Can custom and practice trump contract?

Employers tend to assume that discretionary payments are, well, discretionary. What some employers do not realise is that it may be possible for discretionary payments to become implied into an employee’s contract by way of custom and practice.

A quick reminder: terms and even policies can become contractual through custom and practice where

1. they have been drawn to the employees’ attention, and
2. they have been followed without exception for a substantial period of time.

However, how these principles are applied by a tribunal remains the subject of discussion.

This month, in the case of Park Cakes Ltd v Shumba and others [2013] (Park) the Court of Appeal found that an employment tribunal was wrong to decide that employees were not entitled to enhanced redundancy payments.

The employees had previously transferred to Park Cakes Ltd under the TUPE Regulations and were dismissed by reason of redundancy. They brought claims for unfair dismissal and alleged that they were entitled to enhanced redundancy payments on the basis that their old employer had a custom and practice of making enhanced payments to redundant employees. The employees’ written contracts made no reference to enhanced redundancy payments; however their old employer had a group wide policy of paying them.

The Court of Appeal said that in deciding whether the employees had an implied contractual right to enhanced redundancy payments, the tribunal should look at how the employer’s conduct would objectively appear to its employees. What mattered was whether it would be reasonable for the employees to believe they were automatically entitled to the payment.

In deciding whether employees are entitled to enhanced redundancy payments (or other discretionary payments) due to custom and practice, a tribunal can take into account factors such as:

• whether the policy of making enhanced payments has been drawn to the attention of employees
• whether the policy has been followed without exception for a substantial period
• the number of occasions the policy has been followed
• whether payments under the policy have been made automatically or as a result of specific negotiations covering each particular redundancy exercise
• whether the terms of the policy have been consistently applied on every occasion that redundancies have been made.

It is important for employers who make discretionary payments to employees to ensure that any policies or documents which refer to them are carefully drafted. Discretionary payments should always be referred to as “discretionary” or “ex gratia” and not “estimates” or “entitlements”. Employees are then aware from the outset that the payments are discretionary.

If you are in any doubt about discretionary payments or the interpretation of your policies, please contact our Employment law team.