Contractual Terms through Custom and Practice

Sun, 17 Mar 2013

By Mugni Islam Choudhury

In CSC Computer Sciences Ltd v McAlinden and others (2012) UKEAT/0252/12 the EAT considers the thorny issue of when custom and practice will give rise to a contractual entitlement. Mugni Islam-Choudhury considers the ruling and its implications.

It is well established that custom and practice in the workplace can lead to contractual entitlements being created, which the employer cannot unilaterally withdraw from without breaching the contract. But what if payments are made by the employer under a mistaken belief? Can this lead to a contractually binding entitlement being created? 

The EAT recently examined this thorny issue in the case of CSC Computer Sciences Ltd v McAlinden and others (2012) UKEAT/0252/12

Facts:

The 23 claimants all brought claims for unlawful deduction of wages, on the basis that through custom and practice, they were entitled to contractual annual pay increases in line with the Retail Price Index (RPI).

As an added twist, all 23 employees had transferred under TUPE in 2000 to CSC from a company called ITS, and therefore, they transferred under their pre-TUPE ITS terms and conditions. 

It appears that CSC mistakenly believed that whilst employed by ITS, there was a contractual entitlement to make annual pay increases in line with RPI. However, the evidence of practice prior to the transfer was sketchy at best. More importantly, in 2004, 2005, 2006, and 2007, CSC gave these employees (who numbered 70 in total) pay rises in line with RPI. There were 6 individuals who did not get these pay rises in 2007, but this was because they had received “out-of-scale” increases in pay due to promotions.

There were also communications from CSC to employees from 2005 that suggested that CSC believed that the RPI increases were contractual entitlements, although there was never any express clause in the contract to that effect. 

In 2008, CSC tried to “buy out” of the RPI increases, and entered in to negotiations with trade unions. Ultimately, no valid agreement was reached, and so the employer unilaterally stopped paying the annual RPI increases, which then triggered the claims.

Tribunal Decision:

The Tribunal found that there was insufficient evidence to show that there was a contractual term to pay RPI increases prior to the transfer in 2000. However, it went on to find that post transfer, CSC had mistakenly believed that there was such a contractual entitlement, and acting on that mistaken belief had made payments in subsequent years. Therefore, the payments were not made merely as a result of “policy”. Furthermore, CSC had communicated its understanding to employees and was understood by the employees to be a contractual entitlement. 

The Tribunal found nothing in the express terms of the contract which was inconsistent with the contractual right being in existence. 

Significantly, the Tribunal found that the mistaken belief was irrelevant. As CSC had made the payments consistently for a substantial period in the belief that it was a legal entitlement, and followed the policy in such a way, it had crystallised as a contractual right, irrespective of whether the belief was correct. The Tribunal concluded that the date that the payments had crystallised as contractual was 1 April 2010, and therefore a failure to pay PRI increases amounted to unlawful deductions of wages from that date. 

EAT decision:

CSC appealed the decision on a number of grounds, including on the basis that it was wrong in law to found a contractual right through custom and practice that was based on a mistaken belief. 

In reviewing the case law, Mr Justice Langstaff (President), applied the Court of Appeal cases of Garrett v Mirror Group Newspapers [2011] IRLR 91 and Albion Automotive v Walker [2002] EWCA Civ 946. In particular, the EAT considered the non-exhaustive list of factors to take into account when considering whether a unilateral policy becomes contractual (as set out in Walker), as:-

a) Whether the policy was drawn to the attention of employees;
b) Whether it was followed without exception for a substantial period;
c) The number of occasions on which it was followed;
d) Whether payments were made automatically;
e) Whether the nature of the communication of the policy supported the inference that the employers intended to be contractually bound;
f) Whether the policy was adopted by agreement;
g) Whether the employees had a reasonable expectation that the enhanced payment would be made;
h) Whether the terms were incorporated into a written agreement;
i) Whether the terms were consistently applied. 

In Garrett, the Court of Appeal took a more holistic approach and referred to the guidance above as essentially dealing with the broader question of what was agreed between the parties whether expressly or by implication, and the factors above all go to that central issue. 

In examining the Tribunal’s findings, the EAT found that the Tribunal had applied the law correctly, and therefore upheld the decision. The EAT rejected the argument that the payment made on a mistaken belief made any difference. It pointed out that if a policy was applied with no intention to create a contractual right, but satisfied the Walker test, this would lead to a contractual entitlement being created. Therefore it would be curious (and wrong) if an employer believed that there was a contractual entitlement, as did the employees, but the law found that there was no custom and practice. As a result, the EAT held that whether or not the belief was mistaken was irrelevant. 

Comment:

This case is useful in summarising the approach to be taken in assessing whether policy becomes contractual through custom and practice. It also demonstrates the pitfalls of not conducting proper due diligence as to contractual terms prior to the date of transfer in a TUPE situation. 


In many case, the issue of overtime is an area of dispute about whether or not it has become contractual over a period of time. In the light of this guidance for an employer to successfully argue that overtime has not become contractual, the employer should make clear to employees in express documentation that overtime it is discretionary and not contractual and employees should be reminded of this from time to time. 

By Mugni Islam Choudhury

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