The devil is in the detail in discretionary benefits

Repeated customs can easily turn into contractual obligations and lead to
costly and avoidable payouts. Getting the details right will help resolve this

The question of whether a supposedly discretionary benefit has become
incorporated into the employment contract through custom and practice, is an
important but vexing one.

Two recent cases show the pitfalls and give guidance. In Albion Automotive
Ltd v Walker, Walker was one of 22 employees made redundant by Albion. The
staff had worked for Albion’s predecessor, and were taken on after Albion
purchased part of the predecessor company. None of the employees had a written
contract of employment or terms and conditions.

The predecessor company had carried out six redundancy exercises over a
four-year period, and had provided enhanced redundancy payments in each case.

After Albion took over, five more workers were made redundant, but were not offered
enhanced redundancy payments. They did not take legal action. When Walker was
made redundant, he claimed for breach of contract at the employment tribunal,
which found that he had a contractual entitlement to the payment on the basis
of established custom and practice.

Albion appealed, but lost in the Employment Appeals Tribunal (EAT) and at
the Court of Appeal, which held that several factors were relevant, including:

– Whether the policy was drawn to the attention of the employees

– If it was followed for a substantial period of time without exception

– The number of occasions on which it was followed

– Whether payments were made automatically

– Whether the nature of the communication of the policy supported the
inference that the employer intended to be bound

– Whether the policy was adopted by agreement

– Whether the employees had a reasonable expectation that the payment would
be made

– Whether the terms were incorporated into a written agreement

– Whether the terms were consistently applied

In the contrasting case of Campbell v Carbide, Campbell was employed by ICI
and benefited from the terms of a collective agreement with a recognised trade
union, which contained an ‘Employees Redundancy Payment Scheme’. It was stated
that the scheme would be incorporated on a legally binding basis into contracts
of employment. All employees were written to in June 1991, confirming this.

In the collective agreement clause headed ‘Discretionary Severance in
Non-Redundancy Cases’, it stated that if employment was terminated due to a
continuous absence of 26 weeks for reasons of ill health, the employee could
receive an ex-gratia severance payment.

Campbell sought to benefit following six months’ sick leave, arguing that
the scheme had been incorporated into his contract by custom and practice.
Evidence was brought that since 1988, in all instances where employees could
benefit, an ex-gratia payment had been made.

The EAT held that it was not incorporated and that the intentions of the
parties was key. It was relevant that the letter in June 1991 did not mention
the ill-health scheme. It was also relevant that the collective agreement
expressly stated that the redundancy scheme was contractual, while the
ill-health scheme was discretionary.

Key points

– It is possible for a consistently applied practice to be
incorporated into the contract of employment

– Varying the practice from time to time can help to reduce the
expectation of employees

– Any written record of the benefit or practice should make it
clear the benefit is discretionary, and is not intended to form part of the
employment contract

By Sarah Lamont, Partner, Bevan Ashford

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