Appeal No. UKEAT/0104/04/CK

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 13 September 2004

Before
HIS HONOUR JUDGE MCMULLEN QC
MR P GAMMON MBE
MR P R A JACQUES CBE

LONDON UNDERGROUND LTD	APPELLANT

MR N FISHER	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MR ROBERT PALMER
(of Counsel)
Instructed by:
Transport for London
Legal Services
55 Broadway
London SW1 0BD	
For the Respondent	MR SCHONA JOLLY
(of Counsel)
Instructed by:
Messrs Morrish & Co Solicitors
1st Floor
Oxford House
Oxford Row
Leeds LS1 3BE	

SUMMARY

Unlawful Deduction from Wages

On promotion to a managerial grade, the contract provided for an increase of at least 5% on basic salary, but this did not extend to unsocial hours allowance. Employment Tribunal failed to construe terms in accordance with the evidence of custom & practice which was to increase basic salary but not the allowance and gave no explanation of its reasons for not implying this custom. Decision set aside.

HIS HONOUR JUDGE McMULLEN QC

1.	This case is about unlawful deductions from pay and the construction of a contract of employment.  The judgment represents the views of all three members who pre-read the relevant papers.  We will refer to the parties as Applicant and Respondent.

Introduction

2.	It is an appeal by the Respondent in those proceedings against a decision of an Employment Tribunal sitting at London (South), Chairman Mr M Zuke, registered with Extended Reasons on 19 November 2003.  The Applicant and Respondent were represented there and here by Ms Schona Jolly and Mr Robert Palmer respectively, both of Counsel.

3.	The Applicant claimed an unlawful deduction had been made from his pay.  The Respondent contended that the pay was pursuant to the contractual provisions in force.

The issue

4.	The essential issue as defined by the Employment Tribunal was whether the Applicant was entitled to be given an increase in pay of 5% over his previous total earnings when he was promoted into a managerial grade, or 5% over his basic pay.  The Tribunal decided in his favour.  The Respondent appeals against that decision.  

5.	Directions sending this appeal to a Full Hearing were given in Chambers by Burton P and further to those an agreement was reached by the parties as to the presentation of evidence in the form of agreed notes from the Employment Tribunal.  We are grateful to the parties for that approach.

The legislation

6.	The relevant provisions of the legislation are the Employment Rights Act 1996, Section 13 (1), (2) and (3):

13	Right not to suffer unauthorised deductions
(1)	An employer shall not make a deduction from wages of a worker employed by him unless –
(a)	the deduction is required or authorised to be made by virtue of a statutory provision or a relevant provision of the worker’s contract, or
(b)	the worker has previously signified in writing his agreement or consent to the making of the deduction.
(2)	In this section “relevant provision”, in relation to a worker’s contract, means a provision of the contract comprised –
(a)	in one or more written terms of the contract of which the employer has given the worker a copy on an occasion prior to the employer making the deduction in question, or
(b)	in one or more terms of the contract (whether express or implied and, if express, whether oral or in writing) the existence and effect, or combined effect, of which in relation to the worker the employer has notified to the worker in writing on such an occasion.
(3)	Where the total amount of wages paid on any occasion by the employer to a worker employed by him is less than the total amount of the wages properly payable by him to the worker on that occasion (after deductions), the amount of the deficiency shall be treated for the purposes of this Part as a deduction made by the employer from the worker’s wages on that occasion.”

7.	Also relevant is Section 1, which deals with a statement of initial employment particulars.  This requires an employee to provide a written statement and also to provide indications of when a change has been made (see Section 4).  In particular the scale or rate of remuneration, or the method of calculating it, must be vouchsafed in writing to the employee.  The Employment Tribunal cited sections 13 and 23, which provides for a remedy, but did not set out those provisions nor Section 1.

The facts

8.	The Respondent is by statute a railway undertaking.  It runs the underground railway in London.  The Applicant was employed by it in three capacities.  First, in 1983 he was a Train Driver, now known as a Train Operator.  He then became unwell and was deployed as a Line Information Assistant.  His previous earnings were protected by reference to an employee’s handbook, to which we will return.  His contractual documents in addition to that were a letter of 13 May 1999 and statement of terms and conditions said to comply with Sections 1 and 4 of the Employment Rights Act 1996:

“2.	… The letter informed him that the starting salary for his job as line information assistant was £22,304, and that:
“in addition to your contractual salary of £22,304, the post of line information assistant attracts a 15% unsocial hours allowance (£3346 per annum).  This allowance does not affect the protection of earnings calculations shown above.”
The letter was accompanied by a statement of the main terms and conditions of employment for administrator band C, which was the grade of the line information assistant post.  The statement says that the contractual salary on appointment will be £22,304 per annum based on contractual hours.  This statement does not refer to the unsocial hours allowance.”

9.	The handbook this is not expressly incorporated.  It is common ground that it formed part of the contract of employment implied by custom and practice.  The Employment Tribunal was asked to decide this issue.  It did not.  But today both sides agree that that is the impact of its Decision.  The Tribunal made a decision about the content of the Applicant’s pay:

“5.	A number of jobs undertaken by the Respondent’s employees attract an unsocial hours allowance.  For many of these jobs the allowance is not separately expressed, but is included in the salary.  For example, as Mr Kieran stated, the train operator’s salary includes an unsocial hours allowance.  For historical reasons, the unsocial hours allowance paid to line information assistants has not been integrated into the annual salary.  However, it is not a separately negotiated allowance.  It is expressed as 15% of basic salary, and automatically increases each time that the basic salary increases.  Line information assistants receive pay including the unsocial hours allowance when they are on holiday and when they are sick.  Working unsocial hours is an integral pat of the line information assistant’s job.  The line information assistants are obliged to work unsocial hours as condition of their employment.”

The Applicant went in for promotion in 2001 as the Tribunal found:

“6.	In August 2001 the Applicant successfully applied for promotion to network control centre operator.  This is a managerial grade post.  The Applicant received a letter of offer of appointment dated 7 September 2001, to take effect on 2 October.  At that time, the Applicant’s annual salary as a line information assistant, including the unsocial hours allowance was £28,124 per annum.  The letter of offer of appointment to the network control centre operator job was on a starting salary of £25,678 per annum.”

10.	The effect of his promotion was to reduce his total remuneration by £1,419. (The figure of £131 gross annual earnings decrease in paragraph 9 is accepted to be an error we use our power under Employment Tribunals Act 1996 section 35(1) to correct it to £1,419).  The explanation for this was given to the Applicant by his relevant manager prior to the institution of these proceedings and it is as follows:

“…  I would like to explain how your salary for your salary for your new post as a NCC operator has been calculated.
Your previous annual contractual salary for your position as a line information assistant was £24,456, in addition to your contractual salary you were also in receipt of a 15% allowance for unsocial hours.
When calculating your new salary London Underground Limited salary administration handbook states that staff being promoted from administration grades to operational manage grades Q3 level should receive a 5% increase or be put to the minimum of the salary band for that grade, whichever is the greater amount becomes your new salary.
Your new salary of £26,705 is the minimum of the Q3 salary band range, as this figure is greater and 5% on top of your previous salary.  Unfortunately the 15% allowance you receive for unsocial hours in your position as a line information assistant is not part of your basic salary, therefore could not be included in the calculation for your new salary.”

11.	The Applicant was dissatisfied with this explanation.  A grievance was filed.  It was rejected and thus the Applicant launched Employment Tribunal proceedings.  It had been accepted by Counsel for the Respondent that it was a surprising conclusion that on promotion the Applicant’s actual earnings decreased.  The Tribunal went on to provide its reasoning for upholding the Applicant’s claim as follows:
“15.	The Tribunal considered the status of the line information assistant unsocial hours allowance.  We noted that it is not negotiated separately from the line information assistant’s pay.  Unsocial hours is an integral part of the line information assistant’s job.  The allowance is paid when the line information assistant is on holiday or sick.  The Tribunal concluded that although the sum is expressed as a separate “allowance”, in reality it is an integral part of the basic pay or salary of a line information assistant.  We concluded that the starting point for calculating the Applicant’s salary on promotion should have been his actual gross earnings as a line information assistant which were £28,124 at the material time.”

It awarded him £4,151.12 in respect of his complaint of unlawful deductions

12.	During the Applicant’s career a dispute had also arisen about the application of the correct rate of pay on his transfer from being a Train Driver to an LIA. Documents were produced to the Employment Tribunal of exchanges between the Applicant and the Respondent relating to the correct form of protection.  These are not strictly relevant to the Tribunal’s reasoning but there is an indication of the way in which the Respondent segregated what it described as contractual salary from its treatment of unsocial hours allowance, for it wrote on 24 July 2000 as follows:

“The Train operator’s Salary includes already the unsocial hours allowance and is therefore already protected as your rostered earnings, Your rostered earnings as a Line information assistant is made up of your basic £22,304 + £3,346 unsocial hours allowance.”

That apparently was unclear to the Applicant but in response to a further query from him on 21 November 2000 the relevant manager made the position clear.

13.	The actual language of the Salary Administration Handbook, as it is properly called, includes the following:

“5.3	INTERNAL PROMOTIONS
5.3.1	GENERAL
It is normal practice for LU to grant a salary increase on promotion in accordance with the rules set out below…”

14.	There rules set out a table from which one can plot that the Applicant was entitled to what is described as a minimum salary increase of 5% on being promoted.

The Respondent’s case

15.	The Respondent contended that the Employment Tribunal had erred in law in that it had wrongly construed salary in the handbook as referable to all the Applicant’s earnings, that is to include his unsocial hours allowance.  Since it is common ground that the handbook, at least as part of it, is incorporated by custom and practice, the Tribunal had further erred in its treatment of the evidence upon which this term was based.  The evidence was all one way indicating a long-standing custom and practice of payment of a 5% increase on promotion based upon contractual, or what we think might better be described as basic, salary without reference to the allowance.  Further, the Tribunal erred by failing to recognise that in the payslips handed to the Applicant each pay period there was a similar reflection of such segregation.

16.	The employees comprised within the LIA group, which is itself part of a larger group, had not negotiated into the contractual or basic salary the figure for the unsocial hours allowance, whereas other groups, notably train operators, had take that step in respect of their contracts.  In other words, it was a deliberate decision by those responsible for the collective arrangements that there should continue to be separation between the basic salary and the allowance.  Alternatively it was contended that the Tribunal had failed to explain its reasons as to why it rejected the evidence relating to this custom and practice.

The Applicant’s case

17.	On behalf of the Applicant it is contended that the Tribunal had reached the correct conclusion.  The evidence was wanting for the establishment of the custom and practice, as contended for by the Respondent.  As a matter of construction, the Applicant’s case was correct when looking at both the salary administration handbook and the representations which had been made to him in his appointment letters.  The Respondent had made an unlawful deduction.

The legal principles

18.	The legal principles appear to us to be as follows.  The first step in a claim under Part II of the Employment Rights Act 1996 is the establishment of what is properly due as wages under section 13 (3).  Once that has been determined it is possible to discern whether or not there has been a deduction and if so whether that has been authorised by any provision set out in the contract.

19.	The contract may include terms incorporated or implied by custom and practice.  A term of a contract may be implied by custom and practice only if it is reasonable, notorious and certain: see Devonald v Rosser & Sons [1906] 2 KB 728.  An Employment Tribunal must give adequate reasons for its decision: see Meek v City of Birmingham District Council [1987] IRLR 250 and English v Emery Reimbold & Strick Ltd [2003] IRLR 710.

Conclusions

20.	We reject the arguments of the Applicant and consider that the Respondent’s arguments are correct.  We have decided that the appeal should be allowed.
21.	The first step is to determine the nature of the contractual provision.  It has to be said that if one looked only at the salary administration handbook the term used there, “salary”, without qualification, would be apt to include both the basic salary and the allowance.  As a matter of ordinary language we can see no other approach.  However, that is not the end of the analysis, for the relationship between the Applicant and the Respondent was also regulated by the letter of appointment (cited in paragraph 8 above) where there is a clear separation between what is described as contractual salary on the one hand and unsocial hours allowance on the other.

22.	The contract is also regulated by the statutory statement of terms which is silent, as the Tribunal pointed out, on the unsocial hours allowance.  It was suggested to us that an employee seeking to know what the unsocial hours allowance was and to what hours it applied, or any other detail, should be able to ask the relevant manager.  In an undertaking as large as this, regulated for over 100 years by collective bargaining between independent trade unions and management, it is surprising that such details should not be forthcoming in a way which does not require reliance upon a relevant manager for their exposition. Nevertheless the statement of terms does indicate what the salary on appointment is to be.

23.	The words in the handbook on promotion are made clearer by these two initial documents i.e. the letter and the statutory statement.  Further illumination is given by the exchange of correspondence relating to the dispute in 2000 about the payment of protection of earnings following the Applicant’s leaving his position as a train operator.  That was resolved in the Applicant’s favour by the Respondent writing off a large sum which had been paid to him in error.  But it is worth reflecting that in that exchange of correspondence the separation of basic salary and unsocial hours allowance is reiterated.

24.	If it were simply a matter of construction, the decision of the Tribunal would be incorrect.  Applying this set of documents, only the contractual or basic salary is increased by 5% on promotion.  That does have, in the Applicant’s case, the surprising result that he suffers a loss of total pay. The salary of the management grade to which he was promoted includes an element for having to work unsocial hours, going hand in hand with being a managerial appointment rather than a clerical one. Thus the Applicant would find himself having to work unsocial hours, just as when he was an LIA, but this time with his total pay going down.

25.	However, this case goes further, because evidence was called relating to the custom and practice.  We have been shown the evidence and we accept the proposition put by Mr Palmer for the Respondent that the evidence was all one way.  There was no case in which the Respondent had applied the 5% to the total salary package rather than simply to the basic pay.

26.	The use of the word ‘contractual’ in the context of these parties requires explanation.  Of course the Applicant was entitled by contract to the unsocial hours allowance when he was in a position which required him to work those hours.  But it is used by these parties as a way of separating the allowance from the basic salary which is described as contractual; and so a special meaning is attached both to the words ‘salary’ in the handbook and ‘contractual salary’ in the letters of appointment.

27.	The special meaning emerges from a consideration of the custom and practice within the Respondent.  Since that practice had been well-known it meets the requirement for the implication of a term.  Not only was it clear to the relevant Human Resources Manager that this was the practice, it appears also to have been clear to the trade union as well, for an officer gave evidence indicating that there was a campaign for the position to be changed or the policy reversed.
28.	It is also fair to say that the Applicant had the support of his line manager, but it is unclear whether or not the support was given out of sympathy or on moral grounds or as a matter, as it were, or internal workplace law.  It seems that it was the former rather than the latter, for the managers hitherto supporting the Applicant were forced to back down in the light of advice given by the HR people.  It is of course no part of the Tribunal’s duty, nor ours, to take a view about whether it is reasonable to expect a person on promotion to a managerial position to take a reduction of £1,419 a year.

29.	It is possible to construe contracts in a way which produces an absurd result, but if those are the clear terms of the contract then it is the duty of the Tribunal and of us to so construe them.  The practical application of the handbook to the Applicant’s promotion reduces his pay, but there are many other circumstances in which that phenomenon would not occur.  In order to meet the terms of section 13 (3), we are concerned only with what was properly payable by way of contract, so as to determine whether there was a proper deduction.

30.	In our judgment, the combined application of sections 13 (3) and 13 (1) and (2) yields the result that there was no unlawful act by the Respondent in applying the contractual provision established by custom and practice of enhancing by at least 5% the basic or contractual pay, as it is put, of the Applicant and not enhancing the unsocial hours allowance.

31.	The Employment Tribunal has erred.  If it were unconvinced by the evidence relating to incorporating or implying the term from custom and practice, it has not said so.  We have had the evidence put before us and we accept there was only one conclusion.  It follows that this case should not be remitted on that ground.

32.	A further point was made that the exchange of correspondence in 2000 had indicated to the Applicant that his contractual salary included the 15% unsocial hours allowance.  Having been shown the relevant correspondence to which we have referred to above, that position is untenable.  As a matter of construction of those documents it cannot be said that it weakens the force of the analysis which we have applied to the employee handbook and to the original contractual documents.  If anything, it strengthens the position of the Respondent in asserting the existence of such an approach.  The approach is different, in any event, in respect of protection of earnings, as those very words show: ‘earnings’, not ‘basic pay’.

33.	We therefore will allow the appeal and set aside the decision and the award of money by the Tribunal.  Quite simply the Applicant has failed to prove his case under section 13 (3).

34.	We cannot leave this issue without commenting, as we have hinted above, that there could be greater clarity in the Respondent’s documentation to its employees.  No doubt there is a clear record somewhere of the negotiations which led to the relevant percentages. It cannot be right that this issue is not dealt with in the statutory statement and that there is no clear indication of where to find the answer. We hope that our comments will assist London Underground and the relevant trade unions in resolving issues such as this in the future.

35.	We would very much like to thank both Counsel for the assistance they have given in both their written and oral presentations today. The appeal is allowed.