Frontline UK Employment Law Update Edition 25 2023 - Case Updates

1. Steel v Spencer Road LLP [2023] EWHC 2492
2. MXX v A Secondary School [2023] EWCA Civ 996
3. Omar v Epping Forest District Citizens Advice [2023] EAT 132
4. Virgin Active Limited v Hughes [2023] EAT 130

1. Steel v Spencer Road LLP [2023] EWHC 2492 (LINK)

In this case, the High Court confirmed that the doctrine of restraint of trade did not apply to bonus clawback provisions and so they were not subject to the test for enforceability applied to contractual obligations in restraint of trade (the most common type being post-termination restrictive covenants).

The Appellant employee was employed by the Respondent company, a global executive search firm. Under his contract of employment, the Appellant received a basic annual salary and a discretionary bonus. The contract stated that the bonus was conditional on the Appellant remaining in employment for three months after the payment date and not giving or receiving notice of termination in that period. If the conditions were not met, the contract provided that the Respondent could recover the discretionary bonus payment and any costs, fees and charges incurred in enforcing such payment.

The Appellant was paid a bonus of £187,500 in January 2022. One month later, he gave notice of his resignation. The Respondent requested repayment of the bonus under the clawback provisions of the contract and the Appellant refused to pay. The Respondent therefore issued a statutory demand for the full amount of the bonus plus £12,623 in legal fees.

The Appellant applied to the Insolvency and Companies Court (“ICC”) to set aside the statutory demand on the basis that the bonus clawback provisions were:

• an unreasonable restraint of trade. The Appellant argued that the effect of the clawback provisions, when combined with his three-month notice period, was that he would have to remain an employee for six months after payment of the bonus in order to retain it);
• penalty clauses that were unenforceable.

The ICC held that the bonus clawback provisions were not within the restraint of trade doctrine because they did not restrict the Appellant’s ability to work elsewhere. The Judge referred to Tullett Prebon v BGC Brokers [2010] EWHC 484 (QB), in which the High Court held that a requirement to repay signing and retention bonuses in the event that the brokers resigned or were not actively performing their duties before the end of a specified minimum term, was not a restraint of trade. He also distinguished this case from 20:20 London v Riley [2012] EWHC 1912 (Ch), in which the High Court held, in relation to a “wholly different” clause requiring the defendant to repay consideration of £1.5m paid for the sale of a business in the event that he left within 3 years, that the argument it was a restraint of trade could proceed to a full trial.

The Judge stated that in the present case, the severity of the consequences were not clearly out of all proportion to the benefit received and the conditions attached to the bonus payments were “very moderate”. The Judge also found that the argument that the provisions were a penalty clause had no real prospect of success.

The Appellant repaid the bonus but appealed to the High Court in relation to the restraint of trade point. The Claimant argued that Tullett Prebon was wrongly decided and the Judge should have followed the approach in 20:20 London. He also argued that the Judge had failed to consider other clauses in the contract, such as a 13-week non-compete, which operated as a significant disincentive to resign. The Appellant’s final point of appeal was that the Judge should not have refused his application to set aside the statutory demand in what is said to be an emerging area of law.

The central issue of the appeal was whether the bonus clawback provisions in the contract, which were conditional on remaining in employment for a specified period, were a restraint of trade.

The High Court dismissed the Appellant’s appeal and found that the provisions were not a restraint of trade. The Judge found that Tullett Prebon was established authority on the matter and that the contractual provision in question in 20:20 London could be distinguished on the facts.

Furthermore, the decision was not affected by other contractual provisions, such as post-termination restrictions, that were also a disincentive to resign. Whilst the application of the doctrine of restraint of trade is still an emerging area of law, the Judge considered this case to involve the application of established precedent.

This case provides reassurance that employers can use bonus clawback provisions to disincentivise employees from resigning, provided that the provisions are clearly documented from the outset, carefully drafted, objective and reasonable. There may still be a risk of successful challenge where the severity of the consequences for the employee are “out of all proportion to the benefit received”, but there is as yet no judicial guidance on when this might be the case.

2. MXX v A Secondary School [2023] EWCA Civ 996 (LINK)

In this case, the Court of Appeal unanimously dismissed an appeal against the High Court’s decision that the Defendant secondary school was not vicariously liable for the wrongdoing of a college student (“P”) who, following a one-week work experience placement, had groomed and sexually assaulted the Claimant pupil in the months after P’s work experience placement had ended.

The Claimant joined the Defendant as a pupil in 2013, at the age of 13. In February 2014, P, one of the Defendant’s former pupils, undertook a one-week work experience placement at the Defendant, as part of his ambitions to qualify as a PE teacher following his college studies. By early March 2014, following the end of the placement, P and the Claimant had been communicating on Facebook, which lasted for several months. The communication had arisen out of P meeting the Claimant in person and inviting her to attend an after-school badminton club, and their interaction during the badminton club itself.

In August 2014, P committed the torts of sexual assault and battery against the Claimant. In September 2014, P was arrested, and later pleaded guilty to sexual activity with a child and causing a child to watch a sexual act.

The Claimant brought a personal injury claim against the Defendant, alleging that the Defendant was vicariously liable for the unlawful acts committed by P both during and after the work experience placement. To establish vicarious liability of a third party, a two-stage test has developed in case law: stage one asks whether there is a relationship of employment, or akin to employment, between the wrongdoer and the third party, and stage two asks whether there was a sufficiently close connection between the wrongdoing and the relationship between the wrongdoer and the third party.

The High Court dismissed the claim, holding that the relationship between P and the Defendant was not employment or akin to employment. The one-week placement did not meet this test, as: the Defendant had offered P the placement as an altruistic favour; the placement was more of a burden than a benefit to the Defendant; P had performed limited and ancillary tasks to the Defendant (such as helping with lessons by running warm ups, coaching students, assisting with equipment); P was only under the Defendant’s control in that he had agreed to its safeguarding policies; P was supervised by staff at all times and was closely directed in all of his activities; and P was never given teaching or caring responsibilities. Ultimately, the Defendant had not created the risk of P committing the wrongdoing, which in any event occurred a while after the placement had ended. While the Defendant had greater funds than P to compensate the Claimant, this was not a principled reason to hold the Defendant vicariously liable.

The High Court also held that even if stage one had been met, stage two of the test would not have been satisfied in any event. There was not a sufficiently close connection between P’s relationship with the Defendant and P’s wrongdoing. In particular, given how limited and closely supervised P’s role was, and how bereft he was of authority, teaching or caring responsibility over pupils, the most that could be said about P’s relationship with the Defendant was that it allowed P the opportunity to meet the Defendant. Nor did P’s compliance with the Defendant’s safeguarding policies imply any delegation of a function or responsibility to P.

The Claimant appealed.

The Court of Appeal accepted the Claimant’s arguments in relation to stage one of the test. In its view, the relationship between the Defendant and P was akin to employment:

• The High Court had over-relied on the Defendant giving P a work experience placement as an altruistic favour. According to case law, the objectives of the Defendant and P did not need to be aligned in order for there to be a relationship akin to employment.
  
  
• The High Court also wrongly inferred from the nature of P’s activities during his placement that he was merely shadowing or observing. P had been given responsibility for doing some of the work of the Defendant’s PE department (such as teaching badminton during the after-school club). He therefore played a role in the Defendant’s business as a school, doing tasks which benefited the Defendant by releasing staff to spend time on other tasks, and the pupils also benefited from his work by learning sports skills. The High Court therefore did not fairly reflect P’s activities during the placement, and in any event a mere shadow/observer role was not inconsistent with the status of being an employee or akin to an employee.
  
  
• The High Court did not give sufficient weight to the fact that P was made to sign his agreement to the Defendant’s safeguarding policy. This agreement showed how the Defendant regulated its relationship with P. While this was not sufficient on its own to show a relationship akin to employment, it was a factor pointing towards such a relationship.
  
  
• P was closely supervised at all times, and closely directed in any activity done with pupils. This was akin to undergoing training as any employee could undergo, and demonstrated that P was subject to close direction and control, which again pointed towards an employment-type relationship.
  
  
• Pupils were required to treat P as they would any member of staff, to address P by the title “Mr [P]”, and that P was “here to support in lessons”. This was consistent with P being held out by the Defendant to be akin to a member of staff, such as a teaching assistant.
  
  
• It was not the case that, at most, the Defendant gave P the opportunity to meet pupils including the Claimant. The precise risk which materialised had been anticipated by the Defendant in the safeguarding policy it required P to sign. By bringing P into the school, the Defendant allowed P to play a part in coaching groups of pupils who were instructed to treat him as a member of staff.
  
  
• However, on stage two of the test, the Court of Appeal agreed with the High Court. Given the limited nature of P’s role during the one-week placement, the facts did not begin to satisfy the requirements of the “close connection” test. The grooming which led to the sexual offending was not inextricably woven with P carrying out his work during the placement, such that it would be fair and just to hold the Defendant vicariously liable for P’s acts.

The Court of Appeal therefore held that the Defendant was not vicariously liable for the tortious actions of P.

This case demonstrates that even the shortest of work experience placements can give rise to an employment or quasi-employment relationship for the purposes of vicarious liability. It provides a helpful reminder of the two-stage test for determining vicarious liability, and demonstrates the extremely fact-specific nature of the analysis.

3. Omar v Epping Forest District Citizens Advice [2023] EAT 132 (LINK)

In this case, the Employment Appeal Tribunal (“EAT”) held that an Employment Tribunal (“ET”) had failed to make adequate findings of fact or to apply the correct legal principles when deciding that the Claimant was not unfairly dismissed by the Respondent because he had effectively resigned during a ‘heat of the moment’ altercation with his line manager.

On the morning of 19 February 2020, the Claimant became angry in conversation with his line manager (“S”), and uttered words amounting to a verbal resignation. S accepted the Claimant’s words of resignation.

The Claimant alleged that in a meeting later on 19 February 2020, he and the Respondent’s Chief Executive (“A”) had agreed that all parties could continue working together as “these fallouts happen”, and that he was offered an alternative role and given a chance to consider it.

The Claimant claimed that in a subsequent meeting with A, he was told that S had decided she could no longer work with the Claimant, and that his resignation would therefore stand. While the Respondent agreed that the meeting started in this way, it argued that the Claimant went on to accept that he could not work with S and that his resignation still stood. The Claimant was asked to put his resignation in writing, which he stated he would do. However, in an email to A, the Claimant instead stated that he wished to retract his verbal resignation as it was said in the “heat of the moment” resulting from his unresolved grievances, and that he understood the Respondent as being similarly minded to reconcile.

The Respondent refused to accept the Claimant’s retraction and treated his employment as terminating on one month’s notice. The Claimant brought a claim for unfair and wrongful dismissal, arguing that he had not in fact resigned as the situation fell within a so-called “special circumstances exception” he argued was established in case law. The Respondent argued that the Claimant had resigned.

In a surprisingly short judgment, the ET held that the principal question of fact in issue was whether the Claimant was offered an alternative position at the 19 February meeting. The ET found that the Claimant had not in fact been offered a new role, but that he had genuinely believed he was being offered a new role, which he declined. The ET concluded that the Claimant had brought his employment to an end by resigning at the 19 February meeting, such that he was not unfairly or wrongfully dismissed.

On appeal, the EAT set out the following key principles regarding words of dismissal and resignation, whether written or oral, from the case law:

• A “special circumstances exception” does not exist when giving notice of dismissal or resignation from employment.
  
  
• A notice of resignation cannot unilaterally be withdrawn, and the giver of the notice cannot change their mind unless the other party agrees.
  
  
• Words of (or potentially amounting to) dismissal or resignation must be construed objectively in all the circumstances of the case, in accordance with normal rules of contractual interpretation; the subjective uncommunicated intention of the speaking party is not relevant, and the subjective understanding of the recipient is relevant but not determinative.
  
  
• It must be apparent to a reasonable bystander in the position of the recipient that: 1) the speaker used words constituting words of immediate (or, as here, words of immediate notice of) dismissal or resignation; and that 2) the speaker of the words was genuinely intending to resign or dismiss and was ‘in their right mind’ when doing so.
  
  
• In most cases, where words are used that objectively constitute words of dismissal or resignation, there will be no doubt that they were ‘really intended’, unless one of the parties has expressly argued to the contrary, or that fairness requires an ET to raise the issue of its own motion.
  
  
• The point in time at which the words are objectively assessed for whether they have been ‘really intended’, is at the moment those words are uttered. However, evidence of what happened afterwards is admissible if it is relevant and casts light objectively on whether the resignation/dismissal was ‘really intended’ at the time.
  
  
• There is likely to be a fine line between cases where the resignation/dismissal was not ‘really intended’ and cases where there has been an impermissible change of mind – this is a question of fact for the ET to consider in each case.

The EAT held that the ET had not properly considered the core question of whether it would have appeared to the reasonable employer that the Claimant ‘really intended’ to resign. Instead, the ET erred in law by using a “special circumstances” exception that did not exist, to try and justify departures from the general rule.

The EAT further held that the ET had missed out three crucial elements in its findings of fact:

• The exact words used by the Claimant in his conversation with S on the morning of 19 February.
  
  
• The discussions in the meeting between the Claimant, S and A later on 19 February 2020, including whether that meeting ended with it being apparent to A that the Claimant had not ‘really intended’ to resign.
  
  
• The discussions at the beginning of the meeting between the Claimant and A on 21 February 2020. The EAT decided that the question of whether A had begun that meeting by stating that S decided that she could no longer work with the Claimant and that his resignation stood, was important to the question the ET should have considered. The ET needed to decide whether that was how the meeting began, and if so, whether it pointed towards the Claimant’s case that he had not really intended to resign, and that the Respondent knew the outcome of that meeting was that the Claimant intended to stay in his job, so that A had effectively ‘dismissed’ him, or whether it was more in line with the Respondent’s case that the Claimant had in law given an effective resignation on the morning of 19 February. As the ET had ignored these questions, it had taken the Claimant’s agreement to put his resignation in writing at the end of the meeting as being evidence that he had really intended to resign. In the EAT’s view, the agreement to put his resignation in writing looked very different if in fact A had at the beginning of the meeting in law dismissed him and then ‘jostled’ him into resigning.

This case provides helpful guidance on how Employment Tribunals should approach disputes over resignations tendered in the “heat of the moment”. It can be tempting for employers to seize on a verbal resignation tendered in the context of a dispute, because it is expedient to do so; this case is a reminder that doing so is not without risk, and the circumstances will be closely scrutinised.

4. Virgin Active Limited v Hughes [2023] EAT 130 (LINK)

In this case, the Employment Appeal Tribunal (“EAT”) explored the matter of the Claimant, who worked as an Assistant General Manager at one of the Respondent’s health clubs. Following a promotion to Manager, he subjected three colleagues at the club (“A”, “B” and “C”) to investigations which led to disciplinary action against them.

A, B and C filed grievances about the Claimant’s management style and conduct of the various investigations. These grievances included claims of bullying and harassment based on comments he had allegedly made relating to sexual orientation, race and nationality.

The Claimant was suspended and subsequently invited to a disciplinary meeting in relation to his alleged comments concerning race and sexual orientation. However, the Claimant asserted that the “process had been stacked against him” and that A, B and C were not acting independently or in accordance with the Respondent’s formal procedure. The Claimant additionally alleged he was unlawfully harassed by A, B and C and that a threat had been made against him.

Following the disciplinary meeting, the Claimant was summarily dismissed for gross misconduct with his subsequent appeal also being dismissed. He brought claims against the Respondent, including race discrimination on the basis that he had been treated less favourably because of his race, comparing his own treatment to that of A, B and C.

In relation to the Claimant’s race discrimination claim, the ET held that he had established facts from which it could conclude that he had been subject to direct race discrimination. In coming to its conclusion the ET considered it significant that an allegation about a comment alleged to have been made by the Claimant to colleague A about her nationality (“We had better watch out in the office, you’re Iranian aren’t you?”) had resulted in disciplinary action against the Claimant, whereas a comment which was alleged to have been made to the Claimant by colleague B about her own race (“you are only doing this to me as I am old, black and fat”) had not.

However, the EAT held that the ET had failed to analyse whether there were material differences between the Claimant and his comparators. Under the Equality Act 2010, on a comparison for the purposes of a direct discrimination claim, there must be “no material differences between the circumstances relating to each case”. In this case, the EAT found that there was no analysis of the possible significance of the fact that the Claimant was alleged to have referred to the race of A, whilst B had referred to her own race. The EAT held that on the face of it, the circumstances of the Claimant and his comparator, A, appeared to be materially different. More generally, the EAT found that the ET had treated A, B and C as comparators without analysing whether there were material differences between their circumstances and those of the Claimant, and had gone on to hold that because of the difference of treatment between the Claimant on the one hand and A, B and C on the other, the burden of proof shifted to the Respondent to disprove discrimination. This was an error. The EAT highlighted the importance of using comparators with similar circumstances. Indeed, the greater the difference in comparators, the smaller the likelihood that discrimination was at play.

This case highlights the importance of carefully analysing whether or not evidence of a difference in treatment is sufficient to prove facts from which direct discrimination can be inferred, and therefore shift the burden of proof onto a Respondent to prove a non-discriminatory reason for the difference in treatment. This analysis must include an assessment of whether, and to what degree, any comparator’s circumstances are similar to those of the Claimant. The greater the difference in circumstances, the less likely it is that the burden of proof will be discharged.