third indent, ensure the payment of outstanding claims relating to pay for the last 18 months of the contract of employment or employment relationship preceding the date of the onset of the employer’s insolvency or the date on which the contract of employment or the employment relationship with the employee was discontinued on account of the employer’s insolvency.  In this case member states may limit the liability to make payments to pay corresponding to a period of eight weeks or to several shorter periods totalling eight weeks.

(3)	However, in order to avoid the payment of sums going beyond the social objective of this Directive, member states may set a ceiling to the liability for employees’ outstanding claims.”

It is common ground that, in this particular case, the Directive itself has no application.  It applies only to claims against employers who are in a state of insolvency within the meaning of Article 2(1).  That Article applies only where there has been a request to open proceedings involving the employer’s assets, or where the competent authority has decided to do so.  In this case the only step has been the appointment of a receiver, which is insufficient to bring the case within the scope of the Directive.  Community law cannot therefore give rise to any obligation to pay more than domestic law requires.  However, it is accepted that the provisions of sections 182 and 186 of the 1996 Act must have the same meaning, whether applied to a case within the Directive or outside it. 

The Employment Tribunal’s Decision

6	The Tribunal held that, although they considered the Appellants’ argument to be an attractive one, they were bound by the decision of this Appeal Tribunal in Morris v Secretary of State for Employment [1985] ICR 522.  In that case an employee was owed wages and holiday pay when his employers went into liquidation.  The Secretary of State, in calculating his entitlement, had applied the statutory cap to the gross salary figure, before making deductions for tax and national insurance contributions.  An Industrial Tribunal decided that this method of calculation was correct and their decision was upheld by the EAT.  The Tribunal in the present case regarded this decision as binding on them.  They were invited by counsel for the Appellants to hold that they were no longer bound by the case of Morris, in the light of the subsequent decision by the House of Lords in Mann v Secretary of State for Employment [1999] ICR 898, which, it was submitted, implicitly overrules the earlier EAT decision.  However, the Tribunal did not accept this submission.  In paragraph 9 of their Extended Reasons they held that:

“To our knowledge [Morris] has not been explicitly overruled and we do not think it safe or appropriate for us to work on the basis that Mann implicitly overrules it, especially when that case deals with a different section of the Act.  It is for this reason that we feel constrained to follow the decision in Morris although frankly we cannot say we are entirely happy with that course of action.”

The Submissions

7	Andrew Short, counsel for the Appellants, acknowledged that the approach taken by the Respondent accords with the decision of the EAT in Morris.  However he argues that the reasoning of the House of Lords in Mann, when considering section 122(3)(a) of the Employment Protection (Consolidation) Act 1978, now section 184(1)(a) of the 1996 Act, applies equally to section 186.  The issues in Mann concerned the adequacy of the implementation of Directive 80/987/EEC (“the Directive”) and of Directive 75/129/EEC (the latter dealing with laws relating to collective redundancies).  Mr. Short relies heavily, in the present appeal, on a passage in the speech of Lord Hoffman, where he considered whether the employees ought to be permitted to choose which eight week period should be treated as guaranteed.  The question was therefore whether section 122(3) of the Employment Protection (Consolidation) Act 1978 (now section 184(1) of the 1996 Act) was compatible with Article 4(2) of the Directive, which permits such temporal limitations.  Lord Hoffman held that the relevant provisions should be construed according to the Directive and, applying the ruling of the European Court of Justice in Regeling v Bestuur van de Bredrijfsvereniging [1999] ICR 605, construed restrictively.  At page 908 C he stated: 

“The limitation of the guarantee liability to eight weeks is therefore a derogation from the main recited objective to “guarantee [employees] payment of their outstanding claims” and must be restrictively construed.  In my view, this requires that section 122 be read to confer the maximum possible protection consistently with the limitation of the guarantee to arrears of pay in respect of eight weeks.  This means that the employee is entitled to choose what he regards as the eight weeks most favourable to his claim.”

8	Mr. Short submits that section 186 should therefore also be read, following this reasoning, so as to confer the maximum possible protection for employees, consistently with the “limitation” of £220 per week.  This can only be done, he suggests, by interpreting section 186 as requiring the application of the statutory cap after the appropriate deductions have been made, which gives a more favorable result to employees.  

9	Alternatively, he submits that the decision in Morris is wrong and that we should not follow it.  This is on the basis that the phrase “The total amount payable” in section 186(1) refers to the total amount payable to the employee from the Fund and not to the amount owed by the employer, which is described throughout the provisions as “the debt”.

10	Tim Ward, counsel for the Respondent, submits, firstly, that the decision in Morris was correctly decided and should be followed by this Appeal Tribunal.  He adopts the reasoning in that case and points out that Morris was not referred to in Mann. 

11	In relation to the effect of the decision in Mann, he submits that Article 4(3) of the Directive permits Member States to impose a limit on the amount of the liability of the guarantee institution, providing as follows:

“However, in order to avoid the payment of sums going beyond the social objective of this Directive, Member States may set a ceiling to the liability for employees’ outstanding claims…” 

The United Kingdom has elected to impose such a limit in the form of section 186 of the Act, currently £240 in respect of any one week (prior to the 1st February, 2001, it was £220, the relevant sum in the present case).  The purpose of Article 4(3) is to permit a Member State to impose a limit on the extent of employee protection.  The Directive does not require that the maximum employee protection be given where a limit on liability is imposed by Article 4(3).  The House of Lords in Mann expressly considered both the provisions of the Directive and the case law of the European Court of Justice.  They considered section 122(5), now section 186 of the 1996 Act and the limit, then, of £205 per week.  Lord Hoffman, with whom the other Lords agreed, expressed the view that this limit was not unreasonably low.  In so far as the passage relied upon by the Appellants at 908 C (see above) might be said to apply to section 122(5), it is clearly obiter.  There is therefore no basis for deciding that Mann implicitly overrules Morris, which remains good law.

12	We have considered these submissions carefully and, in our judgment, the Respondent’s submissions are to be preferred.  Our reasons are as follows.  Firstly, we take the view that Morris was correctly decided.  Giving the judgment of the Court, Waite J. explained the nature and purpose of the legislative scheme, governing payments by the Secretary of State out of the Redundancy Fund to employees of insolvent concerns who are entitled to them.  Having set out the provisions of section 122, in particular section 122(5), now section 186, he referred to the “normal practice” of the Department of Employment in treating the employers’ debt to the employee, in respect of the arrears of wages and holiday pay, as though they had not been the figure claimed but the lesser sum represented by the then statutory limit of £140.  From that figure they then made the statutory deductions for income tax and national insurance payments.  The employee complained about that method of calculation, arguing that the method advanced by the Appellants in this appeal was the correct one. 

13	Observing that the issue resolved itself to one short question of construction, Waite J. identified the question as follows: 

“What was meant by the phrase in subsection (5) “The total amount payable to an employee in respect of” the relevant debt?”  

The answer was held to be that which was provided by the Secretary of State in his submissions.  The correct analysis of all payments to an employee, which are made subject to a statutory deduction, is that the employer is paying the gross amount of the wage to the employee.  Whilst it is true that the employee only takes home a lesser figure, the money that passes from the employer to the Inland Revenue is the employee’s money.  It is part of his wage, diverted by his employer to the Revenue in satisfaction of a liability, which the employee owes to the Revenue as a taxpayer.  Thus, analysing section 122(5) correctly, the phrase “total amount payable to an employee” refers to the whole of the amount of the gross payment applied to or on account of the employee.  The EAT described this analysis as the correct one:

“….depending as it does upon a proper analysis of the fundamental characteristics of the employment contract.  Our duty, when called upon to interpret the words of a statute, is in the first instance, to look for that construction which best accords with the ordinary meaning of the words used. When regard is had to their context, we think that the ordinary meaning of section 122(5) is that which we have held it to be”(page 526, D-E).

14	We agree with this reasoning and with the decision of the EAT and we therefore reject the Appellants’ submission that Morris was wrongly decided and that we should not follow it.  We should add that Mr. Ward, in oral submissions, sought to rely upon a further point in support of his submission that Morris was correctly decided.  He described this as a more complicated point, which involved an analysis of some of the statutory provisions governing social security payments, in particular section 112 of the Social Security Contributions and Benefits Act 1992.  I hope that I summarise it accurately by stating that his contention was that social security legislation gives the Respondent no choice but to treat the sum payable under section 186 as a gross payable sum, to which the cap is applied before deductions.  This contention was not accepted by the Appellants but, since we agree with the clear reasoning of the EAT in Morris, and consider the case to have been correctly decided on that basis, it is unnecessary for us to consider this additional point further.

15	I turn, then, to the primary case advanced on the Appellants’ behalf, namely that the subsequent decision of the House of Lords in Mann implicitly overrules Morris, that the Employment Tribunal erred in not departing from the decision in Morris and that we should now interpret section 186 as requiring the application of the statutory cap only after the other, appropriate deductions have been made.

16	On this point too, we find against the Appellants.  Article 3(1) of Directive 80/987/EEC requires Member States to ensure that guarantee institutions guarantee, subject to Article 4, payment of employees’ outstanding claims resulting from, inter alia, the termination of their employment on account of the employers’ insolvency.  By way of derogation Article 4(1) permits limitations on the liability of such institutions.  Article 4(2) permits a temporal limit on the guarantee, which enables Member States to impose a maximum period for the outstanding claims which shall be guaranteed.  The United Kingdom, by section 184(1)(a) of the Act, has limited the period of the guarantee to eight weeks.  It is common ground that the House of Lords in Mann held that the eight week limit is a permitted derogation to the Directive and must, accordingly, be interpreted restrictively, so as to afford maximum benefit to the employee.  Accordingly it must be construed as permitting an employee to choose the eight weeks in respect of which his claim is most valuable. 

17	However, it is Article 4(3) which is most relevant to the present appeal.  It provides: 

“However, in order to avoid the payment of sums going beyond the social objective of this Directive, member states may set a ceiling to the liability for employees’ outstanding claims.” 

The United Kingdom has elected to impose such a ceiling, in the form of section 186 of the Act.  Article 4(3) thus specifically permits Member States to set a limit on liability for outstanding claims, so long as the social objectives are met, in order to avoid exceeding the requirements of the Directive.  It does not require that the maximum level of protection be given to qualifying employees.  The ECJ in Regeling [1999] ICR 605 confirmed that the social purpose of the Directive is:

“…to ensure a minimum level of protection for all workers” (paragraph 20 of the Judgment at page 621).  

Whilst Article 4(3) should itself be restrictively construed, in determining the scope of the permissible derogation, this does not mean that the Directive requires that the maximum employee protection must be given where a limit on liability is imposed by virtue of Article 4(3).  

18	In Mann the House of Lords considered the construction of the Directive and the approach of the ECJ.  The calculation point in issue in this appeal was not before the House in that case.  The Appellants were arguing that the ceiling of £205, as it was then, went far beyond the scope of this derogation from the general obligation to guarantee the employee’s arrears of pay.  Applying Regeling and holding that the scope of the derogation contained in Article 4(3) should be restrictively construed, Lord Hoffman then identified the purpose by which it should be so construed.  At page 906 G-H, he held that: 

“….the purpose of paragraph 3 of article 4 is presumably to enable member states to limit the burden on the social welfare budget by confining the benefit of the guarantee to employees who would be likely to suffer hardship from the loss of wages due to them.”

19	Whilst observing that he did not find it an easily justiciable question, Lord Hoffman went on to state, at page 907 D-E, that:

 “Although the burden is upon the Secretary of State to justify the use of a derogation, the limit imposed under section 122(5) of the Act of 1978 does not seem to me to be unreasonably low.  It may be lower than average earnings, but this is only one of the matters to which the Secretary of State must have regard…. and I do not think that paragraph 3 of article 4 precludes his having regard to other matters as well.”

20	It seems clear to us that the passage in Lord Hoffman’s speech relied upon by the Appellants was directed at the provisions of section 122(3)(a), now section 184(1)(a), and not at the ceiling set in section 122(5), now section 186.  The case of Morris was not referred to or considered at any stage.  Nor was the method of calculation and the reasoning behind it before the House of Lords.  In our judgment the Employment Tribunal was correct in holding that it is not legitimate to apply the dicta in that passage to the issue in this case and to find that Mann implicitly overrules Morris, when the former case was concerned with a different section of the Act and no consideration was given to the method of calculation under section 186.  We therefore see no reason to depart from the previous decision of this Appeal Tribunal on the precise point before us, which we have found to be correctly decided.  This appeal must therefore be dismissed.