Legality of employer decisions

29 / 09 / 2017

In this article Employment Partner Blair Adams and Pensions Partner Clive Weber jointly comment on the important Court of Appeal decision in IBM v Dalgleish on 3 August 2017 (IBM Decision)

Overview

In the IBM Decision the tests for employers making valid decisions under employment and pensions law are reviewed by the Appeal Court. In employment law the employer must not breach its duty of “trust and confidence” and in pensions law the employer has a “duty of good faith” not to destroy or seriously damage the relationship of trust and confidence. Both of these duties were put under the microscope in the IBM Decision.

IBM in the High Court

The IBM pension scheme members were employees or former employees of IBM UK which was therefore subject to the contractual duty of trust and confidence. In contrast, the key powers under the IBM pension scheme trust deed and rules were held by IBM Holdings which, although not an employer of the scheme members, was nonetheless subject to the pensions’ duty of good faith.

The High Court decided  IBM’s pension rearrangements were invalid and in breach of the duties of trust and confidence and the duty of good faith: IBM had led its employees to expect there would not be further pension changes and could not go back on this unless it could show it was “necessary” to do so. As this had not been demonstrated, the pension rearrangements were legally invalid.

(See our previous articles for more detail on the questions asked of the High Court:

Court of Appeal’s different approach

The Court of Appeal stuffed the genie back in its bottle: the High Court’s novel approach ran the risk of the Court substituting its own decision on the facts in place of the employer as the primary decision maker. Instead, the Court of Appeal said IBM needed only to show its decision was rational and this test was satisfied.  In legal terms, the test was based on the principles in the Wednesbury case (please see Blair Adams’ comments below under “Consequences for employment law”).

Bradbury v BBC (Bradbury)

The Appeal Court’s decision in Bradbury was given a few days before the Court’s IBM Decision and also involved the Court considering the employer’s duty of good faith.

The Appeal Court upheld the High Court’s decision that the BBC’s cap on pensionable pay – pay increase of only up to 1% being pensionable – was valid and did not breach the duty of good faith. This was especially the case bearing in mind the care the BBC took over the changes and the compelling financial need.  The Court of Appeal emphasised the High Court’s decision on good faith could not be faulted.

To conclude from the pensions perspective, what an employer can and cannot do to manage its pension scheme liabilities is now much clearer. The high hurdle erected by the High Court’s decision in IBM has been dismantled by the Court of Appeal. This more certain legal framework should help employers and trustees work together.

Consequences for employment law

In the IBM Decision, the Court of Appeal also placed the Wednesbury rationality test firmly in the mainstream of employment law by holding that it is the test to be applied when determining whether trust and confidence has been breached in the context of decision-making by employers.

So, if an employee wants to show that an employer’s decision is a breach of trust and confidence, they will have to show that:

  • the employer did not consider all the relevant factors, or considered irrelevant factors; and
  • no reasonable employer would have made that decision.

The rationality test was first applied to an employment situation in the 2015 Supreme Court case of Braganza v BP. Mr Braganza, a crew member on a BP ship, was lost at sea in unexplained circumstances and it fell to BP to exercise its discretion about whether or not to pay out under a life insurance arrangement. BP concluded that Mr Braganza had committed suicide, which disqualified his family from benefiting under the life insurance. However, the Supreme Court held that, when judged by the Wednesbury rationality test, BP’s decision failed both parts of the test.

The first part of the Wednesbury rationality test is all about the factors that went into the decision, and therefore:

  • employees who want to challenge a decision will seek an explanation of the factors that were or were not taken into account; and
  • employers who keep records of how and why they made a decision will normally be in a better position to demonstrate compliance.

However, the second part of the test favours employers: a decision cannot be challenged if the employer can show that it acted within a reasonable range. In contrast, previous case law in this area (e.g. decisions about bonuses) required the employee to show that the employer had acted “arbitrarily” or “capriciously“: arguably this was a lower threshold for employees than having to show that “no reasonable employer” would have made the decision.

Overall conclusion

IBM is essentially about the employer’s exercise of its powers under a discretion it holds, either under the contract of employment or under the pension scheme rules. Other more graphic cases (such as where one employee is given a pay rise but others are not) may still be tested according to whether the employer’s decision is arbitrary or capricious.

For further information please contact Blair Adams at badams@wedlakebell.com or Clive Weber at cweber@wedlakebell.com