Redundant Empolyee v John McNally (H M Inspector of Taxes)

Redundant Employee appeals against an amendment to her self-assessment for 2001-02. The Appellant appeared in person; Mr Akash Nawbatt appeared for the Inspector.

The Appellant applied in advance for a hearing in private giving the following reasons: that the Inspector had no objection; that there is no important public interest; for the protection her private tax affairs, particularly that future employers might carry out checks using online sources possibly resulting in her being branded as an undesirable employee; she would be intimidated as an appellant in person by the presence of the public; and that the confidentiality of her former employer was at risk. Regulation 15 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 provides:

“15.

(1) Subject to the following paragraphs of this regulation, hearings before a Tribunal shall be in public.

(2)

A Tribunal may direct that all or part of a hearing shall be in private—

(a) upon the application of all the parties by notice to the Clerk;

(b) upon the application of any party by notice to the Clerk;

(c) of its own motion,

in each case, a Tribunal is satisfied that a hearing in private is necessary—

(i)

in the interests of morals, public order, national security, juveniles or for the protection of the private life of the party; or

(ii)

it considers that publicity would prejudice the interests of justice.

(3)

Before determining an application under paragraph (2)(b), or giving a direction under paragraph (2)(c), a Tribunal shall give all other parties to the proceedings an opportunity to make representations.

(4)

Before giving a direction under paragraph (2) that the entire hearing be in private, a Tribunal shall consider whether only part of the hearing should be heard in private…”.

I record that I considered that the test in paragraph (2) was satisfied solely for the last reason put forward by the Appellant. I was aware at the time that this was a case arising out of the termination of her employment and I thought it possible that matters relating to her former employer might come out without their having the possibility of answering them, publicity for which would be contrary to the interests of justice, and that it would be difficult to have part of the hearing in private when this was the central issue. In fact, nothing was said at the hearing to which her former employer could object. The other reasons put forward would not have persuaded me to agree to a hearing in private. That the other party agrees is relevant but not decisive; while I agree that no public interest in involved that is not a consideration laid down in Regulation 15; the figures are not relevant and so publicity about her private tax affairs is not in point; if future employers made checks using online sources I do not see any objection to their knowing that she had been involved in a tax appeal; and while I can understand that the presence of others in the Tribunal may be intimidating, there can always be persons connected to the other party present (in fact there were two members of the Solicitor’s Office and two Inland Revenue officers present).

The Appellant gave evidence. I find the following facts.

The Appellant contends that her contract was terminated on 24 September 2001. She contends that the staff handbook did not provide that she could be required to take garden leave because that provision was merely discretionary.

Mr Nawbatt contends that the Appellant was given three months notice and the contract expired on 23 December 2001. She was required to take garden leave on 24 September 2001, in accordance with the provision in the staff handbook, or in accordance with her agreement to the terms of the termination letter, and in any case the payments made between October and December 2001 were not referable to any breach of contract (if it was a breach) in requiring her to take garden leave.

The tax law is not in dispute. If the Appellant is right, she is entitled to the £30,000 tax-free amount in section 148 of the Taxes Act 1988 in respect of remuneration during October to December 2001; if the Inspector is right the whole remuneration is taxable. The dispute turns on the construction of the termination letter. It is common ground that I should apply the approach of Browne-Wilkinson J (as he then was), to a termination letter that stated a termination date at the expiry of the notice period but referred to payments in lieu of notice, in Chapman v Letheby & Christopher Ltd [1981] IRLR 440 at [13]:

“First, the construction to be put on the letter should not be a technical one but should reflect what an ordinary, reasonable employee in Mr Chapman’s position would understand by the words used. Secondly, the letter must be construed in the light of the facts known to the employee at the date he receives the letter.”

As the expression “pay in lieu of notice” is used in paragraph 3 of the termination letter Mr Nawbatt referred me to the following passage from Lord Browne-Wilkinson’s speech in Delaney v Staples [1992] 1 AC 687 at 692:

“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 principal 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 a 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 Appellant referred to a number of authorities for such propositions that when an employment contract is terminated with immediate effect, the effective date of termination is the date of termination and not the expiry of the period for which payment in lieu is made; that payments in lieu of notice are not wages but damages; that putting an employee on garden leave without an express term of the contract may be a breach of contract. None of this was disputed by Mr Nawbatt who contended that everything turned on the construction of the termination letter. The Appellant also contended, citing Chapman v Letheby & Christopher Ltd [1981] IRLR 440 at [16], that if the termination letter was ambiguous the words must be interpreted against the person using them, in this case the Company. In Chapman the issue turned on whether the application to the Industrial Tribunal was made in time, which the employer contended it was not; there is no equivalent in this case. What I think the Appellant meant was that the letter should be construed in a way that gave her the better tax result, which is not the same as construing it against the Company.

The Appellant construes the termination letter as meaning that her employment was terminated with effect from 24 September 2001, as expressly stated in paragraph 1, when she handed in her security pass, mobile phone laptop, etc. She was entitled to three months notice as correctly stated in paragraph 3, but no notice was in fact given and she received three months “pay in lieu of notice” (having meaning (4) in Delaney v Staples) by monthly instalments plus the continuation of the benefits to which she was entitled as stated in paragraphs 5 and 6 of the termination letter. The Administrator treated her as no longer employed and repaid her contributions to the Group Employee Share Ownership Scheme at the end of October 2001.

Mr Nawbatt construes the termination letter as giving three months notice as implied at the beginning of paragraph 3 and by the second sentence of paragraph 3 requiring her to be available for work “during your notice period.” Naturally during the notice period benefits continued as stated in paragraphs 5 and 6. The reference to pay in lieu of notice in paragraph 3 is to meaning (1) in Delaney v Staples (or rather to the more normal payment in arrears for garden leave). He explains paragraph 1 as meaning that the terms of the termination letter apply with effect from 24 September 2001. He points out that the Appellant’s contention is contrary to her agreement to be available for work for the notice period and her agreeing to a continuing duty of confidentiality which would have ceased if the contract had been terminated without notice.

Neither party can give a completely satisfactory construction to the termination letter. Against the Appellant’s construction is that if, in accordance with paragraph 1, the contract did terminate with immediate effect without any notice, what is the meaning of her obligation in paragraph 3 to be available for work “during your notice period,” and why should she agree to the continuing duty of confidentiality which would have ceased on breach of the contract? Against the Inspector’s construction is that if three months notice was given, why did the Company use the plain words of paragraph 1 that the employment was terminated “with effect from today;” why were normal contractual payments of salary during the notice period described as “pay in lieu of notice;” and why did the Administrator repay her contributions to the Group Employee Share Ownership Scheme at the end of October? Something must give. In my view it has to be paragraph 1. Rather than meaning that the employment agreement was terminated with effect from that day it must mean that her holding the post of Vice-President was so terminated. An ordinary reasonable employee in the Appellant’s position would understand the words of paragraph 3 of the termination letter against the relevant background to mean that three months notice had been given, although this is not stated specifically. That paragraph starts by referring to her entitlement to three months contractual notice and then goes on to require her to be available for work if required “during your notice period.” In spite of the words in paragraph 1 an ordinary reasonable employee cannot have understood that the Company had terminated the contract with immediate effect and without any notice when paragraph 3 refers to the contractual notice period and provides for the Appellant to have duties during the notice period. If the Appellant’s interpretation were right, those words in paragraph 3 have no meaning. If paragraph 1 is read in this way the only remaining inconsistency is that the Administrator treated her employment as terminated in September 2001. This may have been due to a misunderstanding between them and the Company about whether termination was immediate or on notice. As we have seen from the quotation from Delaney v Staples the words “pay in lieu of notice” can support either construction, although they are less apt in the context of continuing normal monthly payments. It is also relevant that her entitlement to holiday pay was paid in December which is a natural occurrence at the end of a contract, even though paragraph 2 of the termination letter says that it should have been paid in September 2001. As a matter of overall impression the termination letter conveys to an ordinary reasonable employee that the Company is enforcing the contract rather than breaking it. The Appellant is required to be available for work during the notice period, and is reminded of a continuing duty of confidentiality, neither of which would apply if there had been an immediate termination. I also consider that, if possible, one should favour a construction that involves the Company not being in breach of contract. In my view, therefore the Inspector’s construction is to be preferred.

I also find that the Company’s ability to put the Appellant on garden leave was a term of her contract. It was a discretionary right of the employer, just as much as their right, which is also contained in the staff handbook, to require her to work at other locations. The point of including such provisions is that if they exercised their right she could not complain. I also find that she agreed to take garden leave by signing the termination letter. I also agree with Mr Nawbatt that the payments she received from October to December 2001 were not referable to any breach (if it was a breach) of contract in requiring her to take garden leave.

This is not to say that I do not accept that the Appellant thought she was agreeing to receive pay in lieu of notice within meaning (4) in Delaney v Staples, which would give her tax benefits. But her belief is not the test of the construction of the termination letter. This case is a further illustration of Lord Browne-Wilkinson’s statement that the phrase is not a term of art, being capable of comprising the opposite meanings of a payment not in breach of contract, and a payment on termination of a contract without proper notice, as the Appellant has contended.

Accordingly, I dismiss the appeal.

The Appellant asked for costs on the ground that the Inspector has acted wholly unreasonably in connection with the hearing in question (Regulation 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994. The notice of appeal is dated 13 April 2004 and so I cannot consider any matters before that date. Her only complaint after that date is that she supplied information and documents to the Inspector at a meeting on 13 May 2004 but the Inspector did not reciprocate either then or at the preliminary hearing on 1 July 2004. I have looked at the Directions issued after the preliminary hearing and they set out a timetable for producing the bundle of documents, witness statements and skeleton arguments in the normal way. I cannot see anything unreasonable in the Inspector’s conduct of the hearing and make no Direction for costs.