Questions and answers

The employment law team at Norton Rose answer questions on workplace issues

Race Discrimination

Q:  I provided a reference for an
employee after he left my company’s employment and he is intending to sue me
for race discrimination. Can he do this?

A:  Section 4(2) of the Race
Relations Act 1976 ("RRA") makes it unlawful for an employer to
discriminate against "a person employed by him". The 1997 case of
Adekeye v Post Office decided that this phrase referred only to a person
employed at the time of the discriminatory act, not to a person who was no
longer an employee.

However, Coote v Granada Hospitality Limited threw doubt upon this. Belinda
Coote brought a sex discrimination claim against Granada, alleging that she had
been dismissed because of her pregnancy. Although this claim was settled,
subsequently Ms Coote had difficulty finding employment and alleged that
Granada had failed to provide an employment agency with a reference.

Ms Coote then brought proceedings claiming that this was a reaction to her
previous complaint and amounted to unlawful victimisation contrary to section 4
of the Sex Discrimination Act 1975 ("SDA"). The European Court of
Justice ruled that the 1976 Equal Treatment Directive did protect former
employees from retaliatory measures taken by the employer after the employment
relationship had ended.

Following that decision, the Employment Appeal Tribunal ("EAT")
decided that the SDA could be construed in such a way as to allow Ms Coote to
proceed with her claim. As section 4(2) of the RRA is worded in a similar way
to the relevant section in the SDA, it was thought the law concerning an act of
discrimination which had taken place after the end of employment could be

However, the recent case of D’Souza v London Borough of Lambeth
("Lambeth") suggests otherwise. D’Souza had brought a successful
claim of unfair dismissal and race discrimination having been summarily
dismissed by Lambeth.

The Employment Tribunal ordered his reinstatement but it was not practicable
for Lambeth to comply with the order. D’Souza subsequently presented another
claim to the Employment Tribunal alleging that Lambeth’s failure to reinstate
him was a further act of race discrimination.

The Employment Tribunal followed the position as outlined in Adekeye v Post
Office, and rejected D’Souza’s claim on the basis that the RRA does not cover
discrimination that occurs after the end of employment. The EAT felt compelled
to follow that case as it was a Court of Appeal decision, however they did so
"without relish". The EAT said that the Court of Appeal may wish to
review the decision in the future, however the EAT could not change the law.

In consequence, if your employee is threatening to sue for race rather than
sex discrimination over a reference that was provided subsequent to the
termination of his employment (however terminated), at the moment he would not
be able to pursue the claim. Employers should be aware however that the
situation is likely to change in the future and carefully worded references
always make sense.

Paul Griffin

PFI/PPP transactions

Q:  Does TUPE apply to PFI/PPP

A:  Generally speaking, these
transactions are structured in such a way that there is a change of employer,
therefore attracting the operation of TUPE. Often, the principle difficulty
lies in identifying those individuals who will be caught by TUPE and ensuring
that excess employees do not transfer across. These transactions are made more
complex by the presence of third party contractors whose employees are often
engaged in the undertaking that is to be transferred to the private sector.

If the location of the employee’s job changes on a PFI/PPP transaction then
problems arise when the new location is a significant distance from the old. If
(for example) hospital PFI transactions involve a new build, the private sector
employer should be aware of the difficulties inherent in moving employees. Case
law holds that a contractual mobility provision does not override a redundancy
situation within the meaning of the Employment Rights Act 1996.

Peter Talibart

Compromise Agreement

Q:  When making a severance
payment to an executive in a Compromise Agreement, when is it taxable and when
is it free of tax?

A:  A severance payment (for
loss of employment and whether a redundancy or not) is free of tax up to
£30,000 if it comes within the exemptions set out in sections 148 and 188 of
the Income and Corporation Taxes Act 1988. The key is that it is a genuine ex
gratia payment with no strings other than the obvious one of preventing a
future dispute.

It used to be the case that you couldn’t agree a "genuine" severance
payment in advance but the Inland Revenue is now more relaxed about this and
you can both anticipate the departure of an executive and agree the future
level of a payment and still obtain the tax exemption, provided that the
departing employee is not tied into consultancy arrangements or other
obligations in the compromise agreement itself.

In order to retain the tax exemption employers should therefore take great
care that the compromise agreement is not used as a vehicle for asking the
employee to enter into commitments that are not already anticipated in the
contract (for exanple, existing and ongoing restrictive covenants would be
quite reasonable but new covenants would not).

The tax exemption is not available in cases of early retirement and the
Inland Revenue does expect to see a clean break. At present the tax authorities
will also, on the authority of EMI v Coldicott, refuse to treat any severance
payment as free of tax if there is a pay in lieu of notice in the individual’s
contract of employment. This may change in the light of the recent Court of
Appeal case of Cerebus Software v Rowley.

This is therefore a clear point to watch out for and if the severance
payment is taxable, an employer’s National Insurance contributions at some 11.9
per cent is payable as well.

Inland Revenue practice is that provided payment is made to an employee
after the P45 is issued, then, in addition to the first £30,000 being paid free
of tax (for a genuine severance payment), the balance need only be taxed at
basic rate, leaving the employee to pay any marginal tax that is or may become

This assists the employee’s cash flow and where the payment obligation
arises in a new tax year and no alternative employment is obtained in the
short/ medium term, there may be no higher rate tax due.

In addition to the first £30,000 being free of tax we would often advise
companies and employees alike that, in appropriate cases, this threshold can
effectively be raised by the sensible use of pension enhancement, outplacement
consultants (tax free for employees with at least two years’ service) and the
reimbursement of the employee’s legal fees (also a tax free benefit).

Tim Russell

Disability Discrimination

Q:  I employ an individual who has
been diagnosed as suffering from ME – does that mean they are protected by the
Disability Discrimination Act 1995 ("DDA")?

A:  A person has a disability
and can therefore claim protection under the DDA if he or she has a physical or
mental impairment that has a substantial and long-term adverse effect on his or
her ability to carry out normal day-to-day activities. A Code of Practice has
been issued by the Secretary of State to assist employers in putting the DDA
into practice in the workplace and this provides assistance on the definition.

Although case law has shown that ME is a physical impairment for the
purposes of the DDA, an employee has to go on to demonstrate that the illness
itself has lasted or is likely to last more than 12 months (ie, the illness is
long term) and that it affects the employee’s ability to carry out one or more
day to day activities.

The Code of Practice identifies normal day-to-day activities as mobility,
manual dexterity, physical coordination, continence, the ability to carry or
otherwise move everyday objects, speech, hearing or eyesight, memory or ability
to concentrate, learn or understand and perception of the risk of physical

With ME, it is likely to affect such aspects of day-to-day activities as
mobility and memory or ability to concentrate, although depending on the
seriousness of the condition, there may be additional symptoms. But the fact
that an employee has ME puts an employer on notice of a potential disability
and best practice dictates that an employer treats the employee as if they are
protected by the DDA so as to mitigate against any problems.

Nicola Philp


Q:  We often receive applications
from Commonwealth citizens who say they are here as a working holidaymaker.
What does this mean and can we employ them in any role?

A:  The working holidaymaker
category is available to Commonwealth citizens aged 17-27 who want to come to
the UK for an extended holiday of two years. A working holidaymaker has to
obtain permission to enter on this basis before he arrives in the UK and is
permitted to work in the UK provided his employment is "incidental"
to his holiday.

A working holidaymaker is not permitted to pursue a career or profession
while he is in the UK. In practice, this means that he is entitled to take on
only low level jobs such as bar and restaurant work, secretarial work etc. A
working holidaymaker is not permitted to take a position for which specialist
skills and knowledge or professional qualifications are required such as
accountancy or law.

Further, the requirement for employment to be incidental to the holiday
means that a working holidaymaker is permitted to work full time for only 50
per cent of the time he is here i.e. for 12 months out of 24 months. Full time
work is deemed to be 25 hours or more per week. Alternatively, he may work part
time for the whole time he is here.

Therefore, an employer is limited as to the nature of the work it can offer
a working holidaymaker. Even if the job meets the skills threshold, the
employer must make it clear that employment will be limited to 12 months on a
full time basis if the working holidaymaker has not worked before in the UK. If
the working holidaymaker has worked for another business in the UK, for example
six months, subsequent employment should in turn be limited to six months to
ensure that he does not work for more than the permitted 12 months.

Clearly an employer who employs someone for more than the permitted length
of time or in a skilled role runs the risk of being found liable under S8
Asylum & Immigration Act 1996. A working holidaymaker who is found to be
working in breach may be liable to be removed from the UK.

Following the review of the work permit scheme and the relaxation of the
qualifying criteria it is now easier to obtain full work permits for working
holidaymakers who may be required for more skilled or managerial positions in
the UK. If the working holidaymaker and the position on offer meet the
requirements of the work permit scheme, an employer may wish to consider
submitting a full work permit application, rather than run the risk of either
party contravening UK immigration law.

Caron Pope

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