December 2013


76.2 Employment law – general background – scope of the Part

This Part of the chapter provides an overview of the main aspects of employment law, as follows: 

Given the relative complexity and breadth of this area of law, and the official receiver’s involvement in only certain aspects (which are covered in greater detail in Part 2 to the chapter), this is intended to be a brief summary only.


76.3 Employment rights

Employment rights (and obligations) arise from both statutory protection and from common law (case law) precedent.  For employment rights to arise there has to be a relationship of employer and employee, which is normally a question of fact demonstrated by the existence of an employment contract [note 1] [note 2] (see paragraph 76.5).


76.4 Defining the employment relationship

The key factor in establishing if parties have the relationship of employee and employer is the existence of an employment contract (see paragraph 76.5), and employment has been defined as ‘employment under a contract of employment, a contract of apprenticeship or a contract personally to do work.’ [note 3].

Where it cannot be found that there is a contract of employment, it is likely that the arrangement will be that of self-employment, under a ‘contract for services’ [note 4] and the various employment rights will not apply.

See paragraph 76.49 for the definition of employee as regards the ability to make a claim to the National Insurance Fund.


76.5 Existence of an employment contract

A contract of employment may be express or implied [note 5] [note 6], in writing or oral [note 7].  The existence of a contract of employment is a question of law [note 8] and, whilst the label that the parties apply to the arrangement is persuasive, it is not determinative [note 9].  In deciding that a contract of employment exists, a court or tribunal will seek to identify the following features: 

  • That the employer exercises some control over the employee [note 10] [note 11] [note 12] [note 13]. 
  • That there is an obligation on the person to provide work personally [note 14] and that the work being done is integral to the business of the employer and not ancillary to it [note 15]. 
  • That there is a mutuality of obligation (normally, an obligation to work and an obligation to pay for that work) [note 16] [note 17].


76.6 The status of ‘worker’

Certain statutory employment rights are extended beyond employees to ‘workers’ [note 18].  The definition of worker includes employees, but also includes one who agrees, under contract, to perform personally any work or services for another party who is not a professional client of his, or one who is in the employment of a government department (but not a member of the armed services) [note 19] [note 20].

The term ‘worker’ would generally include agency staff, contract workers or freelancers, which persons would not normally be included under the definition of employee.


76.7 Company directors as employees

Without more a company director is not an employee of the company of which he/she is a director [note 21].  If, however, there is in place a service agreement, or similar, with the necessary features of an employment contract (see paragraph 76.5), then the director will also be an employee, even if the director is the sole director and sole employee [note 22]. 

If the person works full time as a managing director then there may be a presumption that he/she is also an employee [note 23], but as with other enquiries into employment, it is a question of fact and law [note 24]. 


76.8 Indicators of a director as an employee

It has been held [note 25] that the main factors in determining the question of a director’s employment were:

  • The use of any descriptive term such as managing director, sales/marketing director, etc
  • Whether there was an express contract of employment or a board minute constituting an agreement to employ,
  • Whether remuneration was by way of salary as opposed to a director’s fee.
  • Whether that remuneration was fixed in advance rather than paid on an ad hoc basis,
  • Whether remuneration was by way of entitlement rather than being gratuitous,
  • The function actually performed by the director.

Guidance on statutory requirements relating to directors’ service contracts is provided in paragraphs 75.105 to 75.106.


76.9 Partnership cannot be an employer; partner cannot be employee

As a partnership has no separate legal identity (see paragraph 53.19) it cannot employ people.  Often, the partnership name will be on an employee’s employment contract, but this is just as convenient shorthand for the names of the partners (see paragraph 53.136 for the effect of this principle so far as concerns insolvency).

Similarly, on the basis that a person cannot make a contract with him/herself, a partner cannot be employed by his/her own partnership [note 26].


76.10 Terms of an employment contract

The terms of an employment contract may arise from the express statements (written or oral) of the parties to the contract [note 27], written rules of the employer (even those in the form of a notice posted to the workplace wall) [note 28] [note 29], custom [note 30] [note 31] [note 32] [note 33], statutory standards, implied terms (see paragraph 76.11) and/or collective agreements with trade unions.


76.11 Implied terms of an employment contract

Even if not detailed expressly, a contract of employment (see paragraph 76.5) will commonly contain implied duties on the employee (see paragraph 76.12) and employer (see paragraph 76.13).

In this context, a term will be implied if it is so clear that the parties to the contract would have considered it to be a term even though they had not expressly stated it, or if the inclusion of the term would be necessary to give the contract practical effectiveness [note 34] [note 35].


76.12 Implied terms of an employment contract - employee

Even if not detailed expressly, a contract of employment (see paragraph 76.10) will commonly contain implied duties on the employee, as follows:

  • To be ready and willing to work [note 36].
  • To use reasonable care and skill [note 37]
  • To be reasonably competent [note 38].
  • To obey lawful orders [note 39] [note 40] [note 41] [note 42], but not those orders that, though lawful, might place him/her in danger [note 43].
  • To take care of the employer’s property [note 44].
  • To act in good faith (not to take bribes, etc.) [note 45] [note 46].
  • Not to act against the interests of the employer (by running a rival business ‘on the side’, for example) [note 47].


76.13 Implied terms of an employment contract - employer

Even if not detailed expressly, a contract of employment (see paragraph 76.10) will contain implied obligations on the employer, as follows:

  • To pay contractually agreed remuneration [note 48], though there is no obligation to provide work [note 49] unless the contract is for piece work, or similar [note 50].
  • To treat employees with trust and confidence [note 51] [note 52] [note 53].
  • To observe provisions relating to holidays and hours of work [note 54] and to permit time off for official duties (for example, time off for work as a justice of the peace) [note 55].
  • To indemnify employees in respect of expenses occurred in performing duties under the contract [note 56]
  • Not to provide a negligent reference [note 57].
  • To ensure the employee’s safety [note 58].
  • To provide a system of redress of grievances [note 59].
  • To suspend the employee only on reasonable grounds [note 60].


76.14 Statutory protections

In addition to the contractual rights afforded them (see paragraph 76.10), employees and, in some cases, workers (see paragraph 76.6) have statutory rights/protections in respect of the following:

  • To receive a written statement of employment terms (such as rate of pay, hours of work, holidays, notice period, place of work, etc.) within two months of starting work [note 61].
  • To receive at least the national minimum wage [note 62] [note 63], statutory sick pay, statutory maternity pay, itemised pay statements and protection from unauthorised pay deductions [note 64] [note 65] [note 66].
  • To receive rest periods, including holidays [note 67].
  • To receive equal pay for like work of equal value [note 68] and not be subject to pay confidentiality clauses [note 69]
  • Not to be discriminated against (see paragraph 76.36) in respect of gender, disability, age, marriage and civil partnership, pregnancy and maternity, race, sexual orientation, religion or belief, part-time or fixed-term status, trade union membership or gender reassignment [note 70].
  • Family rights such as maternity/paternity/adoption leave [note 71] [note 72] [note 73], parental leave [note 74], leave to deal with caring commitments [note 75], ante-natal leave [note 76] [note 77].
  • Health and safety [note 78].
  • Protection of employment rights where there is a transfer of undertaking [note 79] (see paragraph 76.19)
  • Notice on termination [note 80] (see paragraphs 76.24).
  • Unfair dismissal [note 81] (see paragraph 76.26)
  • Redundancy [note 82] (see paragraphs 76.32)
  • Payment of outstanding wages, etc. in the event of the insolvency of employer [note 83] (see Part 2)


76.15 Employment Tribunals

Employment Tribunals are, in essence, courts which specialise in hearing complaints that a person’s statutory employment rights (see paragraph 76.14) have been breached.

Before bringing a claim before a tribunal, the employee must have exhausted an internal grievance procedure [note 84].


76.16 Employment tribunals – hearing

An Employment Tribunal hearing is normally in front of a specialist employment judge, a lay-person from a panel of those selected by BIS following consultation with employers’ organisations and a lay-person from a panel of those selected by BIS after consultation with employees’ organisations, though the panel may be limited to one lay-person if both parties agree [note 85].  Similarly, the hearing may be in front of the judge only if so ruled [note 86].


76.17 Employment tribunal claim – insolvency

Where the bankrupt is bringing a claim in an Employment Tribunal, the guidance in Chapter 31.9, Part 8 should be followed.

Where a claim is being brought against the insolvent, as an employer, the guidance in paragraph 76.63 should be followed.


76.18 Dispute resolution – ACAS code

The Advisory, Conciliation and Arbitration Service (ACAS) have produced a guide to disciplinary and grievance procedures (http://www.acas.org.uk/index.htmx?articleid=2174) and, whilst adherence to the code is not compulsory, it is admissible is evidence before an Employment Tribunal [note 87] (see paragraph) and the Tribunal can take account of the extent to which it was followed when awarding damages [note 88].

The main features of the code are that a disciplinary proceeding should include a written invitation to a meeting, a grievance should be in writing, with both procedures including a meeting (with a right to be accompanied) and a right of appeal.


76.19 Protection of employee rights where business transferred

The legislation [note 89] provides protection to employees where there is a ‘relevant transfer’ of an undertaking.  Such protection being, in essence, that the employees are retained by the transferee, subject to their agreement [note 90], under existing contract terms [note 91] [note 92].


A relevant transfer (which would apply to both public and private sector undertakings) may include a transfer by sale of the undertaking from one legal entity to another [note 93], or may be where a part of the undertaking is contracted out, passed from one contractor to another, or ‘insourced’ (that is, taken from a contractor back to the client business [note 94].  A transfer of share-holding does not qualify as a ‘relevant transfer’ [note 95].


76.20 Transfer of employment rights in insolvency

A relevant transfer (see paragraph 76.19) does not occur where the employer is in formal insolvency, the transfer is conduced after insolvency and is instigated by the liquidator or trustee [note 96] [note 97] [note 98], but would occur where the transferor was subject to administration proceedings [note 99].


76.21 Transfers of undertakings – rights protected/transferred

As outlined in paragraph 76.19, the legislation [note 100] provides protection to the employees of an organisation where that organisation is transferred (through contracting out, privatisation, sale or takeover).  The main rights are:

  • The employment transfers to the new undertaking,
  • The employee cannot be dismissed by reason of the transfer or by a reason connected to the transfer, and
  • The employment terms and conditions cannot be worsened because of the transfer (except that the new employer is not obligated to continue an occupational pension scheme [note 101].)

Any dismissal in breach of these terms, or failure to ‘carry over’ the existing terms and conditions leading to resignation, will usually be considered an unfair dismissal (see paragraph 76.26) [note 102].


76.22 Continuity of employment

Most of the statutory employment protections outlined at paragraph 76.14 are available only to employees who have attained a minimum period of employment (which can be between one month and two years depending on the protection).  The calculation of the length of continuous employment is with reference to the legislation [note 103].  In particular, a person’s employment by a particular employer is considered to be continuous unless the contrary can be shown [note 104].  There will normally be no break in employment where the employee transfers to an associated business [note 105], or where there is a transfer of the employer’s undertaking [note 106] (see paragraph 76.19).


76.23 Termination of employment

Under common law, a contract of employment may be terminated or otherwise ended by:

  • either party by notice in accordance with the terms of the contract of employment,
  • in the absence of such a term in the contract,  by notice of such period as agreed by the parties (providing that either term is not less than the statutory minimum applying to that employment [note 107]).  The minimum period for termination can be waived by agreement (where there is a ‘golden handshake’, for example) [note 108],
  • expiration, being the expiration of time on a fixed-term contract,
  • termination by frustration.  This is where it is impossible for the contract to be performed in a way that might be reasonably expected (for example where the employee is imprisoned [note 109] or ill [note 110]),
  • dismissal (by notice or summarily) (see paragraphs 76.24 to 76.25), or
  • the compulsory liquidation or bankruptcy (see paragraph 76.40) of the employer.


76.24 Notice on termination

Where an employee has been continuously employed for a period of one month or more, he/she is entitled to receive at least the following period of notice before dismissal [note 111]:

  • One week, if employed less than two years [note 112].
  • One week for each year employed if employed between two and twelve years [note 113].
  • Twelve weeks if employed over twelve years [note 114].

An employee is entitled to a written statement of the particulars of the reasons for the dismissal [note 115].


76.25 Termination without notice

Termination without notice (summary dismissal) is allowed where the termination is by reason of the employee’s conduct [note 116], but such dismissal is generally wrongful (see paragraph 76.30) unless it can be shown that the conduct of the employee was such that it prevented further satisfactory continuance of the relationship [note 117] [note 118].

Where an employer fails to give the statutory notice period, it must pay compensation equal to the pay attributable to the notice period [note 119] [note 120].


76.26 Unfair dismissal

In simple terms, a claim for unfair dismissal is a claim by an employee that that he/she ought not to have been dismissed from his/her job (it was ‘unfair’ to have done so).  The primary remedy for an unfair dismissal claim is to reinstate the employee to the job from which he/she was unfairly dismissed, or re-engage him/her in an alternative job (see paragraph 76.28).  Protection from unfair dismissal arises from statute rather than case law [note 121].  A dismissal may be unfair even if it was conducted within the terms of the contract (see paragraph 76.10).

Unfair dismissal applications are heard by an employment tribunal (see paragraph 76.15).

Where the bankrupt is bringing a claim for unfair dismissal, the guidance in Chapter 31.9, Part 8 should be followed.


76.27 Unfair dismissal – considerations for the tribunal

Assuming the employment tribunal is satisfied that the dismissal was a dismissal and not a resignation or termination by consent, it is for the employer to show the reason(s) for the dismissal and that that reason(s) was/were [note 122]:

  • Related to the capability or qualifications of the employee for performing work of the kind which he/she was employed to do;
  • Reasons related to the conduct of the employee;
  • That the employee was redundant (see paragraph 76.32);
  • That the employee could not continue to work in the position which he/she held without contravention (either on his/her part or on that of his/her employer) of a duty or restriction imposed by or under any enactment; or
  • Some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which that employee held.


76.28 Unfair dismissal – remedies

Where an Employment Tribunal finds in favour of a claimant in an unfair dismissal claim it will explain that it can make an order to reinstate the employee and ask the claimant if he/she wishes the Tribunal to make such an order [note 123] [note 124].  If the claimant is minded not to accept such an order, the Tribunal will instead make an order for financial compensation (see paragraph 76.29).


76.29 Unfair dismissal – basic awards and compensatory awards

When an Employment Tribunal finds in favour of a claimant in an unfair dismissal claim and reinstatement (see paragraph 76.28) is not possible/desirable, it must make a basic award, which is a payment based on a calculation relating to the length of service of the employee and his/her wages [note 125] [note 126] [note 127] [note 128].

Additionally, the Tribunal may make a compensatory award to take account of the employee’s immediate lost earnings, future lost earnings, lost fringe benefits, expenses, loss of employment protection and the manner of dismissal (where there has been reputational damage) [note 129] [note 130].

Finally, the Tribunal may also make a compensatory award where an order for reinstatement (see paragraph 76.28) is not (fully) complied with [note 131].


76.30 Wrongful dismissal

A claim for wrongful dismissal is a claim that the person was dismissed in breach of their contract of employment (where, for example, a contractual notice period was not given (see paragraph 76.24) or where an inefficiency procedure was not followed correctly).  Fairness (or otherwise) (see paragraph 76.26) is not at issue – maybe, for example, the employee was inefficient and it was ‘fair’ to dismiss them, but the correct procedure (as provided for in the contract) was not followed.  The remedy for wrongful dismissal is normally financial compensation.  Wrongful dismissal is a concept of common law and claims are brought before the court.

Where the bankrupt is bringing a claim for wrongful dismissal, the guidance in Chapter 31.9, Part 8 should be followed.


76.31 ‘Constructive’ dismissal

An employee is entitled to bring their employment to an end where the employer is in breach of a fundamental term of the employment contract.  Even though it is the employee’s decision to leave the employment, he/she will be considered to have been dismissed for the purposes of unfair dismissal (see paragraph 76.26) and redundancy (see paragraph 76.32) protection [note 132].

The employee is also likely to be able to seek damages for wrongful dismissal (see paragraph 76.30).

Leaving the employment in such circumstances is known as ‘constructive dismissal’.


76.32 Redundancy

A redundancy (for which compensation is payable – see paragraph 76.34) has occurred where a dismissal is wholly or mainly attributable to [note 133] [note 134]:

  • the fact that an employer has ceased or intends to cease, to carry on the business for the purposes for which the employee was employed, or has ceased or intends to cease the business in the place where the employee was engaged, or
  • the requirements for the employee to carry out work of a particular kind, or work of a particular kind in the place where employed, have ceased, diminished or are expected to cease or diminish.

Under legislation, where the employment is terminated by the death, dissolution or insolvency of the employer it is automatically considered to be redundancy [note 135].  Where the official receiver is dealing with the redundancy of employees of an insolvent the guidance in Part 2 should be followed.


76.33 Consultation prior to redundancy

Before declaring a redundancy scheme, the employer must hold a consultation with the employees [note 136] [note 137] or, where the employee has more than 20 employees, with the employees’ representatives [note 138] [note 139].  The consultation must be fair and proper, at a time where there can be meaningful discussions [note 140].  Where the employer has failed to follow this procedure properly, the employees may, following a claim to an employment tribunal [note 141] [note 142] be awarded compensation in the form of a protective award (see paragraph 76.35).


76.34 Redundancy payments

A right to a redundancy payment arises where the employee has been continuously employed for two years or more at the relevant date (which date is essentially the date that the employment is ended) [note 143].

An employee loses a right to a redundancy payment if he/she refuses a reasonable offer of alternative employment from the employer [note 144].

The claim for a redundancy payment must be made within six months of the relevant date [note 145] and the amount of payment is based on the employee’s age, length of service and gross average wage.

Where the bankrupt has a claim for redundancy, the advice in paragraph 31.8.38 should be followed.


76.35 Protective awards

As outlined at paragraph 76.33, a protective award is an award made by an Employment Tribunal to an employee or group of employees where an employer did not properly consult prior to instigating a redundancy scheme.

The Tribunal can order the employer to pay a week’s pay to each employee for the period staring with the first dismissal or the date of the award and ending with a period determined fair by the Tribunal, but not exceeding 90 days pay, and subject to payments already made by the employer to the employee.

[note 146] [note 147] [note148]


76.36 Discrimination

As outlined at paragraph 76.14, it is unlawful to discriminate on a number of grounds, as follows [note 149]:


Where a bankrupt is bringing a claim for discrimination, the guidance in Chapter 31.9, Part 8 should be followed.


[Back to Introduction] [On to Part 2 – Employment Law and insolvency proceedings]