Morgan Russell Solicitors

Employment Contracts - Operating the Contract in Practice (Implied Terms)

The written contract of employment does not exist in isolation:

1.         Implied terms

Many terms are not expressed in contracts but are implied into the contract by either common law or statute.  Employers need to be aware of the main implied terms to draft effective contracts, make appropriate management decisions and ensure they do not act in a way which may destroy the working relationship.

There are various categories of implied terms.  :

  • Those implied by fact;

The courts will consider implying a term “in fact” where the express terms of the contract between the parties actually fail to deal with an issue.  The courts have developed a variety of tests over a number of years which are known as the “business efficacy” test, the “officious bystander” test and the courts will also consider the conduct of the parties after the contract is made.  By the “business efficacy” test the courts imply terms which are “necessary in the business sense to give efficacy to the contract”.   Possibly one of the most far reaching decisions in which a term was implied using the “efficacy” case is that of Villella v.  MFI Furniture Centres Ltd [1999] IRLR 468 where the High Court held that there was an implied term that the employer would not dismiss the employee, unless it was for a reason other than ill health, where, to dismiss that employee, would deprive him of benefits under a long term disability scheme.   The High Court held that this was necessary “to give business efficacy to the contract to provide disability benefit”.

Under the “officious bystander” test a term can be applied if it is “something so obvious that it goes without saying” (Shirlaw v. Southern Foundries (1926) Ltd [1939] 2 KB 206).  (To some extent this test can overlap with the “business efficacy” test).

Finally, with regard to the parties’ conduct it is in fact very rare for the manner in which a contract is performed to, by itself, amount to a contractual binding obligation but a term may be implied where the conduct of the parties actually demonstrate that the term must have been intended at the time the contract was entered into.

An example is in Mears v. Safecar Security Ltd [1982] ICR 626.   In that case the question was whether an employee was entitled to sick pay in circumstances where the contract was silent on the point.   The employee had been absent from work on previous occasions by reason of sick leave and had not asked for sick pay.  The fact that the employee had not asked for sick pay before but was asking for it on this occasion, was used to support the Court of Appeal’s decision that the only term that could be implied from the conduct of the parties was that there was no sick pay entitlement.

  • Terms implied by custom and practice;

A term can be implied by custom and practice in circumstances where the operation of the term can be said to be customary in a particular trade or locality or at a particular workplace.   The test to decide whether a custom or practice actually constitutes a binding implied term is that the custom or practice must be “reasonable, notorious and certain” (Bond & anr v. CAV Ltd [1983] IRLR 360) and is followed “because there is a sense of legal obligation to do so” (Solectron Scotland Ltd v. Roper [2004] IRLR 40).

The risk that an employer faces with regard to terms implied by custom and practice really centres around where an employee might argue that, for example, a bonus has been paid every year for the past 20 years (in circumstances where the employer, in fact, saw the payment of such bonuses as discretionary).  Another situation that might arise is where enhanced redundancy payments are paid in one year and again in a subsequent round of redundancies.  Again, in a future redundancy situation employees might seek to argue that that payment of enhanced redundancy has become “custom and practice” (or has become contractual on some other basis).

It is established in case law that a discretionary benefit will not become an implied term merely because it has been paid for a number of years (the case of Quinn & ors v. Calder Industrial Materials Ltd [1996] IRLR 126 was one where employers had paid enhanced redundancy payments for a number of years.  The court held that the practice had never been incorporated into an agreement or otherwise communicated to the employees and therefore remained discretionary.   However, we do recommend to employers that when making any sort of discretionary payment or enhancement to a statutory obligation, the basis upon which that payment is being made is expressly stated in writing (e.g. “discretionary”, “non contractual”, the fact of “payment on this occasion does not in any way imply that a payment will be made in the future”.....).

  •  Terms implied by law;

The test for implying a term by law is much wider than the test for a term implied by fact.  It is not a requirement to show that the term is necessary under the “business efficacy” test.   The term can be implied by law where it is necessary to give effect to an incidental benefit.  For example, in the case of Scally v. Southern Health and Social Services Board [1991] 4 ALL ER 563, under provisions in a collective agreement employees have the right to purchase enhanced pension rights.   However, a number of the employees were not informed of the provisions in the collective agreement and so had not had the opportunity to take advantage of the right.   It would not have been possible to conclude that there was an implied obligation to notify the employees of the right to purchase enhanced pension rights on the basis that it was an implied term by fact  (so the performance of a contract did not require that term to be implied).  However, the House of Lords held that the employers were under a duty to take reasonable steps to inform the employees of a contractual term of which they could not have been expected to be aware.  (Because the term was in a collective agreement it was incorporated into the contract).

  • Terms implied or modified by statute.

You will be familiar with terms implied by statute.  The main examples are the minimum notice period (Section 86 Employment Rights Act 1996), equality clauses (Section 1 Equal Pay Act 1970) and limits on working time (Regulation 4(1) Working Time Regulations 1998).

2.         Key terms implied by law  -  Employee’s implied terms

The main implied obligations affecting employees is set out below.  These are generally terms that are implied by law.   Another way to conceptualise terms implied by law is to see them as “characteristic terms”.   This is because the law considers these implied terms as a necessary characteristic of a particular type of contract.   They are terms which the courts have implied as being terms which attach to the contractual relationship between employer and employee. 

  • Duty of fidelity;

An obligation on the employee to serve the employer with good faith and fidelity (Note:   Secret profits:  conflict of duties; acting for own benefit)

  • Duty to obey reasonable instructions;
  • Duty to be adaptable;
  • Duty to exercise reasonable skill and care;
  • Duty to comply with professional obligations; and 
  • Duty to give reasonable notice.

2.1       The Employees duty of fidelity

This duty is probably the most important of the implied obligations on the employee.   A number of specific obligations derive from the duty of fidelity and I will examine these briefly below.

  •  Duty not to disrupt the employer’s business

In a case in the 1970’s the Court of Appeal ruled that industrial action in the form of a “work to rule” to put pressure on the employer constituted a breach of contract.   Although the employees were working to the letter of their written contracts and rule books the Court of Appeal ruled that they owed a duty to serve the employer faithfully “with a view to promoting those commercial interests for which [they were] employed” (Secretary of State for Employment v. ASLEF & ors (No 2) [1972] 2 QB 455) – see also 4.4.2 of these notes.

  • Duty not to compete

There is a duty on an employee not to compete arising from the duty of fidelity.  However, the duty only applies during working hours and does not continue after termination of the contract of employment.  Hence the need for post termination restrictive covenants (see paragraph 2.18 of these notes).   As to the question of whether the duty arises during the employees’ spare time there is a raft of case law on this.  Questions relating to this duty also often centre around circumstances in which an employee has been preparing himself to compete with the employer once employment has ended.   There is a thin dividing line between what may amount to preparatory steps and what actually amounts to active competition.  

  • Duty not to solicit the employer’s customers
  • Duty not to entice employees
  • Duty to disclose wrong doing 

Note there is no general duty to disclose wrong doings but there are possible exceptions where the employee also has a fiduciary duty (i.e. a director or with appropriate seniority), there has also been deemed to be an obligation to disclose the misconduct of others in specific contractual circumstances (again, I emphasise here the importance of contracts being designed for the specific employee in mind, particularly where you are appointing senior employees).  In one case a manager was found to have an obligation to disclose the misconduct of others where his contract stated that he was “responsible for the management of the business and .....for seeing that the business was conducted honestly and efficiently by all who came under his control”.

The duty of fidelity can be relied upon by an employer in support of proceedings to protect against, for example, moves by whole teams of management.

  • Duty of Confidentiality
  • Duty not to make a secret profit

3.         Key terms implied by law  -  Employer’s implied terms include :-

  • Duty to pay wages;
  • Duty to indemnify (re: expenses);
  • Duty to provide work :-

- no general obligation;

- may arise where it otherwise deprives the employee of the opportunity to earn or to exercise his skills.

  • Duty to give reasonable notice; 

- Duty will be overridden by express contractual provision (subject to statutory minimum notice);

- Case law supports somewhere between 3 and 6 months for a company director, 12 months where director of international operations, 1 month for a clerical worker (this is, of course, in the absence of contractual provisions);

  • Health and safety duties;
  • Duty to provide a suitable working environment;
  • Reference duties;
  • Duties relating to Permanent Health Insurance;

- advising employees of rights and benefits;

- some cases have approved such a duty, e.g. to notify of enhanced pension rights;

- terms incorporated by collective agreements;

Note that this does seem to be very limited.   However, if an employer does give advice or information it is under a duty to take reasonable care in giving it.

  • The duty of mutual trust and confidence;   

- This is one of the key implied terms often cited by employees when claiming constructive dismissal – that is, where the employee has terminated the employment relationship in response to an alleged repudiatory breach of contract by the employer – the employee will often allege a breach by the employer of the duty of mutual trust and confidence.

3.1       The Employer’s duty of Mutual Trust and Confidence

This duty has been described in case law as a duty on the employer not, without reasonable and proper cause, to conduct itself in a manner “calculated or  likely to” destroy or seriously damage the relationship of trust and confidence between employer and employee.

Trust and confidence is most frequently relied on by employees bringing claims for constructive dismissal. It should not however be confused with a duty to act reasonably – as there is no such duty on an employer.  The duty means however, that an employer must not act irrationally or perversely.

A breach of the implied obligation of trust and confidence may consist of a series of actions on the part of the employer which cumulatively amount to a breach of the term, even though each individual incident alone may not be sufficient to do so. In particular in such a case the "last straw" need not itself be a breach of contract; the question is, does the cumulative series of acts taken together amount to a breach of the implied term.

The Employment Appeal Tribunal has indicated that in order to determine whether the mutual trust and confidence obligation has been breached in a constructive dismissal case the Tribunal must first consider whether the employer had reasonable and proper cause for its conduct and secondly, (if the conduct was not within the range of reasonable responses open to an employer) the Tribunal should consider whether the conduct complained of was calculated or likely to destroy or seriously damaged the relationship of trust and confidence between employer and employee.

It should also be noted that it is described as a “mutual” obligation and is one which falls on both employer and employee.  However, generally it is a claim brought against employers.   Employers tend to rely on allegations of breach of duties of fidelity and fiduciary duties when taking action in relation to an employee.

The general principles applying when looking at mutual trust and confidence are:-

  • Case law has established that the employer is not under a duty to act reasonably.  However, he must not act irrationally or perversely (that is, in a manner in which no reasonable employer would have acted) when exercising its managerial discretion.
  • Motive is not crucial.
  • Good faith is not, of itself, enough to avoid a successful claim of breach of mutual trust and confidence.   (An honest mistake can still breach the term).

Over the years the duty has been extended or applied to various situations but is most commonly cited in relation to the following situations:

  • References

An employer was in breach when it gave a reference to a prospective new employer which although factually accurate, was misleading and potentially destructive of the employee's future career, in that it referred to complaints against the employee that had not been communicated to her, and that she had not therefore had the opportunity to comment on.(TSB Bank plc v Harris [2000] IRLR 157).

  •  Making the job impossible

In Hellman International Forwarders Ltd v Cooper EAT/1040/96, the employer was in breach when it told an employee that, if she did not complete an unfeasibly large backlog of paperwork within a fortnight, she would lose her job.

  •  Mobility, flexibility and managerial prerogative

In United Bank Ltd v Akhtar [1989] IRLR 507, it was a breach of the implied term for an employer to require its employee to move from Leeds to Birmingham on six days' notice. Even though there was an express mobility clause in the contract, there was a requirement that reasonable notice should be given in the exercise of the employer's power, and a failure to do so breached the implied term of trust and confidence. A term was also implied to the effect that the employer must not exercise the mobility clause except in a manner which rendered its performance feasible.

  •  Bonuses, pay rises and other benefits    

In deciding whether to award a discretionary bonus or a pay rise (and in what sum), the employer owes a duty to make its decision in a manner that is "rational and bona fide, as opposed to irrational and arbitrary" (Cantor Fitzgeral International v Horkulak [2004] EWCA Civ 1287.

  •  Even treatment

The implied term also obliges employers to treat employees "even-handedly". This does not necessarily mean treating them identically but, if the employer treats one employee differently from the rest, its reasons must not be capricious.

  •  Bullying and abuse

In Horkulak v Cantor Fitzgerald International [2003] IRLR 756 the High Court recognised that the modern employment contract included obligations on the employer in connection with the self-esteem and dignity of the employee, and that it was clear from the case law that the use of foul and abusive language can undermine the contract of employment. The fact that a manager is frequently given to foul language does nothing to diminish its power to offend on a given occasion, nor does the fact that the employee may use foul language as well. Therefore an aggressive or abusive management style which undermines the employee is capable of breaching the implied term.

  •  Discrimination and harassment 

Often an employee who has suffered discrimination (www.practicallaw.com/6-200-3174) or harassment (www.practicallaw.com/3-200-3340) under the discrimination legislation but has not been dismissed will be able to rely on a breach of mutual trust and confidence to establish a constructive dismissal.

  • Disciplinary warnings 

Unjustified or excessive disciplinary sanctions can breach the implied duty of mutual trust and confidence. 

  • Suspension 

Suspension should be used with caution pending an investigation, even where the contract gives an express power to suspend. Paradoxically, it may be that, the more serious the allegation, the more care should be taken before suspending the employee, since it is more likely that the allegation will destroy trust and confidence if unfounded.

  •  Demotion 

Demoting an employee without good reason may constitute a breach of trust and confidence but is probably also likely to be a breach of the express terms of the contract, unless it is specifically permitted in the contract.

  •  Dismissal: beyond trust and confidence

The trust and confidence term does not cover dismissal (www.practicallaw.com/3-200-3180) or the manner of dismissal.

4.         Statutory provisions

Employers must remember when operating contracts that there is a layer of statutory provisions which may restrict a clause being operated in a particular way. 

For example, a right to dismiss for gross misconduct in the contract will be subject to unfair dismissal legislation provisions. 

5.         Staff handbooks and policies and procedures

Handbooks are helpful to have as they can contain useful non-contractual information and the employer's policies on a wide variety of matters from dress code to e-mail and internet use.   Great care needs to be taken to ensure that terms intended to be contractual obligations are in the contract, not in the handbook and that the two documents cross reference appropriately.

 

Further Information

If you have any questions regarding the above or require additional information or assistance, please contact Melanie Smith on +44 (0)1372 461411.

The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
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