Factual and Procedural Background
This appeal arises from an order dated 13 June 2007 of the Employment Appeal Tribunal ("the EAT") upholding a decision of the Employment Tribunal ("the ET") promulgated on 28 December 2006. The claim was brought by the Plaintiff against her former employer, Company A, for compensation for constructive unfair dismissal. The ET upheld the claim and directed that compensation would be assessed at a separate remedy hearing. The employer appealed to the EAT against both the finding of constructive unfair dismissal and the ET's remedy directions. The EAT upheld the dismissal finding, and the employer's appeal to the current court concerns only the remedy directions. The remedy hearing occurred on 12 October 2007, with reasons given on 18 October 2007.
The central factual background is that the Plaintiff worked for Company A from September 1999 as a secretary/personal assistant. She was overworked and subjected to bullying by a manager, Mr Baldock. After collapsing due to stress in August 2003 and enduring continued mistreatment, the Plaintiff left work in September 2004, never returning. She was signed off sick with anxiety and depression. Company A initially reduced her sick pay to statutory sick pay, then reinstated full pay temporarily. The Plaintiff raised grievances in December 2004 concerning bullying and overwork, which were inadequately addressed. A meeting in January 2005 was distressing for the Plaintiff, who ultimately decided to terminate her contract by constructive dismissal in February 2005, with an agreed effective termination date of 15 March 2005.
Legal Issues Presented
- Whether the Employment Tribunal erred in principle by allowing the assessment of compensation for unfair dismissal to include losses flowing from the employer's antecedent injurious conduct that caused the Plaintiff's illness and reduced earning capacity prior to the dismissal.
- Whether compensation for loss sustained must be confined to losses flowing directly from the dismissal itself, excluding losses caused by the employer's prior breaches of the implied term of trust and confidence.
Arguments of the Parties
Appellant's Arguments
- The ET misdirected itself by including loss caused by the employer's prior repudiatory conduct in the assessment of compensation for unfair dismissal.
- Compensation must be limited to loss flowing directly from the dismissal, which occurred after the Plaintiff was already ill and on sick pay.
- The Plaintiff may have a separate common law claim for damages arising from the employer's antecedent breaches but cannot recover such losses as part of an unfair dismissal claim.
- The decision conflicts with the guidance in Eastwood and the principles established in Johnson v. Unisys Ltd.
Appellee's Arguments
- The ET correctly directed itself that in a constructive dismissal case there is one fundamental breach: the employer's repudiatory conduct accepted by the employee, constituting the dismissal.
- The compensation awarded was solely for loss of earnings flowing from the dismissal, attributable to the employer's prior conduct.
- The Plaintiff did not seek compensation for antecedent breaches such as psychiatric injury or lost earnings before dismissal.
- The ET findings that the Plaintiff would have remained employed but for the employer's conduct support the award of compensation for reduced earning capacity post-dismissal.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Eastwood and another v. Magnox Electric plc; McCabe v. Cornwall County Council and others [2004] IRLR 733 |
Clarifies the boundary between statutory unfair dismissal claims and common law claims for breach of implied term of trust and confidence, especially regarding financial losses from pre-dismissal conduct. |
The court relied on Eastwood to determine that losses caused by antecedent breaches are not recoverable as compensation for unfair dismissal. |
| Johnson v. Unisys Ltd [2001] IRLR 279 |
Establishes that damages for manner of dismissal are generally excluded at common law and are recoverable only under the statutory unfair dismissal scheme. |
The court used Johnson to explain the statutory exclusivity of unfair dismissal compensation and the limits on common law claims. |
| Malloch v. Aberdeen Corporation [1971] 1 WLR 1578 |
Limits damages for wrongful dismissal to pay in lieu of notice. |
Referenced to illustrate the limited scope of common law damages for dismissal. |
| Addis v. Gramophone Co Ltd [1909] AC 488 |
Establishes that damages for injured feelings or mental distress are not recoverable for wrongful dismissal. |
Used to highlight limitations on damages recoverable at common law for dismissal-related claims. |
| Wallace v. United Grain Growers Ltd [1997] 152 DLR (4th) 1 |
Discusses implied terms regarding fair exercise of dismissal power and the difficulties in implying such terms. |
Referenced in the discussion of possible implied terms and their applicability to dismissal claims. |
| GMB Trade Union v. Brown UKEAT/0621/06/ZT; UKEAT/0442/06/ZT (2007) |
Considers whether compensation awarded for constructive dismissal included losses flowing from antecedent breaches rather than dismissal itself. |
The court noted that this case applied Eastwood and reduced compensation when losses flowed from antecedent breaches, supporting the current court's view. |
| Gogay v. Hertfordshire County Council [2000] IRLR 703 |
Illustrates the difference in recoverability of damages for suspension versus dismissal. |
Used to demonstrate anomalies in recoverable damages depending on employment status. |
| Malik v. Bank of Credit and Commerce International SA [1997] IRLR 462 |
Concerns the implied term of trust and confidence in employment contracts. |
Referenced in the context of the implied term breached by the employer. |
Court's Reasoning and Analysis
The court began by summarising the facts, statutory framework, and the ET's directions on compensation assessment. It focused on section 123(1) of the Employment Rights Act 1996, which limits compensation to loss "in consequence of the dismissal." The ET had allowed compensation for loss flowing from the employer's antecedent breaches that caused the Plaintiff's illness and reduced earning capacity before dismissal, reasoning that such loss was part of the dismissal consequences.
The court found this approach incorrect as a matter of principle. It relied heavily on the House of Lords decisions in Johnson and Eastwood, which delineate the boundary between statutory unfair dismissal claims and common law claims for breach of contract. The court emphasized that losses caused by antecedent breaches of the implied term of trust and confidence, which existed before dismissal, are not losses flowing from the dismissal itself and are therefore not recoverable in unfair dismissal compensation.
The court rejected the argument that a constructive dismissal, being a single indivisible breach, allows recovery of all losses flowing from antecedent breaches as part of the dismissal claim. Instead, the dismissal occurs when the employee accepts the breach, and losses caused before that date must be pursued separately at common law.
Although the ET and EAT had upheld the broader approach, the court respectfully disagreed, concluding that the EAT had misdirected itself. The court also noted the practical difficulties and anomalies arising from the statutory scheme but maintained the legal distinction as currently established.
Holding and Implications
The court ALLOWED the employer's appeal, holding that the Employment Tribunal and Employment Appeal Tribunal erred in principle by including losses caused by the employer's antecedent breaches of the implied term of trust and confidence in the assessment of compensation for unfair dismissal.
The direct effect of this decision is that compensation for unfair dismissal under section 123 of the Employment Rights Act 1996 must be confined to losses flowing directly from the dismissal itself, excluding losses caused by prior breaches for which the employee may have a separate common law claim. No new precedent beyond this clarification was established, but the ruling reaffirms the boundary between statutory and common law remedies in unfair dismissal cases.