Appeal No.	 EAT/839/95

EMPLOYMENT APPEAL TRIBUNAL
58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS

	At the Tribunal
	On 13 May 1997

Before
HIS HONOUR JUDGE D M LEVY QC
MRS D M PALMER
MR N D WILLIS

THE LONDON BOROUGH OF SOUTHWARK	APPELLANTS

MR A BAKER	RESPONDENT

Transcript of Proceedings

JUDGMENT

Revised

	APPEARANCES

For the Appellants	MR B UDUJE
(of Counsel)
The Solicitor
London Borough of Southwark
Southwark Town Hall
Peckham Road
London
SE5 8UB	
For the Respondent	MR M FORD
(of Counsel)
Ms M Sedgwick
UNISON
1 Mabledon Place
London
WC1H 9AJ	

	JUDGE D M LEVY QC:     We have in our list today an appeal and a cross-appeal from a decision of a Chairman sitting alone at London (North) on 6 October 1994, which was sent to the parties many months later, on 8 June 1995.  Apparently the reason for the delay was because the learned Chairman had difficulties in resolving the legal issues which had been raised before him, most of which have not been so far in issue in the submissions made before us today.  It will be convenient immediately to set out the factual background to the decision as necessary for the appeal and cross-appeal.

	In May 1972, Mr Anthony Baker, the Applicant below, the Respondent here (“Mr Baker”) commenced his employment with the London Borough of Southwark (“the Council”).  He was a plant engineer.

	In 1991 the Council decided to reorganise the department in which Mr Baker was working and to re-negotiate the contract of employment which they had with Mr Baker and many of his fellow employees.  Mr Baker was to be given a new post as “plant inspector”.  The Council talked of the changes to the contract in terms of buying out the earlier contracts of employment.  One aspect of the buy out was to give a lump sum to employees in consideration of them giving up sums payable to some of them if they were called out at night.  These were known as “stand by payments”.

	In the negotiations before the contracts were surrendered and re-granted, an official of the Council wrote to Mr Baker a letter dated 24 January 1991 under the heading “Buy-Out” which includes two paragraphs:

“Set out below is a breakdown of contractual earnings/emoluments for your present post and your new post of Plant / [the word ‘Heating’ is crossed out] Inspector Sc6 in the Client Services Division.
The Council’s current policy is to make a lump sum payment to compensate [our emphasis] for the difference in earnings/emoluments for a two year period.
I have also added some explanatory notes to help you understand the basis on which the calculations have been made.”

	On the next sheet the contractual basis of the calculations are set out and, so far as Mr Baker is concerned, under “Stand-by payments” there is a dash.

	In September 1991, when we understand that the old contract had been surrendered and the new contract had started to come into operation, an officer of the Council, a Ms Claire Hughes, wrote further to Mr Baker, a letter which included these paragraphs:

“1)  Standby payments will now be paid monthly on the rate of £22.00 per month, starting in October.
3)  The buy-out paid to you in February was incorrectly calculated.  As discussed you are therefore owed £977.00 - buy-out adjustment; this will also paid in your October salary.”

	In 1993 the Council informed Mr Baker that he was incapable of discharging his duties by reason of permanent ill-health and they offered payment to him in lieu of notice or accepting a notice period of 12 weeks.  In the context of their offer they said this:

“Your attention is drawn to the fact that your holiday pay in lieu of holiday not taken this leave year and your pay in lieu of notice are to be offset against overpayments:-
(a)  £977.00 (Buy out of standby September 1991 - incorrect payment)
(b)  £242.99 (Overpayment of standby allowance - incorrect rate)”

	There is no dispute as to the Council’s entitlement to recoup the £242.99.  There has been a dispute as to whether the Council was entitled to recoup the £977.00.  On 20 December 1993, Mr Baker accepted the first option; that is payment in lieu of notice offered to him by the Council.  On 31 December 1993 saw his last day of service.  On 16 March 1994 he made an Originating Application to an Industrial Tribunal in which his case was stated:

“On termination of my employment, due to medical retirement, my employer deducted the sum of £977 from my wages without authorisation from me.
This sum (£977) was paid to me in September 1991 as a ‘buy out’ of conditions of employment.
I consider that Southwark Council are in breach of Section 1 of the Wages Act 1986.”

	The employers Notice of Appeal, inter alia, said this:

“The Council disputes that it has acted in breach of Section 1 of The Wages Act 1986 in deducting £977.00 from a salary payment made to Mr. A. Baker, Plant Inspector.
Section 1[5][a] of this Act permits the deduction of money from an employee’s wages where the deduction is a reimbursement in respect of overpayment of wages.
It is contended that this was a lawful deduction of an overpayment for which the Council was entitled to be reimbursed.  Deduction was based on the principle of restitution, that is the recovery is legitimate given that the payment of £977 would not have been made had the true facts come to light at the time.
About April/March 1991 Mr Baker received a ‘buy-out’ payment of about £17,000 from the Council resulting from the reorganisation of the Heating Section.  On the 24th February 1991 Mr Baker was assimilated into a new post of Plant Inspector in place of his post of resident Plant Engineer.  Unlike the previous post the new one did not attract conditioned overtime and service accommodation emoluments.  Under the Council’s buy-out scheme the difference between the salary/emoluments of the two posts was calculated and a compensation payment made for the loss incurred projected over a two year period.”

	It then deals with the letters which we have read and said there was a misleading of the Council into believing there was an outstanding entitlement of £977 by Mr Baker.

	Those were the issues joined between the parties before the Industrial Tribunal.  The Chairman held that the payment of £977 was wages and from that holding Mr Baker has appealed by way of cross-appeal.  The Chairman further held that the payment in lieu of notice was not wages for the purposes of Section 7 of the 1986 Act, but the holiday pay was.  From that decision there is no appeal.  

	The Chairman held, as a consequence of his first two holdings, that the £977 would need to be apportioned between the payment in lieu and holiday pay, which he left it to the parties to agree; that is found in paragraph 8 of his judgment.  He also held that under Section 1(5)(a) of the Act, following the decision in Home Office v Ayres [1992] IRLR 59, the Industrial Tribunal had jurisdiction to consider whether the deductions could lawfully be made at common law, which on the facts he held that they could not.  Hence the appeal of the Council.  

	It would be convenient, as we have said, first to deal with the cross-appeal.  We turn to the Extended Reasons on this issue.  Having found that the £977 was paid by mistake, for which Mr Baker was in no way responsible, the Extended Reasons read as follows in paragraphs 6 and 7:

“6  I also find from the evidence of Mr Taylor that the payment of this £977 was a mistake and that Miss Hughes was in error when she told the meeting that the buy out had been under-calculated by £977.
7  Before passing to the authorities it is now necessary to consider the nature of these payments because in order for there to be a deduction over which the Industrial Tribunals have jurisdiction under the provisions of the Wages Act it is necessary that that deduction must be from wages.  [and all the references are to the Wages Act 1986 and we will, although this Act has been replaced by a later Act, only refer to the earlier Act].  Section 1(5) upon which the Respondents [the Council] rely shows that the deduction can only be made under paragraph (a) of that subsection in respect of over payments of wages and over payments of expenses [that is not challenged].  I deal with the second point first.  I am quite satisfied that this £977 was an over-payment of wages [this is the finding which Mr Ford on behalf of Mr Baker challenges.  The reasoning for this then follows].  The employees wages were paid on a very complicated structure as can be seen from the figures shown at page 17 of the Respondents bundle and consisted of a large number of subsidies, enhancements and various other matters.  The £977 was expressed according to Miss Hughes letter and the accompanying document ... to be in respect of a stand-by allowance given as a blank figure ... .  The definition of wages in section 7(1) of the Wages Act of 1986 means any sums payable to the worker by his employer in connection with [emphasis added] his employment including a large number of matters mentioned in paragraphs (a) to (f) of that subsection.  I find that this stand-by allowance if it is not any other emolument reparable to Mr Baker’s employment under the definition in paragraph (a) of section 7(1) is covered by the words in section 7(1) ‘any sums payable to the worker by his employer in connection [emphasis added] with his employment’ in that if the Applicant had not been employed by the Respondents he would not have received this money and that he received it as part of the salary and emoluments paid to him by the Respondents.  The fact that he was not entitled to it is to my mind immaterial.  Had he been entitled to it, it would have fallen under the definition of wages.  Consequently I am satisfied that the £977 is wages.  The fact that he was not entitled to a stand-by allowance appears to me to be immaterial.  Had he been entitled to it, it would have been paid as wages.”

	Before referring to the submissions made by Mr Ford, it will be convenient to set out the provisions of the appropriate sections of the Wages Act 1986.  Section 1(1) provides:

“(1)  An employer shall not make any deductions from any wages of any worker employed by him unless the deduction satisfies one of the following conditions, namely -
(a)  it is required or authorised to be made by virtue of any statutory provision or any relevant provision of the worker’s contract; or 
(b) the worker has previously signified in writing his agreement or consent to the making of it.”

	Section 1(5) provides:

“Nothing in this section applies -
(a)  to any deduction from a worker’s wages made by his employer, or any payment received from a worker by his employer, where the purpose of the deduction or payment is the reimbursement of the employer in respect of -
(i)...any overpayment of wages, or
(ii)  any overpayment in respect of expenses incurred by the worker in carrying out his employment,
made (for any reason) by the employer to the worker.”

	“Wages” is defined in Section 7(1)(a) of the Act as:

“(a)  any fee, bonus, commission, holiday pay or other emolument referable to his employment, whether payable under his contract or otherwise.”

	“Employment” is defined in Section 8(1) of the Act as:

“ ‘Employment’, in relation to a worker, means employment under his contract 
and ‘employed’ , in relation to a worker, accordingly means employed under his contract.”

	Mr Ford has submitted to us that the Chairman failed to distinguish the payment of £977 from the previous stand-by allowance payable to engineers employed like Mr Baker. He submitted that the payment of £977 was a one-off buy-out payment of the previous entitlement to stand-by allowances under the then employment of the employees as heating engineers.  Mr Ford has submitted it was not equivalent to the stand-by allowance.  In particular, it was not referable to work done by the employee.  Mr Ford submitted that, by virtue of Section 8(1) of the Act, sums payable to the worker in connection with his employment under Section 7(1 ) referred to payments made in connection with the worker’s contract of employment.  He submitted that it followed that payments must be made under a subsisting contract and properly construed wages in Section 7 are “payments made in respect of the rendering of services during the employment”.  To support his submissions, he referred us to the speech of Lord Browne-Wilkinson in Delaney v Staples [1992] ICR 483, to which all of the other members of the House agreed.  He referred us in particular to the passage at page 488 D where Lord Browne-Wilkinson said, and this was a passage on which Mr Uduje, on behalf of the Counsel, also relied.  

“Before turning to the Act of 1986, I must say a word about the nature of wages and payments in lieu of notice.  The proper answer to this case turns on the special definition of ‘wages’ in section 7 of the Act.  But it is important to approach such definition bearing in mind the normal meaning of that word.  I agree with the Court of Appeal that the essential characteristics of wages is that they are for consideration for work done or to be done under a contract of employment.  If a payment is not referable to an obligation on the employee under a subsisting contract of employment to render his services it does not in my judgment fall within the ordinary meaning of the word ‘wages’.  It follows that if an employer terminates the employment (whether lawfully or not) any payment in respect of the period after the dates of such termination is not a payment of wages (in the ordinary meaning of that word) since the employee is not under obligation to render services during that period.”

	And he then deals with a payment in lieu of notice.

	At page 493 H, Lord Browne-Wilkinson says this:

“For these reasons, I am forced to the conclusion that payments in lieu of the fourth category” 

	Earlier in his speech, (at 489 C) that category of payment was described as:

“Without the agreement of the employee, the employer summarily dismisses the employee and tenders a payment in lieu of proper notice.”

	Lord Browne-Wilkinson continues at page 493 H:

“Where then is the dividing line to be drawn? [that is:  what is and what is not ‘wages’].  In my judgment one is thrown back to the basic concept of wages as being payments in respect of the rendering of services during the employment, so as to exclude all payments in respect of the termination of the contract save to the extent that such latter payments are expressly included in the definition in section 7(1).”

	Mr Ford submitted that the learned Chairman in the decision stated the test of wages as “Had Mr Baker not been employed by the Council, he would not have received this money”.  Those words appear in paragraph 7.  Mr Ford submitted that that is not the correct test.  It would, for example, apply to payments in lieu of notice which, as Lord Browne-Wilkinson has shown, do not fall within the Act.

	Mr Ford further submitted that properly analysed the reorganisation in April / May 1991 amounted to the termination of one contract of employment plant engineer and the substitution of another contract of employment heating engineer.  Hence the payment of £977 was made in connection with the termination of that first contract and was not made in respect of rendering services under either of Mr Baker’s contracts of employment.  Mr Baker was not paid this sum for work he did, nor was Mr Baker under any obligation to do any extra work as a result of the payment.  Rather, the payment was made like a payment in lieu of notice in connection with the termination of one category of employment as explained in Delaney v Staples.  

	Mr Uduje submitted that this point was not argued below but, having regard to the Originating Application and to the employee’s answers and the finding in the Decision, we are satisfied it almost certainly was.  If it was not, it certainly should have been; in any event it is a point of law which the Chairman considered and on which he came to a conclusion.  Mr Uduje adopted the reasoning of the Chairman.  He relied on the passage at page 488 D of the speech of Lord Browne-Wilkinson which we have already read.  He submitted that the payment made was for wages.  In our judgment, his submissions were no answer to those of Mr Ford.  Just as payments in lieu of notice are not wages for the reasons given in Delaney, neither are sums paid as consideration for the buy-out of a contract, as we are satisfied this payment was.  Paradoxically, Mr Baker’s case is stronger because he had no entitlement to the sum which was paid, as all parties agreed.

	In our judgment, the finding of the learned Chairman that £977 was an overpayment of wages was wrong in law.  In accordance with our powers under the Industrial Tribunals Act 1996, section 35, we substitute the finding that it was not an overpayment of wages for that which was made by the learned Chairman.  This disposes of the cross-appeal.

	It is common ground that the termination payments made to Mr Baker consisted of payments in lieu of notice and holiday pay.  The learned Chairman’s decision that the first was not wages for the purposes of the Act, but that the second was, is not appealed against.  The learned Chairman directed that on his findings the £977 payment should be apportioned and left it to the parties to agree the apportionment.  In our judgment, albeit on a different basis, an apportionment still requires to be made and we have asked the parties to see if figures can be agreed.  

	Having regard to the parts of the Notice of Appeal which have been abandoned, we are not clear whether Mr Uduje now submits that the Industrial Tribunal has no power to make the apportionment if the parties cannot agree to the figure, nor we yet know whether the parties have agreed an apportionment.  We will therefore pause at this stage to hear further submissions, if such are to be made.

_________________________

	£400 is the sum which the parties have agreed on an apportionment subject to the determination of the question on which we have ruled in this appeal.  We refuse leave to appeal.