Appeal No. UKEAT/0145/08/JOJ

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 22 May 2008

Before
THE HONOURABLE MR JUSTICE WILKIE
(SITTING ALONE)

Global Crossing (UK) Telecommunications Limited	APPELLANT

MR N H JONES	RESPONDENT

Transcript of Proceedings

JUDGMENT

	APPEARANCES

For the Appellant	MR J ALGAZY
(of Counsel)
Instructed by:
Messrs Lawrence Graham LLP Solicitors
4 More London Riverside
London   SE1 2AU	
For the Respondent	MR N H JONES
(The Respondent in Person)	

SUMMARY

CONTRACT OF EMPLOYMENT:  Damages for breach of contract
The proper approach to the assessment of damages for breach of a contract of employment in a case of wrongful dismissal is that explained in Shove v Downs Surgical plc [1984] IRLR 17.

THE HONOURABLE MR JUSTICE WILKIE

1.	This is an appeal by Global Crossing (UK) Telecommunications Limited against a decision of the Employment Tribunal, sitting at Southampton on 30 November 2007, which concluded that the Respondent, at that stage, was in breach of contract in failing to pay Mr Jones, the Claimant, payment in lieu of contractual benefits claimed by him for the period of contractual notice to which he is entitled and ordered the Respondent to pay the Claimant, by way of damages, the sum of £12,021.12, upon which sum the Claimant would be liable to pay such tax as may be assessed by Her Majesty’s Revenue and Customs.

Introduction
2.	The claim which was brought before the Tribunal by the time of the hearing was a claim for damages for breach of contract in the sum of £12,021.12.  The Claimant, Mr Jones, had been employed by the Respondent and its predecessor from 1 October 1990 until 9 July 2007.  The Tribunal concluded that there were, incorporated into his contract, certain provisions in an employee handbook, which was dated October 2000.  They included the following; paragraph 11 in the terms and conditions of employment:
“Global Crossing reserves the right where either you or Global Crossing gives notice to terminate your employment to exclude you from all or any of Global Crossing’s places of business and to require you to not perform any duties during all or part of your contractual notice period…  Global Crossing will, however, continue to pay your salary and provide all other contractual benefits which you are entitled to for the duration of the notice period.”

3.	Paragraph 7 of the employee handbook provides:
“NOTICE OF TERMINATION  
Notice of termination should be given, in writing, to your direct manager and copied to your HR Manager.  By mutual agreement, notice may be shortened or waived.  In this instance Global Crossing may make payment in lieu of notice at its discretion.”

4.	On 9 July 2007, the Respondent provided the Claimant with a letter containing details of his redundancy payments and other issues relating to his redundancy.  It provided for the termination date of his employment to be that same date, 9 July 2007, but also said:
“The notice period commences on 9th July 2007.  You are not required to work your notice period and therefore your termination date will be 9th July 2007”.

It provided that the Respondent would pay a statutory redundancy payment of £7,905 and what was described as an “ex gratia payment” of £59,169.  That sum reflected gross basic salary in respect of the nine‑months notice period.  The total payment of £67,000‑odd was structured by virtue of an agreement entered into between the Respondent and the Claimant.  This agreement assumed that the first £30,000 of the £67,000‑odd, was paid free of tax by virtue of Section 148 of the Income Incorporation Taxes Act 1988.  That assumption was based on a letter in 2002, by which the Inland Revenue accepted that Section 148 was the appropriate statutory regime, based upon perusal of standard form “At Risk Letters”, which the Revenue said, “Appears to satisfy the company’s obligation to serve notice”.  That, therefore, constituted an assessment by the Revenue that, upon the proper construction of the documentation they were provided with, the termination would not involve a contractual termination payment which would attract tax in respect of its totality, but was subject to the special regime applying, amongst other things, to awards of damages for breach of contract under which the first £30,000 of any such payment was free of tax in the hands of the recipient.  This left a balance of some £37,000‑odd which Mr Jones opted to have applied as payment of additional pension contributions.  Such a payment meant that no tax was payable on that £37,000‑odd.  The effect, therefore, has been that the entirety of the £67,000‑odd, paid to him, has not been subject to any tax.

5.	The dispute which arose was that Mr Jones, whilst happy to accept the lump sum payment which reflected his gross basic salary for a period of nine months, said that he was, in addition, entitled to be compensated for the loss of certain contractual benefits which would have arisen during that nine‑month period had his employment continued.  Initially he quantified that claim as being for £39,000‑odd.  They were in respect of six items.  The first was a stock option, the second was a bonus.  By the time the matter came before the Tribunal, he had abandoned those two particular claims, he has informed me, based on legal advice.  He has not, of course, disclosed what that legal advice was and I do not have before me any of the documentation relating to the stock option or the bonus and, therefore, I do not know on what basis, but the fact is that he had abandoned those claims.  That left four categories of contractual benefit which formed the claim for £12,021.12 which succeeded.  Those were for pension contributions, car allowance, fuel subsidy and BUPA payments for a period of nine months.  In the course of argument, he accepted that the value of the pension payment was £4,733.52, that that sum would be tax free because of its nature.  The other sums claimed, making up the total of £12,021.12, were expressed to be gross figures from which tax had not yet been deducted but he accepted that they would be subject to tax and, indeed, it is in respect of those categories that I apprehend that the third decision of the Tribunal was expressed in the way that it was.

6.	The Tribunal, having made various findings of fact, approached the matter on the basis that it was conducting an exercise in calculating damages for breach of contract in order to see whether the sum paid to Mr Jones over-topped the sum which should be awarded as damages for breach of contract or fell short of it and to the extent that it fell short, that would give rise to a further award.

7.	The Appellant’s first line of attack is that that was a fundamentally misconceived approach.  They say that upon a true view of the events and the documentation, what the Appellants did was to make a single contractual payment pursuant to their entitlement to do so, which meant that there was no breach of contract whatsoever but a lawful termination of the contract and which, therefore, precluded any assessment of damages let alone any assessment as to whether the lump sum payment did or did not fall short of such damages.

8.	The difficulty in the way of that submission is, in my judgment, threefold.  The first is that this argument of fundamental significance to the claim has only been raised for the first time at the appellate level.  The ET3 of the Appellant started off by accepting that, in paragraph 2 of the full response, Mr Jones was entitled in financial terms, “To be put in the position he would have been in had he worked out his nine‑months notice period”.  It then went on to carry out a calculation intended to demonstrate that fact.  This is plainly an acceptance that this was an assessment of damages exercise.  It is nowhere stated that there was no breach of contract, that there was a contractual payment and that any assessment of damages would be wrong in law.  Furthermore, as is plain from the authorities, a contractual payment, such as is now argued for, would run counter to the scheme which was being implemented because, as has been demonstrated in the authorities cited to me, if it is indeed a contractual payment, then it becomes liable to tax in its entirety; there is no question of any £30,000 being free of tax under Section 148.  Accordingly, based on the understanding of the Inland Revenue which is relied on, in my judgment, not only is the argument one which ought not to be entertained at this level having been raised for the first time here, it is a hopeless argument as a matter of analysis.  The clause purporting to give rise to it is hopelessly vague.  It does not say what the payment in lieu of notice will be, whether it would be salary or whether it would be salary plus benefits.

9.	There is a third reason why this argument does not get off the ground and that is this.  As Mr Jones has perceptively pointed out, the paragraph in the employee’s handbook which gives rise to the entitlement to make payment in lieu of notice at its discretion is a clause which does not apply in the facts of this case.  It seems, by its drafting, only to apply where the employee has given notice of termination and by mutual agreement the parties agree that that notice may be shortened or waived.  The facts of this case were that the employer was terminating and, whilst it is right to say that paragraph 11 of the terms and conditions gives the right in the employer to require the employee to whom notice has been given not to attend work or perform duties during the contractual notice period, that clause explicitly states that the Appellant will continue to pay salary and provide all other contractual benefits for the duration of the notice period.  That did not happen in this case.  What happened was that a single payment was made and no other.  In my judgment, therefore, upon the proper analysis of the contractual documentation, the Tribunal was obliged to treat this case as a case of damages for breach of contract.  Therefore, in my judgment, the first ground of appeal fails.  

10.	The second ground of appeal, however, attacks the arithmetic of the Tribunal and seeks to demonstrate that if the Tribunal was trying to put the employee, Mr Jones, in the same position as he would have been in had the contract been performed, that is to say, had his employment continued for nine months and had he been paid salary and contractual benefits, though not being required to attend work, then on any view, the sum that was paid to him, which was the equivalent of gross basic salary for a period of nine months, significantly over‑tops any sum which could have been awarded as damages, even taking into account the contractual benefits which did not form part of that compensation package.

11.	Although it is by no means simple, the way in which any Court or Tribunal assessing damages for wrongful dismissal should go about the task is, by now, fairly well established.  In particular, the case of Shove v Downs Surgical plc [1984] IRLR 17 sets out an approach which has not, subsequently, been subject to question and does take into account the particular complication which arises because of the operation of Section 148 of the 1988 Act and the £30,000 tax free allowance to which such payments are subject.  The approach is this.  The Tribunal is required, first of all, to assess what the employee would have received had the contract been performed.  In this case, what he would have received by way of salary and by way of contractual benefits during the nine months running from 9 July 2007.  That calculation has to be a calculation of what he would actually have received, in other words, in his hand net of tax, where tax was payable.  Of course it would not be payable in respect of the pension contributions but it would be payable in respect of the salary and in respect of the other taxable contractual benefits.  That is the sum which, prima facie, the employee must receive in order to compensate him properly for the breach of contract.  However, the tax regime has to be taken into account so that the sum which the employee receives as damages, in his hand, is sufficient to enable the employee to discharge any tax liability that he may have to the Inland Revenue in respect of the sum awarded.  Therefore, the calculation involves taking the first £30,000, tax free under Section 148, and deducting it from the net figure to which the Tribunal has come and then on the balance of that figure, grossing that figure up in order to ascertain what the tax bill is likely to be that the employee will face, having received that sum in his hands.

12.	In the present case, the Tribunal has wholly failed to carry out the first step of that calculation.  Furthermore, it has deducted the £30,000 from a gross figure which includes the statutory redundancy payment on which, on any view, no tax is payable.  It has then purported to deduct from the balance, a sum in relation to tax, so as to give rise to a figure which is net of tax, but then, in grossing that figure up again, has, unsurprisingly, added pretty well exactly the same amount and, in consequence, it has come to a conclusion that the sum actually paid fell short of the sum to which he would have been entitled by way of damages, by the figure of £12,021.12.  

13.	The Tribunal, in performing that calculation, made certain findings of fact as to what would have happened had the contract been performed; that is to say, had the employment run for a period of nine months from July 2007.  The Tribunal said this:
“… there is no evidence before me that if he [Mr Jones] had worked his notice, the Claimant would have paid any sum into a pension scheme, no allowance has been made for the tax free benefit of such payments in the calculations in paragraphs 19.10 and 19.11.  The tax liability, if any, … is an issue to be determined between the Claimant and HMRC.”

The reference to that is reference to the fact that having netted down what it took to be the appropriate gross figure, it then grossed it up again in order to cater for a tax liability which, on the basis of its findings of fact, it appears that it had assumed would arise because it was highly unlikely that Mr Jones would have had his salary paid into a pension scheme during those nine months the contract was running.  It seems to me that that is a finding of fact which I cannot overturn or call into question and, in that sense, it is favourable to Mr Jones because it results in the Tribunal having awarded a higher sum by way of damages in order to take account of his tax liability than would otherwise have been the case.  However, it may be that as, in fact, he does not fall to have any tax liability on the balance of the payment that that is something which the Tribunal ought properly to have taken into account.  Unfortunately, the Tribunal, not having approached the matter in the way that has been long established by Shove v Downs Surgical plc, really has not approached the question of what his net payments would have been during the nine months of the notice period, what the net payments would have been in respect of the various benefits claimed and, therefore, has not provided itself or this Tribunal with the basis material upon which any sensible calculation can be made.

14.	Mr Algazy suggests that, as a matter of broad impression, the likelihood is that the sum paid, £59,000‑odd, would be greater than the sum to which the Tribunal would have come had it carried out the calculation in the proper way and that, therefore, on any view, there is no underpayment by the Appellant, but it seems to me that whilst that may be the case it would be entirely inappropriate and unsatisfactory for me to conclude this case finally on the basis of such a rough and ready approach.

Conclusion
15.	In my judgment, the present decision of the Tribunal simply cannot stand, as it has approached the calculation in a manifestly erroneous way and it cannot be said by either Mr Algazy or Mr Jones that the answer is obvious, either that the payment made was insufficient or that it was sufficient to meet that liability.  It seems to me, therefore, that this matter will have to be remitted to a Tribunal for the calculation to be carried out properly and having regard to the principles which I have explained and which, as I have indicated, emanate from the case of Shove v Downs Surgical plc.

16.	Therefore, the outcome of this appeal is that it succeeds and the order which I will make is that the matter be remitted to a differently constituted Tribunal, an employment judge sitting on his own, in order for the issue properly to be determined as between the Appellant and the Respondent.  It seems to me that the Tribunal which heard the case has become so mired in its erroneous approach that it would not be safe to send it back to the same Tribunal.