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When do discretionary redundancy payments become contractual by custom and practice?

9 August 2013: Many employers will give enhanced payments on a discretionary basis when making staff redundant. However can employees gain the contractual right to those enhanced payments by custom and practice?

 

That was the question asked in Park Cakes Ltd v Shumba & Ors reported in the Court of Appeal this week.

 

In Park Cakes, case four cake factory managers were made redundant, but did not get the enhanced pay-offs previously enjoyed by colleagues. They argued that they had the right to enhanced redundancy payments based on terms implied by custom and practice. They said that enhanced redundancy payments were paid without exception for a substantial period and that gave rise to an implied contractual obligation.

 

The Court of Appeal remitted for re-hearing but gave some general guidance on what employees should reasonably understand is a benefit for them as of right, especially enhanced redundancy payments. Issues to take into account include:

 

  • On how many occasions, and for how long the benefits have been paid;
  • Whether the benefits are always the same;
  • The extent to which the enhanced benefits are publicised generally;
  • How the terms are described;
  • What is said in the express contract;
  • Whether the employers practice could be equally explained as the exercise of discretion.

 

Employers would be sensible to describe any such payments as discretionary and to reserve the right to vary or remove them. Employers would be wise to either not use a formula, or vary it occasionally. Publicising an enhanced redundancy formula would also be a bad idea.

See also ‘When do discretionary redundancy payments become contractual?

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