When do enhanced redundancy payments become contractual? - Expert Comments

David McRae
21st Aug 2013

The Court of Appeal has provided some useful guidance to employers on the matters to be taken into account when determining whether entitlement to enhanced redundancy payments becomes contractual by custom and practice.

Employment contract


Often, an employer will have a well established practice of using a particular formula to make enhanced redundancy payments to its workforce, although the formula will not be written down in any policy of the employer. The question then arises of whether the particular formula has acquired contractual status.


The Court of Appeal set out a non-exhaustive list of considerations and circumstances which may be relevant in establishing whether a particular formula for enhanced redundancy payments has become contractual. These are as follows:


  • How many times, and over what period, have the enhancements been paid? 

The more often and the longer the period, the more likely they are to be contractual entitlements.


  • Are the enhancements always exactly the same?


The Court explained that any inconsistency during the period relied on as establishing custom and practice would be fatal to the argument that the enhancement was contractual, but that once contractual status had been established, any later departure from the formula would not change the contractual status.


  • To what extent have the enhancements been publicised generally? 


The Court suggested that publicising the availability of enhancements to the workforce as a whole would tend to point towards contractual status. The question is whether the employer has conducted itself in such a way as to create a ‘widespread understanding’ among the workforce that they are entitled to the enhancements.


  • How were the terms described?


The Court suggested that if the employer has clearly and consistently described the enhancements as being discretionary, perhaps by describing them as ex-gratia, this would be likely to prevent enhancements, even enhancements that had been made very regularly, from acquiring contractual status.


  • What is said in the written contract of employment?


If a written term of the contract makes it clear that enhancements are not contractual, custom and practice will not easily be able to supersede the express term.


  • How equivocal is the practice?


The employer’s practice must be looked at objectively and if it is equally explicable on the basis that the employer is exercising its discretion on each occasion, then this will tend to point against contractual status being established.


This guidance highlights that there are a number of practical steps employers can take to prevent a practice of offering particular enhanced redundancy payments from becoming contractual. However, it is essential to remember that there is much less an employer can do to alter the position once the entitlements have already become contractual by custom and practice. It is advisable to take detailed legal advice on the contractual status of any proposed redundancy enhancements before embarking on a redundancy exercise.

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