Analysis: When does ‘custom and practice’ create a legal entitlement to enhanced redundancy payments?
Breda O’Malley and Ciarán Doyle of Hayes solicitors LLP examine the legal framework for employees to successfully claim a legal entitlement to enhanced redundancy payments.
Enhanced redundancy terms are not generally part of employees’ contracts/terms and conditions. As a result, there is sometimes doubt by employees as to whether what has been done before in their employment by way of enhanced redundancy payments for former colleagues, can be relied upon for current or future redundancies in the same employment.
The answer to this turns on whether there is an established custom and practice that could give rise to a legal claim to the same enhanced terms applying in the future. A custom and practice is an implied contractual term, and as such it is legally binding.
What is a ‘custom and practice’?
Case law supports the view that for there to be a custom and practice, a term must be “notorious” and “so generally well known that anyone concerned should have known of it or could easily have become aware of it”. A custom and practice is “a difficult thing to establish”. There are no set rules as to when a custom and practice becomes an implied term and only a tribunal or court can definitively decide this point.
How can it be shown by employees that there is an established custom and practice to enhanced redundancy payments? The statutory adjudication bodies for Irish employment law, namely the WRC and Labour Court, have relied on the UK Court of Appeal’s (CoA) decision in Albion Automotive Ltd v Walker  EWCA Civ 946 that an employer who made enhanced redundancy payments on the same basis for several years had created a custom and practice by which the employer intended to be legally bound.
The CoA listed the following as some of the relevant factors to be considered where it is asserted by an employee that a term is implied by custom and practice:
- the repeated practice, arrangement or policy was drawn to the attention of employees;
- the employer’s communication of the practice, arrangement or policy shows that the employer intended to be contractually bound by it;
- it was followed without exception for a substantial period;
- it was followed on a number of occasions (and, if so, how many); and/or
- the terms were consistently applied.
No one factor is determinative on its own.
In summary, the more often enhanced redundancy payments have been paid, the longer the period over which they have been paid, and the wider the extent to which this information has been published, the more likely it is that employees can assert a legal claim to these payments continuing. If, for example, there is a variation to the amount or terms of previous enhanced redundancy payments, it is less likely that this would create any legal obligation.
Takeaways for employers
- Avoid detailing discretionary benefits in employment contracts, policies or staff handbooks. If a written policy exists, ensure access to it is limited to HR and/or senior management.
- If a redundancy policy is set out in a staff handbook or publicly available, label it clearly as non-contractual and not intended to create any legal rights. Use language such as “discretionary” or “ex gratia”. Avoid using phrases such as “entitled”, “shall receive” or “guaranteed payment”.
- Communications regarding ex gratia payments should be tightly controlled and managed. Even oral discussions could inadvertently give rise to misunderstandings by employees about their entitlements which they could later seek to rely upon.
- Be careful to differentiate between statutory, contractual, and discretionary elements of any redundancy package on offer. No ex-gratia payment should be paid automatically without consideration of the circumstances.
- Link the payment of the ex-gratia redundancy sum to the signing of a confidential settlement agreement on termination.
- If there is any custom or practice that should form part of an employee’s terms and conditions, ensure that it is specified in writing in an employment contract, a policy or a staff handbook.
Where an employee can establish that specific enhanced redundancy benefits have historically been paid in an organisation and/or sector and this information is “universally acknowledged” (O’Reilly v Irish Press Ltd  71 ILTR 194), this will tend to convey that the employee may have an implied contractual right to an enhanced redundancy payment. Importantly, it is for an employee to prove that a custom and practice has become contractual. An employee may struggle to discharge this burden if the employer’s practice or policy is clearly discretionary.