Factual and Procedural Background
The Employment Tribunal sitting at Reading found that four employees, the respondents to this appeal, had been unfairly dismissed by reason of redundancy due to various procedural defects. The Tribunal rejected the employer's submission that the dismissals were fair under section 98A of the Employment Rights Act 1996 on the basis that the dismissals would have occurred in any event even if fair procedures had been followed. The Tribunal also assessed compensation without reducing it for the risk of dismissal, thereby rejecting a submission that the Polkey principle required such a reduction. This latter conclusion is the subject of the appeal.
The four employees held different positions within the appellant company, which specialises in printing and imaging software technologies and employs approximately 96 people at its Oxford office. Due to economic difficulties, the company proposed redundancies, organizing employees into distinct pools for selection. A matrix system was adopted for scoring employees against criteria such as ability to relate to colleagues/customers, aptitude for work, commitment/reliability, relevant skills and experience, and standard of work performance. The assessments were conducted by multiple managers without consistent guidance, and the CEO reviewed the scores in a single evening, making no adjustments despite noting some surprising scores.
The employees were informed of their scores and invited to consultation meetings but were escorted from the premises on the same day the letters were sent. Appeals by the employees were mostly rejected, except one employee was offered an alternative post, which he declined due to loss of trust. The Tribunal found several procedural deficiencies, including the subjective nature of the criteria, inconsistent application, and inadequate consultation. However, it did not find the redundancy pools or the selection process to be unlawful or sham. The Tribunal also considered but rejected the employer's argument that the dismissals would have occurred regardless of procedural fairness.
Legal Issues Presented
- Whether the dismissals were fair under section 98A(2) of the Employment Rights Act 1996, i.e., whether the employer would have dismissed the employees even if fair procedures had been followed.
- Whether the Tribunal erred in refusing to reduce compensation under the Polkey principle to reflect the risk that the employees would have been dismissed in any event.
- The proper application and scope of the Tribunal’s duty to assess loss and make predictions about what would have happened absent procedural defects, including the role of speculation and reliability of evidence in that assessment.
Arguments of the Parties
Appellant's Arguments
- The employer contended that the dismissals were fair under section 98A(2) because the employees would have been dismissed in any event due to redundancy.
- They argued that the Tribunal should have reduced compensation to reflect the chance that dismissals would have occurred regardless of procedural defects, applying the Polkey principle.
- It was submitted that the assessment criteria and scoring by line managers were appropriate and not unduly speculative, and thus the Tribunal erred in disregarding evidence indicating a real risk of dismissal.
- The appellant maintained that ignoring the scoring evidence led to an unrealistic and unjust assessment of compensation.
Respondents' Arguments
- The respondents submitted that the Tribunal was correct to conclude that the evidence was too unreliable and flawed to make any sensible prediction about what would have happened had a fair procedure been adopted.
- They argued that the Tribunal properly exercised its judgment in finding the dismissal process fundamentally flawed, precluding any meaningful reconstruction of events for compensation reduction.
- It was contended that the Tribunal could not have made mutually incompatible findings that dismissal both would and would not have occurred.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Polkey v A E Dayton Services Limited [1987] IRLR 503 |
Established that procedural unfairness does not necessarily render dismissal fair if the dismissal would have occurred anyway; relates to compensation reduction. |
The Tribunal rejected compensatory reduction for risk of dismissal, which was challenged on appeal. |
| Kelly Madden v Manor Surgery [2007] IRLR 17 |
Clarified that s.98A(2) reverses the Polkey principle, allowing dismissal to be fair if employer proves dismissal would have occurred despite procedural defects. |
Used to analyze whether dismissal was fair despite procedural flaws. |
| King v Eaton (No.2) [1998] IRLR 681 |
Distinction between procedural and substantive errors; Tribunal may refuse to speculate where evidence is too unreliable. |
Guided the assessment of whether evidence was too speculative to allow reconstruction of events. |
| O'Donoghue v Redcar and Cleveland Borough Council [2001] IRLR 615 |
Tribunal may find employee would have been fairly dismissed later for unrelated reasons, affecting compensation. |
Supported principle that unrelated future dismissal can limit compensation. |
| Lambe v 186K Ltd [2005] ICR 307 |
Approved use of King v Eaton’s approach as a sensible yardstick for assessing procedural defects and compensation. |
Referenced for proper Tribunal approach to procedural defects and dismissal timing. |
| Gover v Property Care Limited [2006] EWCA Civ 286 |
Confirmed that compensation should reflect period lost due to procedural unfairness, not the entire employment period. |
Supported flexible approach to compensation reflecting lost opportunity. |
| Scope v Dr Carol Thornett [2006] EWCA Civ 1600 |
Confirmed Tribunal’s duty to make predictions about future loss even if speculative, and appellate courts should be cautious in interfering. |
Clarified that speculation is inherent in compensation assessments and Tribunal’s judgment should generally be respected. |
| James Cook and Co.(Wivenhoe) Ltd v Tipper [1990] ICR 716 |
Example of factual finding where dismissal would have occurred due to workplace closure. |
Illustrated factual basis for assessing dismissal outcomes. |
| British Labour Pump Co Ltd v Byrne [1979] ICR 347 |
Prior authority on dismissal fairness and procedural requirements, overruled by Polkey on remedy focus. |
Referenced for historical context on dismissal and procedure. |
| O'Dea v ISC Chemicals Ltd [1996] ICR 222 |
Expressed skepticism about distinguishing procedural vs substantive failings. |
Referenced in discussion of defining "procedure" under s.98A(2). |
| Moeliker v A. Reyrolle & Co. Ltd [1977] 1 WLR 132 |
Addressed approach to damage assessment involving speculative future loss. |
Supported idea that some speculation is inevitable in compensation assessment. |
Court's Reasoning and Analysis
The Court carefully examined the Tribunal’s approach to assessing whether the dismissals would have occurred had fair procedures been followed, as required by section 98A(2) of the Employment Rights Act 1996, and whether the Tribunal properly considered the Polkey principle for reducing compensation based on the risk of dismissal.
The Tribunal had found the dismissal process fundamentally flawed and concluded that it was impossible to say whether the claimants would have been dismissed in any event. The Court identified two possible interpretations of this conclusion: either the Tribunal only addressed the s.98A(2) fairness question without considering the Polkey risk of dismissal for compensation, or it concluded the evidence was too unreliable to reconstruct events for either purpose. The Court favored the latter interpretation but found the Tribunal erred in failing to consider any potentially reliable evidence relevant to the Polkey assessment.
The Court emphasized the established legal principles that while some speculation is inevitable in assessing what would have happened absent unfair dismissal, the Tribunal must consider any reliable evidence that might indicate a risk of dismissal. The Tribunal must not ignore such evidence when calculating compensation under section 123 of the Employment Rights Act 1996.
The Court noted that the employer had adduced evidence, including bona fide scoring of employees against criteria and relative positioning within pools, which suggested a real risk of dismissal. Ignoring this evidence led to an unrealistic and unjust compensation assessment. The Court concluded that the Tribunal misdirected itself by disregarding potentially relevant evidence and failing to engage in the required Polkey exercise.
Consequently, the Court held that the case should be remitted to the Tribunal to reconsider the extent, if any, to which compensation should be reduced, allowing the Tribunal to weigh the evidence and determine the appropriate adjustment based on the risk of dismissal.
Holding and Implications
The Court REMANDED the case to the Employment Tribunal with directions to:
- Reassess compensation for each employee by considering any reliable evidence indicating that dismissal might have occurred even if fair procedures had been followed, applying the Polkey principle.
- Determine appropriate reductions in compensation reflecting the risk of dismissal, if any, based on the evidence before it.
- Decide whether further evidence or submissions are necessary to properly assess compensation.
The direct effect of this decision is to require the Tribunal to reconsider the compensation awards with proper regard to the risk of dismissal, potentially reducing the awards. The Court did not set new precedent but clarified the application of established legal principles regarding procedural fairness, the Polkey principle, and compensation assessment under the Employment Rights Act 1996. The decision underscores the Tribunal's duty to balance the inherent uncertainty of predictions with the need to consider all reliable evidence in compensation calculations.