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

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