Legal news roundup - August 2019


Date: 29 July 2019

A young, male business person reads the newspaper in the sun.

You might expect things to go a bit quiet as many of us head off for our summer holidays. Sadly, nothing can be further from the truth this August. This month, we have a number of court rulings that might impact on employers, residential landlords, contractors or businesses using cookies on their company website. You can check whether any of these ruling affect your business by reading the headlines below.

An unenforceable restriction in an ex-employee’s contract can be ‘severable’ so other restrictions still apply

Employers will welcome a ruling that a restriction in a clause in an ex-employee’s employment contract, stopping her from being ‘interested in’ any competitor business and which was too wide to be enforceable, could be ‘severed’ from the other restrictions in the clause, so those other restrictions remained enforceable against her.

An experienced employee who had held senior positions in the financial services industry was taken on in a junior role by an executive search consultancy. Unsurprisingly, she advanced rapidly to a very senior position. Her original contract of employment was not amended as she progressed in seniority. It contained a non-compete clause imposing a number of restrictions which would apply for six months after she left, including one which said she should not “directly or indirectly engage or be concerned or interested in any business carried on in competition” for six months after she left.

Such restrictions in employment contracts, for example, preventing ex-employees from poaching clients or colleagues or taking, disclosing or using the employer’s confidential information (known as restrictive covenants) are only enforceable if they are no wider than reasonably necessary to protect a legitimate interest of the employer. Otherwise they are unenforceable on grounds they unreasonably stop the ex-employee from making a living (ie ‘in unreasonable restraint of trade’). When deciding what is too wide, the court has to balance the interests of the employer against those of the ex-employee.

The employee in this case left her job and, shortly after, told her former employer that she planned to start working for a competitor. Her employer applied for an injunction to stop her on the basis it breached the restrictions in her contract.

She argued that the restriction on her being “interested in” a rival business was too wide as those words prohibited her from holding any shareholding, however minor, in any competitor at all and did not protect any legitimate interest of the employer. It was therefore unenforceable – even though she held no such shareholding and had no desire to do so. She argued that the fact this particular restriction was unenforceable meant the whole clause was unenforceable - including all the other restrictions it imposed on her.

Her employer argued that the words did allow her to hold minor shareholdings in competitors - they should be interpreted as meaning merely that she should not be actively engaged with a competitor, which was a reasonable restriction.

The Supreme Court agreed that the restriction was too wide and therefore unenforceable.

However, it found that this did not mean that other restrictions in the clause were therefore unenforceable. Overruling the Court of Appeal decision on this point, it said that the offending words could be severed from the rest of the restrictions, leaving those other restrictions valid and enforceable. This is because severing them in that way did not fundamentally change the character of the employee’s contract and did not generate any major change in the overall effect of the restrictions on the ex-employee's conduct.

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Ruling throws ‘three-month rule’ in underpaid holiday claims into doubt

Employers in Great Britain (GB) should be alert to the prospect of employees (and their unions) claiming for unpaid holiday pay on grounds that the ‘three-month rule’ should not apply, following a ruling in Northern Ireland (NI), allowing them to claim backdated holiday pay that they would not otherwise be entitled to.

The NI Court of Appeal has ruled in a case relating to backdated claims for police holiday pay that had been underpaid for more than 20 years. It has said the ‘three-month rule’ which the courts have said applies under GB regulations (ie in England, Wales and Scotland) does not apply under the separate NI regulations.

The three-month rule is based on the fact that claims for underpayment of holiday pay for the four weeks’ holiday required to be given to employees under EU law are technically claims for ‘unlawful deduction from wages’. Under the rule, where the law in England, Wales and Scotland applies, such claims must be made within three months of the underpayment/deduction or of the last of a series of underpayments/deductions – ie a gap of more than three months breaks the series.

There is, however, a two-year cap on unlawful deduction claims in GB which caps the maximum amount payable in unpaid holiday claims there in any event.

The NI Court of Appeal ruled that there is nothing in the equivalent NI regulations to say that a gap of more than three months between deductions breaks a series, so the “proper construction” of the NI regulations is that “a series is not broken by a gap of three months or more” between deductions.

It also said “sufficient similarity of subject matter, such that each event is factually linked with the the alleged series...” was enough to amount to a series.

However, the wording in the GB and the NI regulations is virtually the same. While NI Law is not automatically binding in GB, rulings of the NI Court of Appeal are treated as persuasive by GB courts. This means if this issue is ever appealed in a case in GB, it is likely an employee will argue that the NI approach is right and the previous GB approach should be overruled.

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Employer’s assumption that employee may be disabled can be unlawful ‘perceived disability discrimination’

Employers dealing with an employee who has a potentially progressive impairment which has no substantial adverse effect on their ability to carry out day-to-day activities, should ensure they do not discriminate against them by assuming the impairment is likely to develop in the future so that it does have such an effect, as this may amount to disability discrimination by perception.

A police officer applied for a transfer from one police force to another. Her previous force had recorded, after a function test taken when she was recruited, that her hearing was “just outside the standards for recruitment strictly speaking” but noted that she had no problem with day-to-day activities including operational police work.

The Assistant Chief Inspector (ACI) in the new force, without giving her a function test (and despite evidence from three medical experts that her hearing was stable), turned down her transfer application, saying her hearing was not up to the acceptable and recognised standard and, if they took her on, they might have to increase the pool of officers on restricted duties, increasing costs. The officer claimed direct discrimination on grounds she had been disadvantaged on grounds of perceived disability discrimination by the ACI.

The usual test for whether a person is disabled is whether they have an impairment that has, or is likely to have, a substantial adverse effect on their ability to carry out day-to-day activities, including activities at work.

However, a person may also be disabled for discrimination purposes if they suffer a disadvantage not because they are disabled now, but because there is a perception they will become disabled in the future. This can apply, for example, if they have a progressive condition which currently has an effect on their day-to-day activities, but which falls short of a substantial adverse effect - but they suffer a disadvantage because it is perceived as likely that the condition will amount to a substantial adverse effect in future.

The Court of Appeal has now ruled that the ACI’s decision amounted to direct discrimination by perception. The ACI’s fear that the officer might have to be put on restricted duties was evidence of her perception that the officer had a progressive condition likely to develop to a stage where it would have a substantial adverse impact on her ability to carry out day-to-day activities in the future – and this was the reason for refusing the transfer.

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Employer accesses employees’ emails to family and/or personal email accounts

Employers may be able to access an employee’s work emails, even to family and/or to their personal email accounts, if they include appropriate authority in their work policies, act in a reasonable and proportionate way and comply with any conditions in those policies, according to a recent ruling.

An ex-employee who had set up a competing business tried to argue that post-employment restrictions in his old contract of employment stopping him doing so did not apply. His argument was that the former employer had read personal emails sent to his wife from work - a breach of his right to privacy under human rights laws which also breached the implied duty of trust and confidence between an employer and employee - so his former employer could no longer rely on the restrictions.

The ex-employer argued that the reasons it had accessed his emails included that:

  • It was entitled to do so under its electronic information and communications policy in order to investigate potential breaches of contract, and was not required to tell an employee it was doing so
  • After he had given notice, his manager suspected he was not handing work over properly, and therefore asked to access his emails
  • The emails to his wife and his personal account were not private emails. Those to his wife were work-related, and those to his personal account contained confidential information belonging to his employer

The court found that the ex-employer’s policy was reasonable and its investigation had been ‘appropriate’. In particular, it agreed that the emails were work-related and not private communications.

It said that even if the ex-employer’s action had breached the employee’s right to privacy, that did not mean it had automatically also breached the implied duty of trust and confidence. The post-termination restrictions on the ex-employee were therefore enforceable.

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Tribunal clarifies issues around secret recordings

Employers and employees will welcome clarification of factors to take into account when considering whether secret recordings of meetings, conversations, etc by employees amount to gross misconduct, and breach the implied duty of mutual trust and confidence between employers and employees.

An employee won an unfair dismissal claim but, during the legal proceedings, it emerged that she had secretly recorded conversations during her employment.

Her employer argued that had it known about this at the time, it might have been able to discipline her for misconduct (unless she had been able to put forward a ‘pressing justification’ for making the secret recording). It therefore argued that it would be just and equitable to reduce her compensation for the unfair dismissal to take account of this.

The Employment Appeal Tribunal (EAT) rejected the employer’s argument. It said when assessing compensation, a tribunal was not bound to treat the making of secret recordings as an automatic breach of the implied term of mutual trust and confidence between employer and employee. Helpfully, it referred to factors for employers to consider if employees were found to have made such recordings, including:

  • Reasons for making a secret recording could range from trying to trap an employer into saying something incriminating, to an employee trying to protect themselves from an employer misrepresenting what they had said, or making a record of a meeting so they can obtain advice from a union. In this case there were no indications the employee was trying to entrap anybody, and she did not ask leading questions to get the answers she wanted. Nor did she actually use the recordings during the hearing of her case
  • The content of a recording could be relevant – for example, if the recording is of a meeting where minutes were being kept anyway, or it included very sensitive or confidential information about the business or other people, which could seriously breach their rights
  • A recording may have been made against an express instruction not to, or an inexperienced or distressed employee may not have even considered whether recordings might not be allowed
  • The attitude of the employer to making recordings may be relevant. In this case, there was no mention in the employer’s disciplinary policy that making secret recordings would be gross misconduct; nor had the employer since changed its policy to include it. Indeed, the EAT pointed out that making secret recordings is very rarely mentioned as an example of gross misconduct in company disciplinary procedures generally

The EAT went on to say that employers and employees should, as a matter of good practice, tell each other if they intend to record meetings or conversations. Failure to do so will be misconduct in all but the most pressing of circumstances.

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Employers should beware treating employees less favourably if English is an additional language

Employers should avoid treating employees for whom English is an additional language (EAL) less favourably on the basis they inevitably have a lesser command of English than those for whom it is their first language; otherwise they risk a race discrimination claim as a recent ruling makes clear.

An employee of South Asian Pakistani ethnicity claimed his supervisor was not selecting him to stand in for her at ‘huddles and conference calls’ – important occasions at the company - when she was unable to take part, and this was damaging his career prospects. A fellow employee of the same ethnicity made the same claim.

The supervisor argued that this was because English was their second language, which meant they might give wrong information during these meetings and calls due to their lack of command of the English language. The employees objected, but agreed to mediation.

The mediator did not think the supervisor’s behaviour had been discriminatory (although they asked her to apologise) but thought it had been the result of personality clashes.

The employee was given a new supervisor but was later asked to work a shift with the old supervisor. He refused and raised a formal grievance alleging racial discrimination.

The officer presiding over the grievance found that the employee had “never demonstrated … a lack of command of the English language” and that the supervisor’s comments were “very discriminatory in nature”. However, the grievance was not upheld because the matter had been dealt with in accordance with company policy and the supervisor had not shown further discriminatory behaviour.

The employee appealed, going off sick with work-related stress in the meantime. When his appeal was rejected his employer told him he must return to work or he would be disciplined. Amongst other claims, he claimed race discrimination in the Employment Tribunal (ET) on the basis that language is an intrinsic part of a person’s nationality and keeping him away from the huddles and conference calls because English was not his first language meant he had been treated less favourably than other employees whose first language was English because of his nationality.

The onus was on the employer to show that the less favourable treatment of the employee had not been because of his race. The ET found it had failed to do so and agreed there had been race discrimination.

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Shareholder ‘written resolutions’ invalid unless circulated on the authority of the board

Companies proposing to use written resolutions to make shareholder decisions – ie. agreeing to a decision in writing rather than holding a formal meeting - should ensure every such resolution is approved and circulated by the board and sent on its behalf to all shareholders entitled to vote on the decision, otherwise it will be invalid - as a recent ruling makes clear.

It is common for shareholders in private limited companies to make decisions by ‘written resolution’ signed by the holders of the requisite majority of shares, rather than having to go through the formalities of calling and holding a shareholders’ meeting. Written resolutions are lawful provided the company is private (public companies cannot pass written resolutions), and company law rules are complied with.

A, B and C were the three shareholders of a private company. A and B were also directors. A proposed that the shareholders should appoint C as a director. His plan was that the shareholders would do this by written resolution.

A and C together held a majority of the company’s shares - enough for them to pass the resolution even if B was against it.

Company law rules require that if a written resolution is proposed by a shareholder, the board of directors can choose whether or not to circulate it to the shareholders for approval, unless the board receives a written notice from shareholders representing not less than five per cent of the total voting rights (or any lower percentage specified in the company’s articles of association) requiring it to circulate the written resolution, in which case the board has to do so.

If the board does not receive such a notice, it can choose not to circulate the resolution. If the board decides not to, there is no rule authorising only one of the directors, or one shareholder (or even all the shareholders), to circulate it instead.

A written resolution can still be effective in law even if it is not circulated to all the shareholders.

A emailed B on 19 November 2018, purporting to convene a board meeting on one hour’s notice, authorising the circulation of the written resolution to the shareholders for approval. B refused to attend, saying it was not enough notice.

A and C signed the written resolution anyway. They did not send a copy to B for signature and claimed this was effective to appoint C as a director.

B argued that the written resolution was invalid because the board had not approved its circulation to the shareholders, and because it had not been circulated to all the shareholders.

The court agreed. It said the rules meant that a written resolution can only be circulated to shareholders if the directors, acting as a board, say it can be. A director and/or shareholder acting on their own cannot circulate it.

It also found that the rule requiring that a written resolution could still be effective even if it was not circulated to all the shareholders only applied if the omission was inadvertent. In this case, it was deliberate so the resolution would not have been effective, even if properly circulated by the board.

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Government proposes reductions in tax relief for residential property owners

Owners of let residential property that was once their main residence should assess the impact of government proposals to reduce tax reliefs available to them from 2020.

Firstly, from 6 April 2020 the current exemption from capital gains tax (CGT) for gains related to the final period of ownership of such properties is to be reduced from 18 months to nine months.

Secondly, the lettings relief from CGT - which exempts the first £40,000 of capital gain from CGT on sale of a let property if it has been the owner’s main residence at any time - will continue to apply, but only in respect of gains in periods during which the owner was also an occupier of the property. It will not be available to those who let out the whole of what was previously their main residence.

The government also plans to introduce new extra-statutory concessions, ESC D21 (late claims in dual residence) and ESC D49 (short delay by owner-occupier in taking up residence).

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New Information Commissioner’s Office guidance on cookies

Businesses, organisations and individuals with websites who are providing other online services, such as mobile apps, will welcome new online guidance on the use of cookies recently published by the Information Commissioner’s Office (ICO).

The new Guidance on the use of cookies and similar technologies aims to align the UK’s e-privacy laws in relation to cookies (small data files stored on your computer by websites, etc while you are browsing online which enable third parties to track what you look at and click on so that the online adverts, offers or other information can be tailored to your apparent preferences as indicated by your online behaviour) with the requirements of the General Data Protection Regulations (GDPR).

This became law in the UK from May 2018 and overlaps with the UK cookie rules. One area of overlap clearly dealt with in the guidance is the obligation under UK rules for website owners and others to explain to online visitors what their website cookies will be used for and this must comply with the GDPR requirement that such explanations be in a “concise, transparent, intelligible and easily accessible form, using clear and plain language”. It is likely many websites do not comply.

The guidance has also been updated to take account of technological advances, such as the Internet of Things.

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Government consultation on statutory sick pay and workplace health

Employers may want to consider a new government consultation, Health is everyone’s business: proposals to reduce ill health-related job loss, setting out a wide range of proposals which could significantly affect employers’ liabilities and obligations.

The proposals include the following:

  • Paying statutory sick pay (SSP) to workers who are not currently eligible because they earn too little – but with safeguards to ensure they do not receive more by way of SSP than they earn by working, such as limiting SSP to 80% of their earnings
  • Allowing phased returns to work (if agreed with the employee) for employees who have been off sick for two weeks or more, with employees earning a mixture of wages and SSP during a phased return
  • Allowing employees to ask for reasonable modifications to their work – such as changes to their hours, work pattern, job spec and/or workplace - on health grounds if they have been off sick for a specified period (such as four weeks), and not just if they are disabled
  • Improving access to occupational health (OH) services, including treatments, information and training - for example, by offering OH subsidies or vouchers to SMEs so they can more easily access OH services

The latest date for responding is 7 October 2019.

Clarification on landlords’ duties to inspect, identify and remedy defects at let properties

Landlords will welcome clarification of their duties to inspect let properties, the scope of such inspections and the extent of remedial action which may be required, following a recent ruling.

A council tenant trod on an inspection cover in her garden while mowing the lawn. It broke and she injured herself falling into the hole. The council was responsible for the outside of the property, and the local water company owned the inspection cover. She sued the council for compensation.

The council had inspected the property twice in the recent past but there was little evidence to show what the inspections consisted of.

After expert evidence, the court found that the cover must have been unsafe for a long time (it had been there for some 40 to 60 years and the lip it rested on had corroded away) so that anyone cautiously applying pressure with their foot would have spotted that it was unsafe.

Under defective premises law, a landlord must take reasonable care to make sure anybody who might reasonably be affected by defects in their let premises are reasonably safe from personal injury or damage to their property caused by such defects. This duty applies not just if a landlord knows of a defect, but also if, in the all the circumstances, they ought to have known about it.

The Court of Appeal said this meant there was no duty to routinely inspect let properties, but a duty could arise if, for example, there were known risks at a property. It went on to say that if inspections are actually carried out, they must be carried out with reasonable care. That meant that it would sometimes be enough to carry out a visual inspection, but a more thorough inspection would be required at other times. Relevant factors included:

  • Whether a defect was apparent or foreseeable
  • The type and severity of the risk
  • Any relevant safety regulations
  • What a more thorough inspection would have involved

In this case the court found that because:

  • The risks posed by a faulty inspection cover were obvious, especially if children had access to the property, and
  • The danger could easily have been spotted by cautiously applying pressure to the cover with a foot

then the burden of proving it had carried out its inspections with reasonable care shifted to the council.

The fact the council could produce so little evidence of what had actually been inspected, and that it had not spotted this obvious risk, meant the council had failed to discharge that burden. It should therefore compensate the tenant for her injuries and the damage.

The Court of Appeal said it was irrelevant that the cover belonged to the water company because the council could have required the water board to repair the cover once it discovered it was risky.

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Landlord takes back possession where tenant did not exist

A party entering into a legally binding agreement should check the other party named in the agreement actually exists, a recent ruling makes clear.

Where the other party is a company, a limited liability partnership or a community interest company, you can check the name given in the agreement is registered at Companies House or, for a foreign entity, obtain a letter of opinion from a foreign notary that it exists.

In this case, a lease stated that the tenant of the premises was a company called Seafood Shack UK Ltd. However, there was no such company. The company that actually occupied the premises was called Seafood Shack (Cardiff) Ltd which had a holding company called Seafood Shack Ltd.

By the time the mistake was picked up several months later, Seafood Shack (Cardiff) Ltd had gone into liquidation. When the liquidators disclaimed the premises, the landlord forfeited the lease and took back possession of the premises.

The holding company Seafood Shack Ltd claimed that it was the company that was supposed to have been the tenant of the premises, and argued that the landlord had therefore taken back the premises unlawfully.

The legal test when construing or interpreting the terms of a commercial agreement, such as a lease, is the objective test of what a reasonable person in possession of all background information reasonably available to both (not just one of) the parties at the time the contract was entered into would think the parties had meant.

The High Court found that the landlord had not been aware of the existence of either Seafood Shack (Cardiff) Ltd or Seafood Shack Ltd when it granted the lease, so it was not possible to say that a reasonable person would think it had intended Seafood Shack Ltd to be the tenant.

The Court therefore ruled that Seafood Shack Ltd had never been a party to the lease, and whatever interest Seafood Shack (Cardiff) Ltd had in the premises had been disclaimed by its liquidators. The landlord had therefore recovered possession of the premises lawfully.

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Demolition contractor fined after debris falls into neighbouring property

Contractors working on building sites should ensure they are aware of and comply with their duties to carry out their work in a way that prevents danger, particularly where there is a risk of debris falling into neighbouring properties, otherwise they risk prosecution.

A demolition company knocked down two houses and debris from the job landed in the garden of the property next door. A loss assessor visiting that property was taking pictures of the debris when he stood on a broken window panel and cut his ankle and Achilles tendon.

The Health and Safety Executive (HSE) ruled that the demolition company had a duty to do its work in a way that prevented danger, and it had failed to discharge this duty. It had failed to plan its work sufficiently and failed to erect a secure fence stopping unauthorised access to the site.

It was therefore found guilty of breaching construction design and management laws, fined £3,000 and ordered to pay £1,419.40 in costs.

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High Court gives guidance on ‘de facto’ directors

Limited companies will welcome guidance on how to determine whether they have ‘de facto’ directors – those not formally appointed as directors but treated by a court as having fiduciary and other duties to the company as if they had been formally appointed because they have behaved as if they were full directors – following a recent High Court ruling.

In a complex case, one issue for the court was whether one of the parties involved was a de facto director of a company. It is important to both the company and the relevant individual to know whether the individual is a de facto director (or shadow director – a person in accordance with whose directions or instructions the directors of a company are accustomed to act) as they are also subject to many of the duties and responsibilities – and therefore the liabilities – of formally appointed (‘de jure’) directors.

The court referred to the following principles giving useful guidance on how to determine whether someone is a de facto director:

  • The court must determine the corporate governance structure of the company so it can then decide whether, looked at objectively and taking into account all relevant evidence, the relevant person was part of that structure and whether their acts were directorial in nature. If they are, and their acts were, they have assumed the role of de facto director
  • Being involved in management or exercising influence on management decisions is not in itself enough
  • If a person has assumed the role of director, the court must decide whether they were acting in that capacity when carrying out any wrongful acts, given that:
    • An act can only be done in the capacity of a de facto director if it can only be done by someone in the capacity of director
    • An act which is in the form of directions or instructions to a properly appointed director will be the act of a shadow director. While there is some overlap between the concepts of shadow director and de facto, an act carried out as the former cannot also be an act carried out as the latter
    • An act done in some other capacity (for example, as an employee or agent) cannot have been done as a de facto director

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