How reasonable must an employer be?

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The Supreme Court has taken a fresh look at the limits on an employer’s freedom to operate a contract of employment.

Employer’s decision to withhold widow’s benefits overturned

Last month the Supreme Court had to reach a decision about whether BP was contractually entitled to withhold survivors’ benefits from the widow of an engineer who had been lost overboard from one of its tankers in mysterious circumstances. BP had relied on an investigation which concluded that suicide was the most likely reason for his disappearance, although there was no conclusive evidence. That led to a decision to operate a clause in his contract which excluded entitlement to benefits where the death had been due to the employee’s “wilful default”.

All the judges agreed that in reaching a decision about whether the employee had been responsible for his own death, the employer had a duty to avoid acting unreasonably. That meant that, much like a public authority, it had to take relevant matters into account, exclude irrelevant matters, and reach a final decision that could not be described as irrational.

However they were split over how to apply the test in this case. The majority of three concluded that the evidence was not clear enough to reach a decision with such far-reaching effects. The minority agreed with the Court of Appeal that the employer had stayed on the right side of the rationality line, bearing in mind that evidence of suicide was often circumstantial.

Relationship with implied term of trust and confidence

In recent years the courts have been prepared to rein in the worst excesses of employers’ behaviour by using the implied term of trust and confidence. That has been used to act as a break on employers seeking to operate the contract of employment in an arbitrary or capricious manner – for example by acting in bad faith when operating a discretionary bonus clause.

However by intervening in this case – where the employer was relying on the conclusion of a team of experts investigating the incident – the Supreme Court has arguably set the bar considerably higher. It seems likely that more will be expected of an employer when making a purely factual decision (particularly when this will deprive the employee or his family of contractual benefits) than when operating a discretion.

No overriding requirement of reasonableness

This decision does not affect the general freedom of parties to an employment contract to agree the terms they wish, subject to the basic floor of statutory rights, and to operate it within that legal framework.

In particular, this decision has no impact on the ability of an employer to serve contractual notice terminating the employment, or to dismiss without notice where an employee is in fundamental breach of contract. That was underlined recently in a case involving Leeds United Football Club. A high court judge ruled that the club was entitled to rely on a single but serious incident of misconduct committed five years previously to avoid paying an employee notice pay. This was despite the fact that the Club did not know about the misconduct when reaching the decision to dismiss. Indeed it would not have found out about it at all, had it not conducted a forensic search of his e-mail account in the hope of finding material that would support dismissing him without notice.

An employer’s rights to dismiss under a contract of employment can be contrasted with the protection given to employees under unfair dismissal legislation, which does seek to impose the standards of a reasonable employer on decisions to dismiss in cases which fall within this jurisdiction. Had the employee brought unfair dismissal proceedings against the Club, he would almost certainly have been successful.

The context is all

Returning to the BP case it is worth stressing that it was finely balanced. Taking the litigation as a whole five judges ruled in favour of the employer and only four in favour of the claimant. That would suggest that an agreed formulation about the standards expected of any employer cannot take us all the way, and there will be grey areas where the outcome will be uncertain.

Looking at matters more broadly, it is clear that there can be no over-arching reasonableness standard that will apply in all circumstances. The most practical approach is to assess what type of decision the employer needs to make and then look at the standards that are likely to be expected. There are however hints in the Supreme Court’s decision that larger multinational companies are likely to be held to higher standards of decision making than smaller operations.

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