Employment and pensions

UK Employment Law Coffee Break: Fairness of dismissal for racist joke, umbrella companies compliance, and our latest pensions spotlight for HR

Published on 19th Apr 2024

Welcome to our latest Coffee Break in which we look at the latest legal and practical developments impacting UK employers

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Employer's zero-tolerance policy meant dismissal for inappropriate joke shared on intranet was fair

The claimant was dismissed for posting a racist joke on his employer's intranet in breach of the employer's clear policies on equality, diversity and inclusion (EDI). The employer operated a zero-tolerance policy in respect of discriminatory language and specifically stated in its policy that "a person may be harassed even if they were not the intended target. For example, a person may be harassed by overhearing insensitive jokes that they find offensive". The employer had carried out a national campaign across its operations to reinforce its EDI policies.

The claimant brought a claim for unfair dismissal and this was upheld by the tribunal. The tribunal found that the sanction of dismissal was outside the band of reasonable responses so the dismissal was unfair.

The employer appealed on the grounds that the tribunal had not applied the band of reasonable responses approach to the sanction, but had substituted its own view of the appropriate sanction for that of the employer. The claimant's dismissal was therefore fair.

In reaching its decision the Employment Appeal Tribunal (EAT) considered the tribunal's overall factual findings including:

  • the content of the post itself;
  • the employer’s extensive policies and campaign, including the reference to the impact of offensive material on fellow employees and that a first offence could result in dismissal;
  • that the claimant plainly accepted that he was aware of this campaign (indeed, the post was put forward as a contribution to it);
  • the factual findings that the claimant’s attitude of apology and remorse, long service and prior clean record had all been taken into account;
  • what the chair of the disciplinary hearing considered to have been the claimant’s state of mind; and
  • the view that the chair of the disciplinary hearing also formed and took into account as to the impact on the campaign of imposing a lesser sanction than dismissal would be liable to have.

Having considered all of the facts found by the tribunal in the round, "but particularly having regard to the findings as to the contents of the post, where it was posted and the nature and content of the respondent’s policies and campaigns", the EAT concluded that "any tribunal properly applying the law could not have concluded other than that dismissal, however harsh the tribunal might think the decision, was within the band of reasonable responses open to the employer in this case".

This decision highlights the importance of having clear and robust policies in place that explicitly state the consequences of breaching them, including the potential for disciplinary action to be taken up to and including dismissal. The employer here adopted a zero-tolerance approach and this message was clearly conveyed to employees.

This April has seen a number of employment law developments around carer's leave and flexible working. Employers reviewing and updating their policies may wish to take the opportunity to review their policies more generally, including those relating to EDI and the acceptable use of technology and social media, particularly given the introduction of the new duty on employers to take reasonable steps to prevent sexual harassment of employees in the workplace (which is due to come into force this October).  

Tribunals should substitute their own judgment for that of the employer; the key for employers is therefore to ensure that they carry out a full investigation and carefully consider the circumstances of each case and assess whether a dismissal is a reasonable response based on the specific facts. These include the severity of the conduct; the employee's previous disciplinary record; and any mitigating factors which may have affected their judgement (for example, difficulties in their private life, a physical or mental disability, or other circumstances which may impair judgement).   

UK government announcement on tackling non-compliance in the umbrella companies market

The government announced (as one of its annual Tax Administration and Maintenance Day actions), on 18 April, that it will publish its response to the umbrella consultation "in due course". This means that umbrella companies, staffing suppliers, end users and contractors will have to wait to find out what, if anything, the government will do to regulate the umbrella market.

This announcement provides little detail about the likely outcome of the consultation other than to confirm that the government will publish guidance later this year to support workers and businesses that use umbrella companies, including an online pay-checking tool to help umbrella workers to check whether the correct deductions are being made from their pay.

The announcement also hints that its preferred option is to introduce a statutory due diligence regime for businesses that use umbrella companies, but that it needs to work further with the recruitment industry to understand the impacts of this approach and whether it would reduce umbrella non-compliance.

Read more >

Pensions spotlight: Pensions and settlement on termination of employment

Settlement terms agreed with employees when their employment ends often include provisions relating to pension. Pensions are a valuable part of the overall remuneration package. Therefore an employee may wish to ensure that they are at least given value for the employer pension contributions they would have accrued during their notice period. The employee may also ask to divert part of their overall compensation package into the pension scheme to reduce their tax liability. These requests tend to raise queries relating to tax and also the appropriate structure of the settlement agreement.

The first thing to note is that workplace pension schemes tend to fall into two camps: (i) the contract-based defined contribution scheme (such as a group personal pension plan or group SIPP) or (2) the occupational pension scheme, managed by trustees, with benefits which could either be defined benefit (for example based on the employee's final or average salary) or defined contribution. 

The tax treatment of contributions to these schemes is likely to vary and the employer may operate a salary sacrifice scheme which includes pension contributions. It is important to understand the nature of the pension scheme, how contributions are paid and also how the proposed compensation package breaks down into its component parts to help structure the settlement agreement.

Generally speaking, contractual pay in lieu of notice, pay in lieu of accrued untaken holiday and any payments which fall within the description of Post-Employment Notice Pay (as defined in legislation) (PENP) should be paid through payroll subject to the usual deductions for tax and national insurance. 

The PENP rules typically apply where the employee is given no or short notice or where any contractual payment in lieu of notice does not cover the employee's full entitlement to notice from the employer. 

The PENP calculation focuses on ensuring that the basic pay the employee would have earned had they worked their full notice entitlement is taxed as wages. If salary sacrifice is operated, basic pay for PENP purposes is the pre-sacrifice basic pay. If the PENP figure is higher than the pay in lieu of notice paid through payroll on termination, HMRC will look to tax another part of the settlement package to make up the difference. This would bring into scrutiny any additional "ex gratia" or compensation offered under the settlement terms.

If the employee's termination is on redundancy grounds, statutory redundancy pay can be paid tax free in all cases. Any additional ex gratia or other compensation payment can only be paid tax free to the extent it is not taxable as PENP and provided that the total tax free amount (including statutory redundancy pay) does not exceed £30,000. 

If the compensation offered exceeds £30,000, the employer might be prepared to pay the excess into the pension scheme free of tax as an employer contribution, rather than pay it to the employee after deducting tax. Advice will be needed on documenting this and a review of the pension scheme rules may also be required to see whether increased benefits can be provided and on what conditions.

Employers should also take care to ensure that employees are responsible for their own tax advice and for any tax liability arising from the pension contributions provided for by the settlement agreement, for example, where such contributions exceed the employee's available annual allowance.

If you require further advice, please contact our Claire Rankin, partner in our Pensions team.


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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