Welcome to the March 2018 edition of our employment law report: our monthly round-up of key employment law developments and what they mean for you.


Featured case

Full disclosure

Was it fair to dismiss a teacher who failed to disclose her relationship with a man convicted of making indecent images of children? Tim Gooder explains a Supreme Court ruling on this point.

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Settlement payment reform

Anne Palmer explains the reforms to the taxation of payments in lieu of notice and compensation for injury to feelings, taking effect in April 2018.

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News round-up

Employment news round-up, March 2018

This month's employment news in brief is reported by Ashley Norman and includes the latest news on employment tribunal statistics, new NHS whistleblower regulations, an update on progress of equal pay claims in the private sector and an update on the Oxleas pensions inducement scheme.

Read more

 Pensions quarterly

Key pensions cases and news

The first of our new quarterly updates on key pensions developments, covering case law, industry news and legislative developments. Philip Woolham reports on pensions and sex discrimination, enforcing auto-enrolment, and pensions strike action.

Read more


Full disclosure

Was it fair to dismiss a teacher who failed to disclose her relationship with a man convicted of making indecent images of children? Tim Gooder explains a Supreme Court ruling on this point.


The background

Under the Employment Rights Act 1996 (ERA) there are two key questions which must be answered in order to determine whether or not a dismissal is fair. 

1. Was there a potentially fair reason for the dismissal?

There are five 'potentially fair reasons' for dismissal, namely: redundancy, illegality, capability/qualifications, misconduct and 'some other substantial reason' (SOSR) (sections 98(1) to (3), ERA).

2. Was it fair for the employer to dismiss for that reason?

Under section 98(4) of the ERA, it is necessary to consider whether, in the circumstances, (including the size and administrative resources of the employer's undertaking) the employer acted reasonably or unreasonably in treating that reason as a sufficient reason for dismissing the employee. This must be decided in accordance with "equity and the substantial merits of the case".

For misconduct dismissals, the provisions of the ERA must be read alongside the guidance in a 1978 case: British Home Stores Limited v Burchell. This case established that the employer must

  • believe that the employee is guilty of the misconduct in question; and
  • have reasonable grounds for believing that the employee is guilty of that misconduct; and
  • carry out as much investigation as is reasonable.

Finally, the decision to dismiss must fall within the "band of reasonable responses" (as required following a case called Iceland Frozen Foods Limited v Jones).

The facts

In Reilly v Sandwell Metropolitan Borough Council, the claimant, Ms Reilly, was employed as the head teacher of a primary school.

Ms Reilly's disciplinary record at work was exemplary. However, it came to light that she was close friends with a man who had been convicted of making indecent images of children, Mr Selwood.

Although Ms Reilly was not in a sexual or romantic relationship with Mr Selwood, they had been on holiday together, and bought a house together as an investment. Mr Selwood lived in the house but did not pay rent to Ms Reilly, and Ms Reilly would sometimes stay overnight at the house. Mr Selwood's car insurance policy named Ms Reilly as an authorised driver.

Ms Reilly's job description included a requirement to "advise, assist and inform the Governing Body in the fulfilment of its responsibilities" and to "be accountable to the Governing Body for the maintenance of … the … safety of all … pupils". She was, therefore, under a contractual duty to assist the governing body with its safeguarding duties. Furthermore, the disciplinary provisions in her contract of employment identified a failure to report something which it was her duty to report as being an example of conduct which might lead to disciplinary action. There was evidence that Ms Reilly had sought advice about whether she should inform the school about her friendship with Mr Selwood, but decided not to do so.

When the school discovered Ms Reilly's relationship with Mr Selwood, it commenced disciplinary proceedings, and subsequently dismissed Ms Reilly for gross misconduct.

Ms Reilly claimed that her dismissal was unfair, maintaining that she had been under no duty to disclose her relationship with Mr Selwood, because there was no evidence that it put children at risk. The school's argument was that the misconduct in question was the failure to report the relationship; it was for the school to take a view on whether or not there was a risk to the school's children and what action (if any) it should take.

An employment tribunal found that the decision to dismiss Ms Reilly was fair, and the Employment Appeal Tribunal and Court of Appeal agreed. Ms Reilly appealed to the Supreme Court.

The decision

The Supreme Court dismissed Ms Reilly's appeal and upheld the employment tribunal's finding that her dismissal was fair.

The "potentially fair" reason for dismissal was clearly misconduct. The court, therefore, focussed on the second part of the test for unfair dismissal: whether it was fair for the employer to dismiss for that reason, taking into account whether dismissal was within the range of reasonable responses and was fair in all circumstances (see 'background' above).

The court found that the nature of Mr Selwood's crimes meant that he posed a real risk to children, both directly, and indirectly by operating through those with whom children associated. His association with Ms Reilly, therefore, created a potential risk to children and could be a safeguarding issue. It was for the governors to make an assessment of that risk; not for Ms Reilly to unilaterally decide that they did not need to be notified.

In line with that reasoning, the court found that the tribunal was right to find that dismissal was a reasonable response to Ms Reilly's misconduct.

Burchell test in doubt?

In reaching its decision, the court made some (non-binding) comments about the adequacy of the Burchell approach (see 'background') given that it was developed before the ERA came into force and, arguably, does not sit comfortably with the second part of the statutory element of the unfair dismissal test.

What does this mean for me?

This case highlights that the duty on teachers – and, by extension, others working with children and vulnerable adults – to disclose safeguarding risks is wide. A failure to do so may amount to gross misconduct. Even if a specific risk is not found, or the risk is low, then a school may feel compelled to dismiss for 'some other substantial reason', on the basis that it is not sustainable to allow a senior employee to remain in post if they are associated with a high-risk individual. If you have employees who work with children or vulnerable adults, you may wish to review your contractual documentation and / your policies and procedures, to ensure that such employees are under a duty to report any such risks.

On a separate point, it may be that this case puts a marker down for claimant lawyers seeking to challenge the orthodoxy of the Burchell case. For the time being, the law remains unchanged; but this case does illuminate an 'amber light' warning that the adequacy of the Burchell test may be at risk.

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Settlement payment reform

Anne Palmer explains the reforms to the taxation of payments in lieu of notice and compensation for injury to feelings, taking effect in April 2018.


What is the current position?

There is a £30,000 exemption from income tax available under section 403(l) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) for compensation payments made on termination of employment. If an employee does not have a 'payment in lieu of notice' (PILON) clause in their contract of employment, a termination payment which is equivalent to salary that the employee would have earned during their notice period falls within the exemption and can be paid free of tax.

Compensation payments for 'injuries' caused by an employer may also fall within the £30,000 exemption, but there has been some controversy over whether that exemption applies to compensation for 'hurt feelings'.

What is changing?

Under the forthcoming reforms, employers will be required to subject to tax and class 1 National Insurance Contributions (NICs) an amount equivalent to the employee's basic salary if, and to the extent that, notice is not worked. Whether or not the employee in question has a PILON clause in their contract of employment will no longer be relevant; the basic salary element of a PILON will be treated as 'earnings'.

Employers will be required to calculate which element of a settlement package should be allocated as taxable 'post employment notice pay' (PENP). This will include an amount equivalent to basic pay that the employee would have received if their notice period had been worked; but excludes

  • overtime
  • bonuses
  • commissions
  • gratuities
  • allowances
  • termination awards
  • benefits in kind; and
  • amounts treated as earnings (such as share-based earnings).

Employees who are paid via a salary sacrifice scheme will lose out on the taxation advantages of the scheme if they do not work their notice, or part of their notice, and are given a PILON instead. If the employee in question had worked their notice, they would have benefited from a tax saving on the 'sacrificed' salary. However, under the new rules, the full 'pre-sacrifice' salary due to the employee during the PENP, will be subject to tax and NICs.

Her Majesty's Revenue and Custom has confirmed (in its February 2018 Employer Bulletin) that PENP calculations should not be applied to statutory redundancy payments. These will be subject to tax in the usual way, unless they fall within the £30,000 exemption. Contractual redundancy payments, outside of the statutory scheme, will be subject to PENP calculations.

In addition to reforming the taxation of PILON arrangements, the exemption for compensation payments for injuries is also changing. Unless the injury in question amounts to a psychiatric injury or other recognised medical condition, any compensation for that 'injury' will fall outside the £30,000 exemption. In other words, compensation for general non-clinical stress, anxiety or 'hurt feelings' caused by an employer cannot be paid free of tax.

When does this change take effect?

The new rules will apply to payments made on or after 6 April 2018 in respect of employment which is terminated on, or after, 6 April 2018; not where employment is terminated before 6 April 2018, and payment is made on or after 6 April 2018.

What do you need to do now?

The potential additional cost of termination packages will need to be factored into termination negotiations. You may wish to consider whether it is beneficial for an employee's employment to terminate before or after 6 April 2018.

Internal processes and taxation arrangements should be adjusted to ensure that the correct tax and NIC deductions are made.

You may wish to reconsider the merits of including PILON clauses in your standard contracts. Once the new rules are in effect, there will be little tax saving associated with contracts that do not have a PILON clause. However, if you wish to retain PILON clauses then the cost of making a PILON will be reduced because only basic pay will be taxed, rather than the whole payment. There may also be commercial advantages to including a PILON clause, as this gives you the option of immediately terminating employment without breaching notice provisions; thereby ensuring that any restrictive covenants in the employee's contract remain enforceable. If an employee's contract is terminated in breach of notice provisions, and without a PILON in place, then this will amount to a breach of contract and any post-termination restrictions will fall away.

Will the £30,000 exemption remain in place?

Yes – for now. The legislation introducing the taxation reforms outlined above also contain a power for HM Treasury to introduce regulations which will vary the £30,000 threshold. There is no indication yet whether that power will be exercised in the foreseeable future.

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Employment news round-up, March 2018

This month's employment news in brief is reported by Ashley Norman and includes the latest news on employment tribunal statistics, new NHS whistleblower regulations, an update on progress of equal pay claims in the private sector and an update on the Oxleas pensions inducement scheme.


April reminders…

There are a number of new developments to note over the course of next month.

1 April 2018

  • The national living wage (for workers aged 25 and over) will increase by 33p to £7.83 per hour. Other minimum wage rates will also increase (please see last month's update for details).
  • Statutory maternity, adoption, paternity and shared parental leave pay will increase to £145.18 per week.

4 April 2018

  • Large private and voluntary sector employers (those with 250 or more employees) must publish information about their gender pay differentials by 4 April 2018. According to press reports, around 5,000 organisations have yet to publish this information and the Government Equalities Office has warned that it will 'name and shame' those organisations which miss the deadline.

6 April 2018

  • The maximum compensatory award for unfair dismissal will rise from £80,541 to £83,682. The maximum amount of a 'week's pay', used to calculate statutory redundancy payments and various employment tribunal awards will also rise from £489 to £508.
  • All payments in lieu of notice, including payments where there is no contractual 'pay in lieu of notice' clause (PILON), will be subject to income tax and class 1 NICs, where payment is made and employment is terminated on or after 6 April 2018. From the same date, all payments for injury to feelings will fall outside the tax exemption for 'injury payments' (except where the injury amounts to a psychiatric injury or other recognised medical condition). For more information about the practical application of these taxation reforms, please see our briefing this month, by Anne Palmer.

Ignorance is no bar to claim

Can an employer argue that an employee's ignorance of her right to be paid the minimum wage would prevent her from claiming constructive unfair dismissal in respect of non-payment of that wage? No, said the Court of Appeal, in a recent case called Mruke v Khan . The employer in question was paying an employee 33 pence per hour. The Court of Appeal found that this was such an obvious breach of the law, in relation to which the employee resigned, that it did not matter that the employee had resigned in ignorance of her rights.

New NHS recruitment / protected disclosure regulations

Regulations designed to protect prospective NHS employees who have 'blown the whistle' have moved a step closer this month. The draft regulations implementing this change have been laid before Parliament for affirmative resolution, although the exact date on which the regulations will come into force is not yet known. The draft Employment Rights Act 1996 (NHS Recruitment – Protected Disclosure) Regulations 2018 will prevent NHS employers from discriminating against job applicants who appear to have made a 'whistleblowing' protected disclosure. This reform to the whistleblowing framework is being made in response to research which has shown that some NHS employees feel that they are 'blacklisted' within the NHS as a consequence of making a protected disclosure. Full details of the government's response, including a summary of the regulations, is available here.

Private sector equal pay claims

Large-scale equal pay claims in the private sector appear to be gaining traction. Following on from our February 2018 report on supermarket equal pay claims, it has been reported in the press that retailers, Next and Morrisons, are also facing equal pay claims from large numbers of employees. It has been alleged that Morrisons has failed to equalise pay between customer assistants (most of whom are women) and distribution centre staff (most of whom are men). It has also been reported in the press that the retailer, Next, is also looking at the prospect of £30 million equal pay claim from its shop-floor staff.

The Court of Appeal is due to decide a preliminary issue in equal pay claims against other retailers, including Sainsbury's and Asda, on 23 October 2018.

Tribunal claims continue to rise

Acas has published its latest set of statistics, showing how many notifications of Early Conciliation they received in the period from April 2017 – September 2017. The figures show that up until the end of July 2017, the number of notifications they received had remained consistent with the previous year, at around 1,700 notifications per week. An increase in notifications has taken place following the Supreme Court's decision to quash employment tribunal fees, on 26 July 2017. Although Acas notes that the full impact of the Supreme Court decision is not fully known, because of the extended nature of some disputes, there has been a 59% increase in ET1 receipts and 23% increase in Early Conciliation notifications since 28 August 2017, compared with the same period last year.

If your organisation would benefit from training on dealing with employment tribunal litigation – including guidance on avoiding claims getting off the ground, and tactical considerations – please do contact me or your usual Bevan Brittan contact for a quote. Our employment tribunal training takes a practical, interactive approach and would leave your organisation well placed to deal increased volumes of claims in the coming months.  Please also look out for details of employment tribunal training taking place at our offices over the Summer – dates will be announced on our website and via Employment Eye shortly.

Oxleas and pension inducement

You may recall the publicity surrounding Oxleas and East and North Hertfordshire NHS Trusts' pension proposals a couple of years ago. They were intended to attract new staff in shortage areas by increasing take-home pay. New employees were able to give up membership of the NHS Pension Scheme in exchange for increased salary. The trusts would pass on the money saved on their employer pension contributions to the employees as a pay increase.

Although the schemes attracted a lot of negative publicity, we understand that more NHS employers are considering similar projects. This is often driven by a desire to give employees more choice in their pay and benefits, as well as to recruit and retain staff.

Some may need more money in their pockets, and this is one way to offer this in an era of tight budgets and limited pay rises. Others may have reached the limit of their Lifetime Allowance (the maximum they can save into pensions tax-efficiently). To encourage them to keep working rather than retire early, it may be appropriate to offer them some form of incentive.

This will always be a sensitive area, and must be handled carefully. The offer after all requires employees to give up valuable pension rights. The NHS Pension Scheme provides all members with a guaranteed income in retirement, including protection against inflation, as well as benefits for spouses and in some cases children. Unless they have reached the point where they cannot efficiently save any more into the Scheme, employees may be trading long-term pension rights for short-term benefits.

Even with the best intentions, employers would clearly be offering a financial incentive to give up pension rights. In the era of automatic pension enrolment, it is illegal for an employer to encourage workers to opt out of a pension scheme used for auto-enrolment compliance.

There is also the risk of significant negative publicity, especially if unions and other employee bodies are not consulted and brought on board at an early stage. Employees must not feel that they are under any pressure to accept an offer.

However, there may be good reasons for them to do so, and the Pensions Regulator has confirmed that in the cases of Oxleas and East and North Hertfordshire that the schemes were acceptable from an inducement perspective. The Regulator has however stated that any future project will be assessed on its own merits. So past approval is no guarantee that any future project will be acceptable.

Any public sector employer considering a similar offer must ensure that they manage the whole process carefully, from initial proposal to implementation, and in particular ensure that they do not inadvertently fall foul of the Pensions Regulator, unions or the employees themselves.


Please contact Philip Woolham, in our pensions team, if you require further information on these schemes, or any other pensions advice.

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Pensions quarterly – March 2018

The first of our new quarterly updates on key pensions developments, covering case law, industry news and legislative developments. Philip Woolham reports on pensions and sex discrimination, enforcing auto-enrolment, and pensions strike action.


Air Products – how does age discrimination affect pension schemes?

Pension schemes are inherently age discriminatory. If you are in normal health, you can either draw benefits or not, depending on your age. For many schemes, the age you start to draw benefits will have a significant effect on their size.

An interesting Court of Appeal case, Air Products v Cockram, shows how pension and employment benefits can interact, and how difficult it can be to avoid claims of age discrimination, even if in the end the Court found that there was not in fact any discrimination.

The case stemmed from a rule in a long term incentive plan provided by the employer. The rule stated that an employee lost any share options if he or she left employment. There was an exception that options were still available if the employee retired 'at the customary retirement age'.

The old final salary pension scheme still had a minimum retirement age of 50, and the new money purchase scheme a minimum age of 55.   Mr Cockram retired at 50, as a member of the old pension scheme, and lost his share options. He complained to an employment tribunal that this was age discriminatory, because his 'customary retirement age' should have been 50, not the now standard age of 55 under the money purchase scheme. The company agreed that this was age discriminatory, but could be justified.

In its original decision, the employment tribunal decided that this was not age discriminatory, because the age 55 rule pursued a legitimate aim – to encourage employees to stay in work until the age of 55, and then encouraging retirement afterwards. Although the Employment Appeals Tribunal had sent the decision back to the Employment Tribunal because it had not fully considered and explained its decision, the company decided to appeal. The Court of Appeal decided that the original decision was valid, and there was no need for the tribunal to reconsider or explain it. The Court decided that the objective was already obvious, to encourage retention to 55 and then encourage retirement, and that this could be a legitimate aim.

It is also still apparently fine that old defined benefit pension schemes (often called 'final salary') can have a different normal retirement age than the newer money purchase scheme that Air Product offered.

The Pensions Regulator – using its powers

Crest Healthcare

We mentioned recently that Crest Healthcare and its managing director Shelia Aluko had been charged with to misleading the Pensions Regulator about providing their staff with a workplace pension. Both the company and Ms Aluko have now pleaded guilty to the charges: recklessly providing false or misleading information to the Regulator, and wilfully failing to comply with their automatic enrolment duties.

Crest is based in Birmingham. The case was again heard at Brighton Magistrates Court, so any employer charged by the regulator who is not based in the area can also expect to suffer the extra cost and inconvenience of being forced to travel, and indeed paying for their legal representatives' travel and time.

The Regulator says in its press release:

"On 22 March 2016, Sheila Aluko submitted a declaration of compliance to TPR claiming that the employer had complied with its duties. She claimed staff had been written to about the pension scheme and said 25 staff had been enrolled into a workplace pension scheme.

"In fact, the employer had not completed the setting up of a pension scheme, had not automatically enrolled any staff and had not written to its staff to tell them about automatic enrolment, as it was legally bound to do. No pension contributions had been paid.

"Later the employer began deducting pension contributions from the wages of some workers but kept them in the company’s bank account and did not pay them into a pension scheme for more than eight months.

"It was only after a whistleblower raised the alarm – and TPR had executed a search warrant at Crest Healthcare’s offices and interviewed Sheila Aluko under caution – that the pension scheme was set up and the contributions were paid in."

Sentencing will take place in May. This is particularly long-running and deliberate attempt to avoid Regulator scrutiny, and indeed auto-enrolment obligations (whether originally deliberately or not), and the Regulator will only press criminal charges as a last resort. In the end, no-one has probably lost out too much, but the Regulator is keen to show that employers must meet the auto-enrolment duties, and it has significant powers if they do not. There are now over one million employers who are subject to auto-enrolment duties, and each could in theory find itself in the same position if it does not meet its responsibilities.

Dominic Chappell and BHS

The Regulator's powers aren’t limited to auto-enrolment issues. Dominic Chappell, former director and majority shareholder of BHS's final owner before its collapse was fined more than £87,000 for failing to hand over information to the Pensions Regulator.

The Regulator has the power to require individuals concerned to provide it with information on pensions matters. As part of its investigation into the sale and collapse of BHS, it invoked its power under section 72 of the Pensions Act 2004. Mr Chappell did not provide the information, and also did not provide the Regulator with information about a possible unauthorised disclosure of restricted material.

Although he pleaded not guilty to three charges of neglecting or refusing to provide information and documents without a reasonable excuse, he was found guilty, and fined £50,000, ordered to pay £37,000 costs and pay a £170 victim surcharge.

This is again a particularly extreme case, and the Regulator does not resort to criminal charges lightly, but it does have this power. Usually, the threat of using powers has persuaded parties to hand over information, but in the highly public circumstances of BHS, the Regulator clearly felt forced to go further when it did not receive the information it required.

Industry-wide pension schemes – USS and SHPS

The more public issue is that of Universities Superannuation Scheme (USS), which we've written about before. Members of the academic staff of many longer-established universities have voted for strike action over the closure of their defined benefit pension scheme, and its replacement with a money-purchase arrangement. Negotiations that seemed to have made progress, based around a transition period, have been rejected by the Universities and Colleges Union.

Social Housing Pension Scheme (SHPS) was set up to provide a straightforward one-stop solution for employers who were taking on employees transferring from the public sector. As its name suggests, it is intended for use in the housing sector. Employers could choose to set up or join a pension scheme that provided members with benefits broadly comparable to those they enjoyed in the public sector. SHPS continues to provide this – its various sections have mirrored the changes to public sector provision over the years.

In order to obtain this straightforward access to a suitable pension scheme, employers have to abide by its rules, and in particular pay whatever contributions are required. While the same would be true if, for example, they gained admission into the Local Government Pension Scheme, in recent years employers have been paying significant additional contributions to try to reduce SHPS's pension deficit. As a private sector scheme, SHPS is under a legal obligation to do this, and, along with attempts to grow the size of their assets, the employers must make these extra payments. SHPS's next scheme valuation is imminent, and employers are concerned that they will have to pay more.

Some parts of SHPS are also 'last man standing', so if an employer becomes insolvent and cannot pay all that it owes to the scheme, the rest of the deficit is apportioned to the remaining employers. This in turn increases the amount they have to pay towards the overall deficit.

As a result, we are seeing a number of employers within SHPS trying to find ways to limit their exposure, either by moving into standalone schemes run by SHSP's parent body, or even setting up their own separate schemes and transferring their members to them.

The proposed move to money purchase benefits, even with high levels of contributions, that USS has taken is common in the 'pure' private sector. But they are meeting with resistance to the change, and the strikes are a very public reflection of this. The two schemes' situations are very different. But in different ways, both show the difficulties faced by schemes that must abide by private-sector regulation and legislation, including on funding, while trying to replicate public sector pension scheme benefits.  USS members would always consider themselves as public sector employees.  SHPS is much less in the public eye, but its members are key to delivering social housing in the UK, and pension concerns can mean that there is less money to spend on their main function.

Automatic enrolment

Both employers' and workers' minimum automatic enrolment contribution levels increase on 6 April. Employer contributions will be 2%. Workers will pay 3% (including tax relief).

We're not sure yet what effect this will have on opting-out. Workers will see an increase in the amount they have to pay if they want to keep the employer contributing too. But it will happen at the same time as the new income tax thresholds arrive, reducing the impact pension saving will have on the employee's take-home pay.

Studies and predictions have not been conclusive so far – some predict limited effects, some more significant. Certainly some people will opt out, particularly perhaps those who work for employers who only recently started auto-enrolment, as they will have less time to get used to regular saving. However, we would expect there to be a greater effect in 2019, when the bigger jump to 'steady state' pension saving happens, with workers being asked to contribute 4% of pay (5% with tax relief).

Cold calling ban

We've mentioned before the government's announcement that it would legislate to ban cold-calling in relation to pensions. It has now amended the Financial Guidance and Claims Bill to require the Secretary of State to set a timetable for implementation of the ban by June, including the making of regulations.

While we still don't know when the ban will come into force, it is now likely to be sooner rather than later.


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If you would like to discuss any of these topics, or any other aspect of Employment Law, please contact Head of Employment, Jodie Sinclair.

This article may contain information of general interest about current legal issues, but does not give legal advice.

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