Legal alert

legal alertJuly 2014

A monthly checklist of new and pending laws, regulations, codes of practice and rulings that could have an impact on your business

This month: 

Case law: European Court confirms employers should take commission into account when calculating statutory holiday pay 

Employers paying a worker commission on sales, and where that commission is intrinsically linked to the worker's performance of the tasks required to be carried out, must take commission into account when calculating statutory holiday pay, the European Court of Justice (CJEU) has confirmed. 

A salesman was paid both basic pay and commission on sales. The commission varied month by month, and payments in some months related to work carried out in previous months. While on annual leave, his employer paid him commission earned from sales made in previous months. However, it calculated his statutory holiday pay by reference to his basic pay only, on the basis that an employee is unable to earn commission while on holiday. 

The employee claimed his holiday pay should take account of commission, and the Employment Tribunal referred the question to the CJEU. 

In his preliminary ruling last year, the Advocate General of the CJEU said employers should take commission into account when calculating holiday pay because, for instance, any aspect 'linked intrinsically' to the performance of the tasks the worker is required to carry out, payment for which is included in the calculation of the worker's total remuneration, must necessarily be taken into account for the purposes of the amount to which the worker is entitled during his annual leave. This case fell within this category. 

The CJEU has confirmed its agreement with the Advocate General's ruling. However, while the Advocate General suggested an appropriate method of calculating the amount of commission to be paid for holiday pay might be to base it on average commission over the last 12 months, he and the CJEU recommended this was an issue for the national courts and tribunals. Until the UK Employment Tribunal rules on this, it remains unclear how holiday pay for staff on commission should now be worked out.

Operative date

  • Now

Case law: directors' exercise of powers under Companies Act and articles were valid even though not for 'proper purpose' 

Company directors considering whether to exercise statutory powers and/or powers under their company's articles of association will welcome a ruling on 'proper purpose' under the Companies Act. 

The Court of Appeal ruled that directors of a plc who exercised their powers requiring a shareholder to give information about any third party's interest in the plc's shares could do so for a purpose which is not a 'proper purpose' under the Companies Act - without breaching their fiduciary duties to the company. 

Directors of a plc did not want a corporate shareholder to be able to vote at a shareholders' meeting as they suspected it was owned by individuals who were trying to gain control of the plc. They feared those individuals would use the meeting to stop the company from passing shareholder resolutions to raise more capital driving the price of the plc's shares down. 

The directors used their statutory powers to ask the corporate shareholder whether any third parties held interests in its shares, and the nature of those interests. The directors decided the corporate shareholder's reply was materially inaccurate and stopped it from voting on the resolutions to raise more capital at the relevant shareholders' meeting, in accordance with the provisions of the Act and articles. 

The corporate shareholder claimed the directors' actions breached their fiduciary duty to 'only exercise [their] powers for the purposes for which they are conferred', as set out in the Companies Act. The directors argued they acted to satisfy another fiduciary duty - to promote the success of the company by acting in its best interests. 

The High Court found in favour of the corporate shareholder but, on appeal, the Court of Appeal ruled: 

  • The corporate shareholder could have chosen to avoid the sanction by providing full and correct answers, but failed to do so. It was a 'victim of [its] own choice, not a victim of any improper use of a power of the board of directors'.
  • The relevant provision in the Companies Act (on which the plc's articles were based) does not say the sanction can only be applied for a particular purpose, and the Court found it 'difficult to believe that Parliament intended a detailed inquiry into the minds of the directors of a company to be undertaken before the sanction can be imposed'.

Company directors and company secretaries should, however, note that leave has been granted to appeal this decision to the Supreme Court. 

Operative date

  • Now

Case law: unpaid shareholder/director neither an employee nor 'worker' 

Companies need to ensure they are clear whether its shareholder and directors are actually employers or workers. 

A shareholder/director with no contractual entitlement to be paid for his work was neither an employee nor a 'worker'. In a recent case, a company shareholder/director had many business interests. He did not work for the company full-time, had no employment contract and was not paid for the work he did do. He had several opportunities to formalise arrangements, but didn't take advantage of them. 

There was a falling-out and the other shareholders terminated his appointment as company director. He claimed constructive unfair dismissal and unauthorised deductions from wages. The others argued he could not claim these as he was neither an employee nor a 'worker'. 

The Employment Tribunal ruled that he had promised to do work for the company which created an express contract between them. It then implied a term into the contract that he was to be paid for that work and he was, therefore, an employee. 

The Employment Appeal Tribunal (EAT) said this was the wrong approach. A binding contract required both a promise to do work and consideration for that promise – for example, that the shareholder/director be paid for his work. In this case, there had only been a promise by the shareholder/director, but no consideration from the company so there was no contract. 

As there was no contract, it was not possible in law to imply a term into it. The EAT therefore remitted the case to be tried again before a fresh tribunal. 

Operative date

  • Now

Guidance: new Information Commissioner's Office guidance on when organisations in relationships are 'data controllers' 

Businesses will welcome new guidance from the Information Commissioner's Office (ICO) to help those in relationships with other organisations to determine which is a 'data controller' and therefore subject to data protection law. 

While data controllers are subject to data protection legislation, organisations that are 'data processors' are not. However, in some circumstances (for instance, when an organisation outsources the processing of its data to another organisation) it can be unclear which organisation is the 'data controller'. 

The ICO's guidance Data controllers and data processors: what the difference is and what the governance implications are will help businesses faced with this uncertainty. The key factor is to look at the degrees of independence and control an organisation has over the data processing being carried out. It states, for instance, that to determine whether you are a data controller you need to ascertain which organisation decides: 

  • to collect the personal data in the first place and the legal basis for doing so;
  • which items of personal data to collect, ie the content of the data;
  • the purpose or purposes the data are to be used for;
  • which individuals to collect data about;
  • whether to disclose the data, and if so, who to;
  • whether subject access and other individuals' rights apply, ie the application of exemptions;
  • how long to retain the data or whether to make non-routine amendments to the data.

These are all decisions that can only be taken by the data controller as part of its overall control of the data processing operation.

However, decisions about how data is stored, the security measures used to protect it and how to transfer it safely to other organisations and how to delete and/or destroy data that should no longer be retained, are usually decisions for data processors. 

It also covers specific relationships such as employing a market research company, a third party payment business, a law or other professional service firm and a data storage company. 

Operative date

  • Now


Case law: employee who gave longer than contractual notice could not claim constructive dismissal 

Employers will welcome a ruling that where an employee gave seven months' notice instead of the contractual minimum notice period of three months, he could not claim constructive dismissal. 

An employee of more than 25 years' standing brought a grievance, but was not satisfied with the employer's procedure and appeal. He resigned giving seven months' notice even though his contractual minimum notice period was three months. He brought various claims, including for constructive dismissal. 

The employer successfully argued that the employee should be treated as having affirmed his contract of employment, because such a long notice period (during which he continued working and was paid substantial remuneration) was inconsistent with his claim for constructive dismissal. Rather, it was consistent only with the continued existence of his contract. 

The Employment Appeal Tribunal dismissed the employee's claim for constructive dismissal. 

Operative date

  • Now

Case law: employers should consider reasons of all involved in potentially discriminatory decisions to dismiss

It is not uncommon for a number of people within an organisation to influence a decision to terminate an employee's employment contract. Employers should therefore bear in mind a recent ruling when considering terminating employees' contracts, particularly to make sure the reasons are not directly discriminatory. 

A doctor brought an age discrimination claim after a manager terminated her consultancy following internal criticism and a negative internal report. As the claim was for direct age discrimination, the Employment Tribunal (ET) had to consider the reasons for her treatment. It looked at the manager's reasons, including whether he had been influenced by any conscious or subconscious discriminatory mental processes or motives such as stereotypical assumptions about older employees. 

The ET decided he had not, and that he had genuinely believed the doctor was unlikely to be able to adapt to new working conditions. It therefore ruled that the termination was not discriminatory. 

However, on appeal the Employment Appeal Tribunal found that others in the organisation had influenced the decision - such as those who had been consulted when the internal report was drawn up. Their reasons should also be considered, but as the ET had not heard any evidence from some of them it remitted the case to a different tribunal for reconsideration. 

Operative date

  • Now


Case law: landlord must refund service charges not spent on works until after lease ends

Landlords should ensure their leases are clear as to what happens to service charges built up in anticipation of future expenditure, but not paid out until after a tenant's lease has ended. If they don't, they risk having to refund service charges to their tenant. 

A business tenant exercised a break clause and terminated its lease in March 2010. The tenant had made quarterly payments in advance on account of service charges, based on estimated expenditure in future years including charges of £795k, collected and built up over three years from 2006 to 2009, for proposed major building works. The service charge year ran from 1 January to 31 December. 

The works were not carried out until after termination of the tenant's lease, and the total costs were over £1m. There were two disputes: 

1) How much the landlord could charge for services for the year during which the break was effective. The court said that the service charge imposed by the landlord for the year in which the break took place (2010) could cover the complete year to 31 December 2010, not just that part of the year before the break took effect in March. 

However, only costs actually incurred in 2010 could be included. As some of the payments to the contractors had been made in 2011 these could not be included in the outgoing tenant's service charges for 2010. Nor could the landlord include service charges for remaining major expenditure planned for 2011. 

2) Whether the landlord should repay the £795k already paid, because none of the works took place (or were paid for) until after the lease had terminated. The court ruled that under the terms of the lease, this had to be repaid as none of the works it was collected for had been carried out until after the lease had ended. 

The court set off the amount to be paid for 2010 against the £875,000 to be repaid, creating an excess. The court awarded the tenant a percentage of that excess, pro rata its period of occupation of the premises during the 2010 service charge period before termination under the break clause. 

Operative date

  • Now

Case law: heads of terms during negotiations irrelevant when interpreting final agreement

Following a High Court ruling, businesses negotiating and signing agreements containing entire agreement clauses should make sure every right or obligation they intend to apply is expressly set out in the final agreement. 

A software developer claimed compensation from a supplier for breach of a software agreement. The agreement was based on heads of terms agreed in writing before the final agreement was signed. The heads of terms provided that the supplier was to do certain things (which it failed to do), but these did not appear in the final agreement which contained an 'entire agreement clause' stating that it constituted 'the entire agreement and understanding between the parties' and overrode 'all proposals and prior agreements, arrangements and understandings between the parties relating to its subject matter'. 

The supplier therefore argued it was not contractually bound to do the things it had failed to do, and the developer had no claim against it. Courts interpret agreements objectively, asking what an objective third party with all the background knowledge reasonably available at the time of the agreement (the 'factual matrix') would understand it to mean. 

In this case, the software developer argued that the heads of terms were part of the 'factual matrix' behind the agreement and the court should take it into account when interpreting the agreement. The High Court disagreed: the heads of terms were not part of the factual matrix behind the agreement because: 

  • to the extent they did not have contractual force, they were simply one step in the negotiations leading up to the final agreement;
  • to the extent that they did have contractual force, the entire agreement clause meant they were superseded by the final agreement.

Operative date

  • Now

© Atom Content Marketing Ltd: 2014 

Members seeking prompt advice on employment, company or commercial law can contact our legal helpline, Directors' Law Express, on 0870 241 3478, up to 25 times a year.

Visit Guidance for more briefings