A limited number of cases have been decided by the House of Lords, Court of Appeal and the EAT concerning the applicability of the common law concept of ‘frustration’ in the context of the contract of employment. Each of these cases considered the operation of frustration on the employment contract in the context of the employee’s illness (e.g. see GF Sharp & Co. Ltd. v McMillan  IRLR 632), their imprisonment (e.g. see Shepherd & Co. Ltd. v Jerrom  ICR 802 (CA)), their military conscription of the employee (e.g. see Morgan v Manser  1 KB 184), the impact of a change in legislation (e.g. see Tarnesby v Kensington Chelsea and Westminster Area Health Authority  ICR 615 (HL)), or the employer’s premises becoming uninhabitable (e.g. see Browning v Crumlin Valley Collieries Ltd.  1 KB 522). Unsurprisingly, given the relative youthfulness of the doctrine (which was developed during the Victorian period), none of the cases have addressed the effect of a global pandemic on the contract of employment.
The onset of the Covid-19 pandemic resulted in the introduction of the Coronavirus Job Retention Scheme (‘CJRS’) enabling employers to furlough their staff, which is embodied in the Treasury Direction to HMRC (‘Treasury Direction’). The updated version published on 25th of June 2020 is available here and the latest relevant guidance here, which amends the original version published on 15 April 2020, available here. The furlough of employees represents a timely and opportune juncture to consider afresh the topic of the frustration of the contract of employment. And not least for the reason that the operation of frustration has an exclusionary effect on employment rights: more later on this point. As such, in this blog post, we focus on the interaction between furlough and the contract of employment, the common law doctrine of frustration and the statutory concept of unfair dismissal. For the sake of simplicity and in line with our previous post on the UK labour law blog, we assume that both employees and (some) ‘limb (b) workers’ (articulated in s.230(3)(b) of the Employment Rights Act 1996 (hereafter ‘ERA’)) will be eligible for furlough under the CJRS regime.
Relevance of Frustration in the Context of Furlough?
As noted by Bogg and Ford on the UK Labour Law blog, whether the onset of the ‘lockdown’ of the UK on 23 March 2020 (owing to the Covid-19 pandemic) could operate to terminate a contract of employment under the common law doctrine of frustration is currently ‘… open to doubt, on the present state of the law…’. No British cases have considered whether a lockdown declared for public health reasons qualifies as a frustrating event and the overseas judgments that have done so offer scant clarity (see Montgomery v Board of Education 131 NE 497 (1921) Supreme Court of Ohio, US and Wing v Xiong DCCJ 3832/2003 Hong Kong District Court). Bogg and Ford go on to say that ‘… it would be unwise to discount this argument being revived in such exceptional circumstances.’ On the back of the first wave of Covid-19 in March to July 2020, we can anticipate a surge in legal disputes surrounding the effect of lockdown and furlough on the contracts of employment of a considerable number of employees and limb (b) workers. Indeed, recently published statistics provide some evidence that post-pandemic disputes are flooding the HM Courts and Tribunal Service and employment tribunals as well as hindering their ability to resolve the already overflowing backlog of cases (see here and here).
What is of considerable interest is the legal position of employees and limb (b) workers whose employers contend that their contracts were terminated by frustration when the lockdown was announced by the UK Government on 23 March 2020, which was required by the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (SI 2020/350) (as amended) (what we will call ‘scenario 1 – purported lockdown frustration’). Furthermore, what cannot be rejected out of hand is the possibility that the employer may claim that the contracts of their employees and limb (b) workers have been frustrated if it subsequently transpires (contrary to the original understandings of the parties) that their purported ‘furlough’ under the CJRS was defective (scenario 2 – ‘purported defective furlough frustration’). This would apply where the parties have entered into a furlough agreement post-lockdown and the employer pays all or 80% of the wages of the ‘furloughed’ employees, but HMRC subsequently rejects the employer’s claim for reimbursement on the basis that the employees or limb (b) workers do not qualify for furlough under one of the various eligibility requirements in the Treasury Direction, e.g. HMRC discovers that the employees or limb (b) workers were not on the employer’s PAYE payroll on or before 19 March 2020, in breach of the requirements of paragraph 5(a) of the original Treasury Direction (we leave to one side the much more complex set of circumstances in which HMRC initially accepts the furlough claim and reimburses the employer in respect of 80% of the wages of the furloughed employees, but subsequently seeks to claw back those sums paid out to the employer for the reason that they have discovered that the relevant employees were in fact ineligible for furlough under the Treasury Direction, or where one of its provisions was subsequently breached). In such a case, the employer may nevertheless seek to claim ex post facto that the employment contract or limb (b) worker contract was in reality frustrated at the date of lockdown or purported furlough (or possibly, the date of HMRC’s rejection of the furlough claim).
In both scenarios 1 and 2, the employee or limb (b) worker may react in a number of possible ways. However, what might appear to be the most appealing option is not the focus of this blog post, i.e. where the employee or limb (b) worker contests the employer’s frustration argument, claims that the contract remains on foot, stays in his/her position in employment (and does not resign) and simultaneously presents a complaint to the employment tribunal for an unlawful deduction from wages claim (Part II of the ERA) in respect of his/her unpaid wages post-‘frustration’. It is argued that an employee or limb (b) worker is unlikely to adopt this course of action and instead, will prefer to resign and claim unfair or wrongful dismissal in response to the employer’s frustration claim. There are a number of reasons for this: first, at the point at which scenarios 1 and 2 are reached, most employees and limb (b) workers will conclude that the working relationship has irretrievably broken down and that they are best ‘out of it’; secondly, if they persist with the option of ‘standing and suing’ for too long, they will eventually be deemed to have affirmed any repudiatory breach of contract on the part of the employer in claiming frustration and ceasing the payment of wages, upon which they may subsequently seek to rely (e.g. in any potential future constructive unfair dismissal or wrongful dismissal claim). Finally, in light of the data (see research by Adams-Prassl et al and the joint Runnymede Trust/ICM report ‘Over-exposed and Under-protected at figure 3, page 7), which demonstrates that disproportionate numbers of ‘furloughed’ employees and limb (b) workers are female, of a BAME background, low-paid and precarious workers, it is quite a risky strategy to ‘stand and sue’, and as such, resigning (notwithstanding the likely crammed labour market) may be the least bad option.
In light of the above, if the employer intimates to the employee or limb (b) worker that their contract has been frustrated from a particular date in scenarios 1 or 2, and the employee has at least two years’ continuity of employment with the employer (albeit not required if section 108(3)(aa)-(r) of the ERA applies or if the legislative provisions regarding automatic unfair dismissals operate), he/she is more likely to resign and challenge the frustration claim in the employment tribunal by presenting a complaint of unfair dismissal. Individuals precluded from exercising the statutory right to claim unfair dismissal under sections 94(1) or 108(1) of the ERA – including a limb (b) worker, or employee with less than two years’ continuous service – can only attempt to challenge frustration by claiming a common law right to wrongful dismissal. In both those circumstances, the key question for the employment tribunals and courts will be: was the contract terminated automatically by frustration, or was the contract terminated unilaterally by the employer through a lawful/unlawful dismissal?
Why Might the Employer Claim Frustration of Contract?
Playing the frustration card provides the employer with an exit route from the contract of employment worthy of the great escapologist Harry Houdini. This makes it an enticing prospect for an employer. There are a whole host of reasons for this proposition. For example, if the employment contract is frustrated, then – subject to the potential for the employee to recover a sum from the employer under section 1(3) of the Law Reform (Frustrated Contracts) Act 1943 (“LRA”), corresponding to any ‘valuable benefits’ it has conferred on the employer – the employer is no longer bound to pay wages from the date of the frustrating event or provide work to the employee, since the contract is terminated from that point forward. In addition, neither party is entitled to damages for any post-frustration non-performance. Of greater significance is the effect of frustration on the employee’s statutory and common law rights. Since the contract is automatically terminated, the employee is deprived of the opportunity to claim that she has been wrongfully dismissed at common law or unfairly dismissed under Part X of the ERA. As a consequence of the latter, the employer will be relieved of all obligations to adhere to any procedures (whether contractually incorporated or based on the ACAS Code of Practice on Disciplinary and Grievance Procedures) prior to the termination of the employment or engagement of the employee or limb (b) worker. And to add insult to injury, the statutory right to a minimum period of notice of termination under section 86 of the ERA is inoperative, meaning that the employer has no duty to make a payment in lieu of such notice. The justification for this proposition of law is that the employee is only entitled to receive statutory notice or payment in lieu where the termination is a unilateral act by the employer. However, frustration is a ‘non-lateral’ form of termination and as such, the statutory notice provisions contained within section 86 do not ‘bite’ (see GF Sharp & Co. Ltd. v McMillan  IRLR 632, 634 per Lord Johnson). The legal position is likely to be identical in the case of contractual rights to enhanced notice periods (or payments in lieu thereof), since the vast majority of notice clauses in employment contracts are drafted and prepared by employers and provide that they are engaged only where it is the employer or employee who is unilaterally terminating the contract. Further, the invocation of frustration removes an employer’s duty to make redundancy payments under Part XI of the ERA, as well as the collective consultation duties that accompany mass redundancies in terms of Chapter II of Part IV of the Trade Union and Labour Relations (Consolidation) Act 1992 (“1992 Act”). Finally, in theory, in a scenario 2 purported defective furlough frustration, it would be open to an employer to raise court proceedings to recover any post-lockdown wages paid out to employees and limb (b) workers prior to the date of HMRC’s rejection of the furlough claim. This would be an unjust enrichment claim, or a claim for the recovery of sums paid to the employee prior to the frustration of the contract under section 1(2) of the LRA. Admittedly, such claims for recovery would be subject to a legion of conceptual, statutory (see the terms of section 1(2) and (3) of the LRA) and policy-related hurdles. Nonetheless, the possibility of a successful claim should not be dismissed too readily.
Although such consequences may motivate employers to claim frustration, most employers would usually be well-advised to exercise some caution before plunging in. Only brazen employers undeterred by a public backlash will attempt to escape liability by presenting a frustration case in court or the tribunal. However, in the event the employer becomes insolvent, the morality, or effect on public relations, of raising such an action will be irrelevant. It may be necessary to rely on frustration as a legal claim in order for an administrator, liquidator or receiver to discharge the legal duties owed towards the company’s (or other insolvent entity’s) general body of creditors and also to present a claim in unjust enrichment or under s. 1(2) of the LRA in order to attempt to recover any wages paid unjustifiably in the case of scenario 2. While fears of criticism may outweigh an employer’s motivations, such fears are unlikely to discourage insolvency practitioners who will have powerful economic incentives compelling them to rely on frustration. Indeed, it has been predicted that ‘coronavirus’s economic danger is exponentially greater than its health risks to the public.’ Since one in ten British businesses predict that they face a ‘high risk’ of becoming insolvent due to the Covid-19 crisis, we may well find that court proceedings are instituted by insolvency practitioners relying on the frustration doctrine, or as a means of defending a complaint presented by an employee in an employment tribunal.
The Criteria for Frustration
The essence of frustration is that without any fault on the part of the employee or employer, their respective contractual obligations have become incapable of being performed owing to a change of circumstances and to the effect that if performance was tendered, it would be radically different from that which had been contracted for. If we consider the detailed doctrinal requirements imposed by the common law of frustration, it is abundantly clear that each of the following criteria must be satisfied based on the leading decisions of the House of Lords in Davis Contractors Ltd. v Fareham UDC  AC 696 and the Court of Appeal in Lauritzen v Wijsmuller BV  1 Lloyd’s Rep 1. First, there must be an outside or extraneous change of situation, which can be classed as the supervening (frustrating) event. Secondly, the supervening event must take place after the formation of the employment contract and be unforeseen by that contract. Thirdly, and crucially, the supervening event must be so fundamental that it is regarded by the law as striking at the root of the contact; making contractual performance impossible, illegal, radically different, or entirely beyond that which was originally intended. Finally, the frustrating event and its effect on contractual performance must not be attributable to the fault or default of either of the contracting parties.
On the whole, although the Government lockdown on the back of the pandemic might be seen as a ‘textbook’ event that is likely to satisfy each of the above criteria, and also ‘pure’ insofar as it is not tainted by fault on the part of either of the parties (see M. Freedland, The Personal Employment Contract 445), we should not dismiss the possibility that the doctrine of frustration may be ruled inapplicable in a Covid-19 pandemic case on the basis of these criteria. For example, take the hospitality industry and the situation where the employer could have continued to retain staff to operate a takeaway business, but either failed to do so, or only retained some staff. Likewise, the case of the employer who claims frustration in the case of scenario 1 (lockdown frustration), but where the evidence demonstrates that it failed to furlough certain employees or limb (b) workers who would have been eligible under the CJRS and Treasury Direction. In such cases, there would be an element of fault inherent in the conduct of the employer, which may detract from the frustration argument (see Villella v MFI Furniture Centres Ltd  IRLR 468 (QBD)). Moreover, in Lauritzen v Wijsmuller BV  1 Lloyd’s Rep 1, Lord Justice Bingham reiterated the point that the doctrine should not be readily invoked and instead narrowly applied and confined, given its extreme effects: ‘[it] kill[s] the contract and discharges the parties from further liability under it…’ ( 1 Lloyd’s Rep 1, 15). Nevertheless, at first blush the criteria for frustration could theoretically be satisfied in some cases due to the circumstances of the COVID-19 global pandemic.
The Frustration Claim
Any analysis of the prospects of success of an employer’s frustration claim is influenced by two distinct factors. First, the law governing frustration in the case of the contract of employment is under-developed. Secondly, as noted above, it is a challenge to identify applicable principles that can be transposed to the unique circumstances of the Covid-19 pandemic, since the latter is a situation far removed from the facts of the case law from and within which the existing jurisprudence has been developed. For example, circumstances such as imprisonment and unsafe premises of the employer are coloured by some degree of ‘fault’ on the part of one of the parties, which calls into question their relevance, owing to the fact that frustration is categorically a no-fault doctrine.
The only cases with facts somewhat analogous to the Covid-19 pandemic situation concern the illness or incapacity of employees. In such cases, the jurisprudence prescribes that performance of the employment contract is suspended for a limited period and not rendered impossible indefinitely. The eleven interrelated and cumulative – but not exhaustive – factors to be considered in cases of illness (as summarised in Williams v Watsons Luxury Coaches  ICR 536, 542 per Wood J) will provide assistance to courts and tribunals in judging whether frustration operates. Of those eleven criteria, in the circumstances of the pandemic, the most influential are likely to be the following. First, the duration of employment to date and the expected length of continuous employment in the absence of the supervening event. For example, a long standing relationship is treated as not so easily destroyed as one which has but a short history, or is inherently temporary (see Marshall v Harland and Wolff Ltd  ICR 101, 105 per Sir John Donaldson P). The effect of the disabling event on the prospect of the employee returning to work is another important factor (see Collins v Secretary of State for Trade and Industry UKEAT/1460/99, 31 January 2001 atparas 5, 15 and 17 per Judge D Pugsley). A third factor is the nature of the employee’s work (see Maxwell v Walter Howard Designs Ltd  IRLR 77). The acts and statements of employers in relation to the employment will also be relevant (see Egg Stores (Stamford Hill) Ltd v Leibovici  ICR 260, 264-265 per Phillips J); with the caveat evidenced by GF Sharp and Co Ltd v McMillan  IRLR 632 at para 20per LordJohnston that the actions, intentions, and opinions of the parties (keeping the employee ‘on the books’ in this case) cannot keep the contract alive. An additional factor is how long a reasonable employer could be expected to wait before terminating the employment contract. In answering this question, the judiciary have taken into account the ‘catastrophic’ effect of frustration on an employee’s prospects of finding future work (Gryf-Lowczowski v Hinchingbrooke Healthcare NHS Trust  EWHC 2407 (QB) at para 50 per Gray J). Although it is impossible to systematise the application of a doctrine that is fact-dependent, these factors are nonetheless indicative of the success of a frustration claim.
However, since giving effect to justice and reaching a fair and reasonable result is an inherent justification for, and key criterion of, the frustration doctrine (Lauritzen v Wijsmuller BV  1 Lloyd’s Rep 1, 14), by far of greatest significance are the pressing policy considerations evident from these cases that will render the tribunals and courts reluctant to uphold a finding of frustration in the vast majority of situations where scenarios 1 and 2 apply. First, they will be keen not to act as the handmaiden for employers to ‘sidestep’ their unfair dismissal obligations where, ‘in substance and reality’, it is the employer that brings the contract to an end, not frustration (see M. Freedland, The Personal Employment Contract 444 and 449, Marshall v Harland and Wolff Ltd  ICR 101, 104 and 109 per Sir John Donaldson P, Harman v Flexible Lamps  IRLR 418, 419 per Bristow J, Converform (Darwen) Ltd v Bell  IRLR 195 and Williams v Watsons Luxury Coaches Ltd  IRLR 164 at para 20 per Wood J). An additional policy factor is the judicial recognition that the doctrine of frustration is not to be lightly invoked and also that it ought to be kept within limited bounds, lest industrial relations become tainted (see Williams v Watsons Luxury Coaches Ltd.  IRLR 164 at para 25 per Wood J). Thirdly, giving employers an artificial escape route from their dismissal obligations would further tilt the imbalance of power in the employment relationship in favour of the employer. This would be counterintuitive since statutory unfair dismissal protection laws have operated to adjust the bargaining strength of employees and to shift the judiciary away from their historic insistence on protecting the economic interests of employers.
Against the backdrop of the highly protective statutory regime of the unfair dismissal jurisdiction, it appears scant space is left for frustration to operate. However, although tribunals may consider these policy issues and sympathise with an employee’s undesirable position, they may nevertheless uphold the frustration argument (e.g. see Collins v Secretary of State for Trade and Industry UKEAT/1460/99, 31 January 2001 at paras 2, 12 and 22 per Judge D Pugsley). Moreover, while the detrimental impact of frustration on employees is important, we must not ignore the dire financial straits currently being faced by some employers. Employers in the UK are incapable of unilaterally varying contractual terms to reduce employees’ wages or benefits without consent. Consequently, in scenarios 1 and 2, struggling employers are confronted with the choice of claiming frustration, dismissing workers outright, or dismissing and re-engaging them on new contractual terms. The general objective of frustration is to achieve a ‘just and reasonable result’ (W. McBryde, The Law of Contract in Scotland para. 21-21), and it will arguably be unjust in some cases to enforce an employment contract in its literal terms after Covid-19 has caused a significant change in circumstances for employers. Relying on the frustration argument may be an employer’s best option, and in order to uphold legal clarity and certainty, accepting the frustration argument also may be the tribunal’s only choice.
Indeed, as Freedland highlights, the law of frustration identifies a mode of termination that has encouraged judges to ‘account for the ending of employment as not involving dismissal, much more readily and extensively than they might otherwise have done’ (see M. Freedland, The Personal Employment Contract 441). Case law offers arguments that can both undermine and support an employer’s frustration claim in the context of the pandemic. The strength of such arguments will depend – in each dispute – upon the construction of the exact contractual obligations in light of the specific circumstances surrounding the contract (W. McBryde, The Law of Contract in Scotland para 21-19). In any case, the three policy considerations discussed above, as well as the far-reaching exclusionary effects of frustration, ought to be afforded great weight so that if frustration is invoked it will be in exceptional cases only. The end result is that a complex mixture of principles and policy factors will be accounted for, and put in the balance by, an employment tribunal.
Employees and Limb (b) Workers Ineligible for Unfair Dismissal
Since the advent of the unfair dismissal legislation, the judicial approach to frustration has been ‘irrevocably influenced and adjusted’ by the policy pressures of adjudicating on a doctrine that could prevent employees from enforcing those rights (M. Freedland et al, The Contract of Employment 535). Notably, these policy considerations do not always point away from frustration to produce employee-protective results. For example, in Harman v Flexible Lamps ( IRLR 418 at 419), Bristow J’s attempt to restrict the application of frustration to lengthy fixed-term contracts not terminable by notice exhibits ‘one set of policy perceptions about statutory employment protection rights’ (see M. Freedland, The Personal Employment Contract 444). Then, the Court of Appeal in Notcutt v Universal Equipment Co (London) Ltd ( ICR 414 at 420 per Dillon LJ) extended the application of frustration to employment contracts that are determinable by short or relatively short notice. This portrays an opposing policy perception about statutory employment protection rights and calls into question how employees and limb (b) workers precluded from claiming unfair dismissal will be treated in the Covid-19 context. What will operate in favour of the frustration claim in the case of employees with less than two years’ continuous service and limb (b) workers is that policy considerations are restricted to the – less protective – wrongful dismissal regime. The contention that there has been a wrongful termination will be difficult in such cases, especially for those employed on precarious atypical contracts who will have few contractual entitlements that they could claim have been breached. This difficulty is coupled with a lack of incentive to challenge an employer’s frustration claim in the teeth of their common law wrongful dismissal claim. Unless they have union backing (which is practically unattainable for most limb (b) workers), the court costs, expenses and/or legal fees will likely outweigh any prospect of financial gain from a damages payment. As a result, disputing frustration with a wrongful dismissal claim will only be worthwhile for higher-ranked and well-paid employees with a valuable net remuneration package, i.e. a long notice period, company car, mileage allowance, pension entitlements, bonuses, or share-option schemes, etc. Absent the ability to challenge a frustration claim in an employment tribunal under the statutory unfair dismissal jurisdiction, it is the most vulnerable workers who are at the highest risk of having their contracts adjudged as frustrated.
The Unfair Dismissal Claim
If we are correct about the strength accorded to the various policy considerations in the calculations of the employment tribunal when weighing up the plausibility of the employer’s frustration argument against the employee’s statutory unfair dismissal claim, the focus will then turn to the nature and cause of the dismissal of the employee. Here, there are two possibilities in the case of scenarios 1 & 2. One option for employees with the qualifying period of employment (of two years unless section 108(3) or the automatic unfair dismissal exceptions apply) is to claim they have been constructively and unfairly dismissed under section 95(1)(c) of the ERA, since the employer relying on the ‘termination by frustration’ argument is unlikely to expressly dismiss. For an unfair constructive dismissal claim to be successful there must have been a repudiatory breach of contract (e.g. the employer claiming ‘frustration’ and cutting off the payment of wages or sending the employee home), acceptance of that breach by the affected employee (i.e. resignation within a reasonable period of time to avoid affirmation of the breached contract), and proof that the constructive dismissal was also substantively or procedurally unfair under section 98 of the ERA. Pursuing a statutory award under this route can be an onerous and futile task, with tribunals often upholding the justice of dismissals that are ‘harsh but fair’ under section 98(4). For example, in Welch v The Taxi Owners Association (Grangemouth) Ltd  UKEATS/0001/12/BI theconstructive dismissal was ruled fair because there were legitimate business reasons (a downturn in business) for reducing the employee’s hours, and see H Collins, ‘Finding the right direction for the ‘industrial jury’: Haddon v Van den Bergh Foods Ltd/Midland Bank plc v Madden (2000) 29 ILJ 288 at 294).
The most plausible and appealing (from the employee’s perspective) form of termination of the employee’s employment contract is a dismissal by the employer in terms of section 95(1)(a)/136(1)(a) of the ERA for the reason of ‘redundancy’ (section 98(2)) (see Williams v Watsons Luxury Coaches Ltd.  IRLR 164 at para 20 per Wood J). Where the employee challenges the frustration argument of the employer by presenting ‘redundancy’ as the real reason for the termination of the employment contract, unlike a constructive dismissal claim, there is no requirement for the employee to establish a repudiatory breach on the part of the employer. It is at this point that the question of whether the employee has two years’ continuous service and was made ‘redundant’ at the point of the declaration of public lockdown on 23 March 2020, or at some later date in the case of scenario 2 (defective furlough frustration), assumes great significance. If we assume that the employee has the requisite length of service, the terms of section 139 of the ERA, which provide the statutory definition of ‘redundancy’, must be consulted. The vast majority of the case law has concentrated on section 139(b)(i) and (ii) and in particular whether the employer’s need for the employee’s specific job has ceased or diminished. The leading decision is that of the House of Lords in Murray v Foyle Meats Ltd. ( 1 AC 51, 55–8), where Lord Irvine held that whether the employee’s job has ‘gone’ or not is irrelevant. Instead, the crucial question is simply whether the dismissal was caused by a diminution or cessation of the employer’s need for work in general or at a particular location. As such, the question is one of causation. If we turn to the cases of scenarios 1 & 2 (a purported lockdown frustration and defective furlough frustration), if it is accepted that the frustration claim is likely to be defeated for the reasons given, it would seem uncontroversial to claim that the circumstances here would be covered by the terms of section 139(b)(i) and (ii). For that reason, both a purported lockdown frustration and defective furlough frustration are likely to be categorised as a dismissal for the reason of redundancy.
The attraction of such a finding for the employee is threefold. First, sections 135 and 155 of the ERA stipulate that a redundant employee who has been continuously employed for a period of two years or more is entitled to a statutory redundancy payment based on the terms of section 162 of the ERA. The sum payable is currently capped at £16,140 (see the Schedule to the Employment Rights (Increase of Limits) Order 2020 (SI 2020/205)) and calculated on the basis of the employee’s age and length of service. Secondly, despite accepting a redundancy payment, employees can still continue their claim for compensation for unfair dismissal. The unfairness of a redundancy can be established under the terms of section 98 (standard unfairness), or instead, if applicable, under section 105(1) of the ERA (deemed unfairness). The circumstances where a dismissal by redundancy will be statutorily deemed unfair by section 105 (outlined in subsections (2A) to (7N)) include those where the redundancy selection is connected to childbirth, trade union activities, or whistleblowing. These mirror many of the reasons that a dismissal will be regarded as automatically unfair and in doing so this provision should ensure that employers cannot deceitfully disguise their reason for dismissals as redundancies under section 98(2)(c) in order to avoid an automatically unfair dismissal ruling. Moreover, since the employer will have adhered to the argument that the contract was frustrated, invariably they will have failed to follow any pre-redundancy procedures, such as consult with the affected employees in advance, search for, and offer, those employees suitable alternative employment, etc. As a result, even where section 105 is inapplicable, it remains very likely (albeit not inevitable) that the employer’s failure to implement pre-redundancy procedures will lead to a finding that the employees were unfairly dismissed for the reason of redundancy (see Waldie v Lloyds Pharmacy Ltd ET/3201534/2018 at para 37 per Judge Ferguson). Accordingly, the unfairly dismissed employees will be entitled to the payment of a compensatory award under section 123 of the ERA, i.e. the sum will depend on the financial loss sustained by the employee as a result of his/her dismissal, subject to a cap of £88,519 or the employee’s full-year salary, whichever sum is the lower (section 124(1ZA) of the ERA). However, that ceiling on compensation will be lifted if the employee’s redundancy was for health and safety grounds (see sections 124(1A) and 100 of the ERA), or for making a protected disclosure (see sections 124(1A) and 103A), which should not be overlooked, since they may well be relevant factors in the case of both scenarios 1 and 2. A final point worth noting is that where the employer argues frustration as the pretext for terminating the employment contract, invariably it will have failed to adhere to the statutory provisions governing mass redundancies under Chapter II of Part IV of the 1992 Act. This could result in a tribunal or court order compelling the employer to pay a protective award to the redundant employee (which can amount to as much as 90 days’ salary), making a frustration claim a perilous option for the employer.
In this blog we have sought to unpick the extent to which the common law doctrine of frustration is likely to find favour with an employment tribunal or court in the context of furloughed employees under the CJRS. We have aimed to highlight the doctrine’s existence and draw attention to its possible invocation in the context of disputes related to furloughed employees and the Covid-19 lockdown. Although it is impossible to forecast the exact number of employers seeking to rely on a frustration claim, the scheduled tsunami of furlough-related cases suggests it is reasonable to suspect there will be some employers who attempt to escape liability under this doctrine. In theory the frustration criteria could be fulfilled in some cases, but having addressed some of the uncertainties in the case law discussed above, in the majority of disputes, it is likely that any attempts by employers to argue that there has been frustration because of the coronavirus pandemic will prove unsuccessful. Instead, the contention that the statutory notion of ‘redundancy’ operates on the contracts of employees with at least two years’ continuity of employment has greater appeal.Consequently, pleading frustration would be a legally high risk strategy when considered alongside the policies underpinning the employer’s dismissal obligations under statute. The frustration argument is therefore an undesirable route for employers to pursue. The exceptions are where the individuals in the case at hand are employees with less than two years’ continuous service and limb (b) workers. While we would discourage employers from attempting to benefit from frustration, insolvency practitioners may not have the luxury of such a choice.There is a difficulty in predicting the outcome of a dispute concerning frustration due to the inherently unpredictable nature of the doctrine and each past decision being fact-sensitive. After all, frustration is not normally invoked in the employment context; but, alas, we are currently living in anything but normal circumstances.
About the authors:
David Cabrelli is a Professor of Labour Law at the University of Edinburgh. His teaching and research interests lie in the fields of employment law and labour law and he has published papers in a number of academic journals as well as a student textbook on employment law (now in its fourth edition).
Jessica is a professional legal researcher at the University of Edinburgh, specialising in UK and EU Employment Law.
(Suggested citation: D Cabrelli and J D’alton, ‘Common Law Frustration and Redundancy in the Context of Covid-19 Furlough’, UK Labour Law Blog, 1 September 2020, available at https://uklabourlawblog.com)