Contracts of employment: Employer in breach of contract when it did not carry out an annual pay review - DAC Beachcroft

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Contracts of employment: Employer in breach of contract when it did not carry out an annual pay review

Published On: 8 October 2014


Ms Earle, a senior legal policy adviser, was recruited by the Equality and Human Rights Commission (EHRC) in 2009. Her position was graded at level 5 in the organisation's pay scale, within which there were a number of incremental pay points from the lowest, at which she started, to the top: the "rate for the job". Before she joined the EHRC she was assured by an HR officer that she would be granted progression through the incremental steps if her performance was satisfactory. Her contract stated:

"Progression through the salary range will be reviewed annually on or around 1 October in each year until the maximum of the range for your role has been reached. Any progression review will include an assessment of your performance during the preceding 12 months. There is no obligation on the EHRC to increase the level of your basic salary at a review. Any increase awarded in one year will not create any right or entitlement or set any precedent in relation to subsequent years.”

As a result of the financial crisis, the EHRC, a government-funded body, was subject to funding constraints which meant that it was compelled to impose a pay freeze on its staff. The EHRC decided that, given these circumstances, it would be pointless to conduct any pay reviews with staff and did not award the claimant (or anyone in her position) either progression or a progression review.

Ms Earle brought a claim for breach of contract, claiming that she had not had the incremental progression to which she had been entitled. An employment tribunal found that the effect of the contractual clause was that Ms Earle had been entitled to an annual salary increment, subject only to the one condition that her performance was satisfactory. The Judge also found that the decision not to hold any performance reviews was a perverse exercise of the employer's discretion. Consequently, the EHRC had acted in breach of contract and Ms Earle was entitled to damages as a result of the failure to increase her pay. The EHRC appealed to the EAT who set aside the employment tribunal's decision. The EAT found that the language of Ms Earle's contract was clear; there was a contractual right to a pay review. Even if the EHRC was not able to increase salary, a review could enable it to indicate how Ms Earle would be placed for future progression once economic circumstances improved. It could not be said that, had annual reviews been held, Ms Earle would have had a real chance of incremental progression. Although the EHRC had acted in breach of contract by failing to hold a pay review, it was clear that the claimant would not have been awarded any incremental increases given budgetary constraints, so she was not entitled to damages

What this means for employers:

This is not a case where the contract gave an employee automatic pay increments. The obligation here was to review salary each year. While it was futile to do so in the context of the public sector pay freeze in any other circumstance it would be wise to conduct a review so that there could be no question of a breach of contract.