Businesses entering into an agreement with a director or employee to defer their pay should ensure the agreement makes clear whether unpaid arrears are contractually payable on termination of the individual’s employment – or risk a claim for unlawful deductions from wages.
A managing director agreed to defer payment of his salary because of cashflow problems in the company. When he resigned, he claimed the accrued amounts of deferred salary were unlawful deductions from his wages (the ‘wages claim’) and should therefore now be paid to him. He also claimed compensation for breach of his contract of employment.
There is no cap on the amount which can be recovered in a wages claim, but compensation for breach of contract is capped at £25,000, so it was important to the director that the wages claim succeeded.
The director’s wages claim could only succeed in law if his deferred salary was an identifiable sum properly payable to him on a specific occasion by virtue of the agreement to defer his pay. The Employment Tribunal (ET) ruled that this test was not met.
However, it said that he could recover £25,000 of his deferred salary as compensation for breach of his contract, as it was an outstanding contractual sum owed to him on the date his employment was terminated.
The director appealed the ET’s ruling that there had been no unlawful deduction from wages. He argued that if (as the ET had found) there was a contractual obligation to pay his deferred salary to him on termination, it necessarily followed that his deferred salary was properly payable to him on a specific occasion (ie on termination) for the purposes of his wages claim. His wages claim should therefore succeed.
The company argued that the agreement was that the director’s salary would only become payable when the company could afford to pay it. As the company still couldn’t afford to pay his salary when his employment terminated, then no sum became properly payable on the occasion of the termination of his employment, and no wages claim could be made in respect of deferred salary. It also argued that the director’s claim was comparable to a claim for payment in lieu of notice, and the courts had previously ruled that payments in lieu of notice could not be recovered in a wages claim.
The Employment Appeal Tribunal (EAT) found that it was an implied term of the director’s agreement that his deferred salary would crystallise, and therefore became an identifiable sum properly payable to him, on the specific occasion of the termination of his employment. This was because the agreement to defer ended when his employment terminated, with the result that a ‘sufficiently ascertainable’ sum became due to him at that point. His deferred salary could therefore be included in his wages claim.
The EAT went on to say that the director’s claim for unpaid salary was comparable to a claim for pay in lieu of untaken holiday (ie it was a claim for a payment that had accrued during his employment), rather than to a claim for pay in lieu of notice (which was a claim that only arose if, and because, his employment had ended).
• Businesses entering into an agreement with a director or employee to defer their pay should ensure the agreement makes clear whether unpaid arrears are contractually payable or not on termination of the individual’s employment – or risk a claim for unlawful deductions from wages
Case ref: Scicluna v Zippy Stitch Ltd & Ors UKEAT/0122/16/DA
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Jonathan Waters is the founder of Helix Law. Before qualifying as a Solicitor he worked in industry and in investment banking for over a decade. He was also the Partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. Jonathan has wide experience of helping and advising businesses to avoid or to deal with commercial disputes and in particular construction disputes.
This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice.