Delaney v. Staples

[1992] 1 All ER 944
[1992] 1 AC 687
[1992] 2 WLR 451

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(Decision by: Lord Browne-Wilkinson)

Delaney
v Staples

Court:

Judges: Lord Bridge of Harwich
Lord Templeman
Lord Ackner
Lord Goff of Chieveley
Lord Browne-Wilkinson

Subject References:
Employment
Master and servant
Employee entitlements
Unauthorised deduction from wages

Legislative References:
Employment Protection (Consolidation) Act 1978 (UK) - s 131
Wages Act 1986 (UK) - s 7(1)

Case References:
Gothard v. Mirror Group Newspapers Ltd - [1988] ICR 729

Hearing date: 22, 23, 27 January 1992
Judgment date: 12 March 1992

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Decision by:
Lord Browne-Wilkinson

My Lords, this case raises a point of some importance on the construction of the Wages Act 1986. That Act prohibits an employer from making unauthorised deductions from 'wages'. The question in this case is whether 'wages' for this purpose includes a payment in lieu of notice paid by an employer when terminating employment without notice.

The facts are simple. The appellant, Miss Delaney, was employed by Mr Staples as a recruitment consultant at a wage of £125 per week plus 6% commission. Her employment started on 11 February 1988. She was entitled to receive one week's notice under s 49 of the Employment Protection (Consolidation) Act 1978, but was dismissed without notice on 9 September 1988. On that date she was given a cheque for £82 'in lieu of notice'. However, before the cheque was presented it was stopped by Mr Staples who claimed he had discovered that she was in breach of her duty of confidentiality. Miss Delaney's weekly pay was apparently up to date but she claimed that there was due to her commission of £18 and accrued holiday pay of £37.50 that Mr Staples had not paid.

Miss Delaney applied to the industrial tribunal in Leicester claiming all three of these sums under the 1986 Act. The industrial tribunal has no jurisdiction to adjudicate upon these claims unless the failure of Mr Staples to pay the sums claimed constituted 'deductions' from 'wages' within the meaning of the Act. The industrial tribunal held that the failure to pay commission and holiday pay constituted 'deductions' and ordered Mr Staples to pay £55.50 to Miss Delaney in respect of those two claims. As to her claim for £82 in lieu of notice, the industrial tribunal held that it had no jurisdiction to adjudicate on the claim since payments in lieu were not 'wages' within the meaning of the Act.

On appeal the Employment Appeal Tribunal held that there had been no 'deduction' of the payment due for commission and holiday pay nor was the payment in lieu 'wages' within the Act (see [1990] ICR 364). On further appeal to the Court of Appeal, the decision of the industrial tribunal was restored: the claims for holiday pay and commission were held to be within the Act as constituting 'deductions' but the claim for £82 payment in lieu was not (see [1991] 1 All ER 609, [1991] 2 QB 47). There is no appeal against the Court of Appeal decision as to holiday pay and commission but Miss Delaney appeals to this House against the decision disallowing her claim to the payment in lieu.

Although the sums at stake are small, the questions raised are of considerable practical importance. If Miss Delaney is not entitled to proceed in the industrial tribunal under the 1986 Act, she can sue Mr Staples for breach of her contract of employment in dismissing her without the one week's notice to which she was entitled. But, since the industrial tribunal has no jurisdiction to entertain claims for damages for breach of contract, such proceedings would have to be brought in the county court. In a large number of cases, claims arising from the termination of employment relate only to the employer's failure to pay accrued wages or sums in lieu of notice. It would therefore obviously be convenient if such disputes could be resolved comparatively simply in the industrial tribunal rather than pursued through the courts.

Before turning to the 1986 Act, I must say a word about the nature of wages and payments in lieu of notice.

The proper answer to this case turns on the special definition of 'wages' in s 7 of the Act. But it is important to approach such definition bearing in mind the normal meaning of that word. I agree with the Court of Appeal that the essential characteristic of wages is that they are consideration for work done or to be done under a contract of employment. If a payment is not referable to an obligation on the employee under a subsisting contract of employment to render his services it does not in my judgment fall within the ordinary meaning of the word 'wages'. It follows that if an employer terminates the employment (whether lawfully or not) any payment in respect of the period after the date of such termination is not a payment of wages (in the ordinary meaning of that word) since the employee is not under obligation to render services during that period.

The phrase 'payment in lieu of notice' is not a term of art. It is commonly used to describe many types of payment the legal analysis of which differs. Without attempting to give an exhaustive list, the following are the principle categories. (1) An employer gives proper notice of termination to his employee, tells the employee that he need not work until the termination date and gives him the wages attributable to the notice period in a lump sum. In this case (commonly call 'garden leave') there is no breach of contract by the employer. The employment continues until the expiry of the notice: the lump sum payment is simply advance payment of wages. (2) The contract of employment provides expressly that the employment may be terminated either by notice or, on payment of a sum in lieu of notice, summarily. In such a case if the employer summarily dismisses the employee he is not in breach of contract provided that he makes the payment in lieu. But the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work to be done under the contract of employment. (3) At the end of the employment, the employer and the employee agree that the employment is to terminate forthwith on payment of a sum in lieu of notice, Again, the employer is not in breach of contract by dismissing summarily and the payment in lieu is not strictly wages since it is not remuneration for work done during the continuance of the employment. (4) Without the agreement of the employee, the employer summarily dismisses the employee and tenders payment in lieu of proper notice. This is by far the most common type of payment in lieu and the present case falls into this category. The employer is in breach of contract by dismissing the employee without proper notice. However, the summary dismissal is effective to put an end to the employment relationship, whether or not it unilaterally discharges the contract of employment. Since the employment relationship has ended no further services are to be rendered by the employee under the contract. It follows that the payment in lieu is not a payment of wages in the ordinary sense since it is not a payment for work done under the contract of employment.

The nature of a payment in lieu falling within the fourth category has been analysed as a payment by the employer on account of the employee's claim for damages for breach of contract. In Gothard v Mirror Group Newspapers Ltd [1988] ICR 729 at 733 Lord Donaldson MR stated the position to be as he had stated it in Dixon v Stenor Ltd [1973] ICR 157 at 158:

If a man is dismissed without notice, but with money in lieu, what he receives is, as a matter of law, payment which falls to be set against, and will usually be designed by the employer to extinguish, any claim for damages for breach of contract, i.e. wrongful dismissal. During the period to which the money in lieu relates he is not employed by his employer.

In my view that statement is the only possible legal analysis of a payment in lieu of the fourth category. But it is not, and was not meant to be an analysis of a payment in lieu of the first three categories, in none of which is the dismissal a breach of contract by the employer. In the first three categories, the employee is entitled to the payment in lieu not as damages for breach of contract but under a contractual obligation on the employer to make the payment.

Against that background, I turn to the relevant provisions of the Act. Section 1(1) prohibits an employer from making 'any deduction from any wages of any worker employed by him' unless such deduction is of a kind authorised by s 1 of the Act. Therefore, to fall within the prohibition contained in s 1 two things have to be demonstrated: first, that there has been a 'deduction'; second that the deduction was made from 'wages'.

As to 'deductions', s 8(3) provides:

Where the total amount of any wages that are paid on any occasion by an employer to any worker employed by him is less than the total amount of the wages that are properly payable by him to the worker on that occasion (after deductions) then, except in so far as the deficiency is attributable to an error of computation, the amount of the deficiency shall be treated for the purposes of this Part as a deduction made by the employer from the worker's wages on that occasion.

The Court of Appeal in this case held that a total failure to make any payment of a sum due could be a 'deduction' within this definition. There is no appeal against that decision nor has there been any submission that it was wrong. I must therefore proceed on the basis that it is correct, without expressing any view of my own one way or the other.

As to 'wages', s 7 of the Act provides:

(1)

In this Part "wages", in relation to a worker, means any sums payable to the worker by his employer in connection with his employment, including

(a)

any fee, bonus, commission, holiday pay or other emolument referable to his employment, whether payable under his contract or otherwise;

(b)

any sum payable in pursuance of an order for reinstatement or re-engagement under section 69 of the 1978 Act;

(c)

any sum payable by way of pay in pursuance of an order under section 77 of that Act for the continuation of a contract of employment;

(d)

any of the payments referred to in paragraphs (a) to (d) of section 122(4) of that Act (guarantee payments and other statutory payments in lieu of wages);

(e)

statutory sick pay under Part I of the Social Security and Housing Benefits Act 1982; and

(f)

in the case of a female worker, statutory maternity pay under the Social Security Act 1986 but excluding any payments falling within subsection (2).

(2)

Those payments are

(a)

any payment by way of an advance under an agreement for a loan or by way of an advance of wages (but without prejudice to the application of section 1(1) to any deduction made from the worker's wages in respect of any such advance);

(b)

any payment in respect of expenses incurred by the worker in carrying out his employment;

(c)

any payment by way of a pension, allowance or gratuity in connection with the worker's retirement or as compensation for loss of office;

(d)

any payment referable to the worker's redundancy;

(e)

any payment to the worker otherwise than in his capacity as a worker ...

The critical question is whether a payment in lieu falls within this wide definition as being a sum payable to an employee 'in connection with his employment'.

Sections 5 and 6 of the Act confer on the industrial tribunal exclusive jurisdiction to determine whether there has been an unauthorised deduction under the Act. If the industrial tribunal finds that such a deduction has been made, it makes a declaration to that effect and orders the employer to pay to the worker the amount of the deduction: see s 5(4). Under s 5(7), where the industrial tribunal has ordered such repayment--

the amount which the employer shall be entitled to recover (by whatever means) in respect of the matter in respect of which the deduction ... was originally made ... shall be treated as reduced by

the amount of the sum ordered to be repayed. This is a penal provision. If, for example, an employer made an unauthorised deduction from wages in respect of a valid cross-claim against the worker the industrial tribunal would be bound to order repayment of the deduction and the employer's cross-claim would for all purposes and in all courts be reduced by the amount improperly deducted.

I return then to consider whether a payment in lieu, although not wages in the normal sense of that word, falls within the definition of 'wages' in s 7(1) as being a sum payable 'in connection with' the employment. The first inquiry must be whether the language of the Act throws any light on the problem. The words 'in connection with his employment' are very wide, in my judgment quite wide enough to include a payment in lieu. I do not agree with the Court of Appeal that prima facie the words are not wide enough to include a payment in lieu because such payments are payments of damages for breach of contract. First, not all payments in lieu (other than garden leave) are payments of damages. Even in the fourth category of case where payments in lieu are properly analysed as being payment of damages, that does not in my judgment mean that they are not payments 'in connection with' the employment. Apart from a context indicating the contrary view, payments connected with the termination of employment (whether or not characterised as damages) are quite capable of being described as being made 'in connection with' that employment.

Nor do I get any help from the items expressly included and excluded by s 7(1) and (2). Given the presence of express inclusions as well as express exclusions, there is no room for an argument that by expressly excluding certain items the draftsman was indicating that such items would otherwise be payments 'in connection with' the employment. Nor can I detect a rough division between the express inclusions as being payments arising from services rendered under the contract and the express exclusions as payments arising from events on or after the termination of the employment. For example, the advances of wages and expenses incurred in carrying out the employment (both of which are excluded items under sub-s (2 )(a) and (b)) both relate to acts occurring during the subsistence of the contract of employment.

Mr Allen, for Miss Delaney, submitted that s 4 of the Act demonstrated that payments in lieu do fall within the definition of 'wages'. Sections 2 and 3 of the Act contain certain provisions providing additional protection for workers who are in retail employment. Those sections restrict deductions from wages being made on any occasion in respect of cash shortages or stock deficiencies to one tenth of the wages payable on that occasion. Section 4(1) and (2) deal with the position at the end of the retail worker's employment as follows:

(1)

In this section "final instalment of wages", in relation to a worker, means--

(a)

the amount of wages payable to the worker which consists of or includes an amount payable by way of contractual remuneration in respect of the last of the periods for which he is employed under his contract prior to its termination for any reason (but excluding wages referable to any earlier such period), or

(b)

where an amount in lieu of notice is paid to the worker later than the amount referred to in paragraph (a) the amount so paid, in each case whether the amount in question is paid before or after the termination of the worker's contract.

(2)

Section 2(1) shall not operate to restrict the amount of any deductions that may (in accordance with section 1(1)) be made by the employer of a worker in retail employment from the worker's final instalment of wages.

Section 4(1 )(b) contains the only express reference in the Act to a payment in lieu. Mr Allen submits that the definition of 'final instalment of wages' as including payments in lieu shows that such payments are 'wages' for the purposes of the Act. In particular the words in s 4(2) 'in accordance with section 1(1)' show that where the 'final instalment of wages' is a payment in lieu, although the special 10% limit applicable to retail workers does not apply, the prohibition on deductions not authorised by s 1 applies to the payment in lieu. Therefore, it is said, a payment in lieu must constitute 'wages' for the purposes of s 1.

I do not accept that submission. The purpose of s 4 is to permit sums not deducted during the employment by reason of the restriction in s 2 to be deducted on the termination of the employment. Such final deduction is to be made from whichever is the later, the last payment of wages (in the ordinary sense) or a payment in lieu. The fact that the employer is only allowed to make the final deduction from a later payment in lieu (if any) does not by itself mean that such payment, for the other purposes of the Act, constitutes 'wages'. Nor do the words in s 4(2) 'in accordance with section 1(1)' take the matter any further. The words are apposite to the case where the final deduction falls to be made from the last wages (in the ordinary sense) since there is nothing in s 4 to authorise deductions prohibited by s 1(1) from such payment. The words 'in accordance with section 1(1)' apply to such payments and the presence of those words can be explained on that ground. Where the final deduction falls to be made from the payment in lieu, such deduction will be in accordance with s 1(1) since there is nothing in s 1(1) to prohibit such deduction even if the payment in lieu is not 'wages' within s 7(1)

Therefore, on the language of the Act, I find neither anything which cuts down the wide meaning of the words 'in connection with his employment' nor anything which demonstrates that Parliament intended payments in lieu to fall within the definition of 'wages'. I turn therefore to the way in which the Act would operate if payments in lieu were included in the word 'wages'. Like the Court of Appeal, I find that the provisions of the Act cannot be made to work if payments in lieu are included in the meaning of wages. I will demonstrate the difficulties by reference to the fourth and most common category of payment in lieu, ie where the worker is summarily dismissed in breach of contract and the employer makes no payment in lieu or a payment in lieu of a sum less than the full amount of the wages for the notice period.

First, in order to demonstrate that the failure to make any payment in lieu is a 'deduction', the worker will have to satisfy the requirements of s 8(3). He will have to show that there was an occasion on which 'wages' were payable to him and the amount of the wages which should properly have been paid to him on that occasion. These requirements cannot be satisfied in relation to a payment in lieu. There is no 'occasion' on which the payment in lieu was 'properly' payable. The worker has no contractual or other right to the lump sum of liquidated damages at any time prior to judgment. Even assuming that the occasion for such payment in lieu was the date of summary dismissal, what was the sum 'properly' then payable? If the worker obtains alternative employment during the notice period, the damages for wrongful dismissal on account of loss of wages which would be payable by the employer falls to be reduced by the wages received by the worker from the alternative employment during the notice period. It is therefore impossible at the time of dismissal to quantify the correct amount of the payment in lieu. Accordingly there is no way in which the amount of the 'deduction' can be calculated under s 8(3).

Next, under s 5(2 )(a) a complaint to an industrial tribunal in relation to an improper deduction has to be made within three months of 'the date of payment of the wages from which the deduction was made'. As I have said, it is impossible to identify the date on which the payment in lieu should have been made. Therefore the time limit in s 5(2) cannot be calculated.

Next, under the general law an employer in paying damages for wrongful dismissal or a payment in lieu by way of liquidated damages is entitled to set off any cross-claim he may have against his employee. For example, in the present case the employer, Mr Staples, was asserting a cross-claim against Miss Delaney for an alleged breach of her duty of confidentiality. If a payment in lieu constitutes 'wages' for the purposes of the Act, no such deduction of cross-claims is permissible since it would not be authorised by s l. Moreover, if the employer were to exercise his right of set-off under the general law by deducting the amount of his cross-claim from a payment in lieu, if the payment in lieu is 'wages' the worker could apply to the industrial tribunal for an order that the employer repay the unauthorised deduction even if it was a legitimate cross-claim. The industrial tribunal would be bound to order such repayment (s 5(4)) and in consequence the employer would lose his right to enforce his cross-claim in any proceedings to the extent of the sum wrongly deducted: see s 5(7). I find it impossible to believe that Parliament in passing this legislation intended, by a sidewind, to alter the common law rights of employers and workers on the termination of employment.

For these reasons, I am forced to the conclusion that payments in lieu in the fourth category do not fall within the statutory definition of 'wages'. Where then is the dividing line to be drawn? In my judgment one is thrown back to the basic concept of wages as being payments in respect of the rendering of services during the employment, so as to exclude all payments in respect of the termination of the contract save to the extent that such latter payments are expressly included in the definition in s 7(1). It follows that payments in respect of 'garden leave' (my category 1) are 'wages' within the meaning of the Act since they are advance payments of wages falling due under a subsisting contract of employment. But all other payments in lieu whether or not contractually payable (my categories 2, 3 and 4) are not wages within the meaning of the Act since they are payments relating to the termination of the employment, not to the provision of services under the employment. To draw a distinction between those cases where the payment in lieu is contractually based and the normal payment in lieu which consists of liquidated damages would be to invite numerous disputes as to the jurisdiction of the industrial tribunal which cannot have been Parliament's intention. For these reasons, I agree with the decision of the Court of Appeal.

This conclusion produces an untidy and unsatisfactory result. On any dismissal, the summary procedure of the industrial tribunal under the Act will be exercisable in relation to unpaid wages (in the ordinary sense), holiday pay, commission, maternity leave etc but claims relating to the failure to give proper notice will continue to have to be brought in the county court. The employee is therefore forced either to bring two sets of proceedings or to proceed wholly in the county court on a claim for damages. To be forced to bring two sets of proceedings for small sums of money in relation to one dismissal is wasteful of time and money. It brings the law into disrepute and is not calculated to ensure that employees recover their full legal entitlement when wrongfully dismissed. The position is capable of remedy by an order under s 131 of the Employment Protection (Consolidation) Act 1978, which enables the minister to confer jurisdiction on industrial tribunals to deal with claims for breach of contract. As the judgment of Lord Donaldson MR in the present case shows, the courts have been suggesting that this power be exercised for nearly 20 years, so far without success (see [1991] 1 All ER 609 at 620-621, [1991] 2 QB 47 at 64-65). I believe that all your Lordships are of the view that the present unsatisfactory position calls for fresh consideration by the minister.