The Court of Appeal has recently re-considered and re-affirmed the ‘least burdensome’ rule when deciding how an employer could perform its obligations under a contract of employment.
In the case of Robert MacKenzie v AA Limited, the Court of Appeal recently confirmed that where an employer has a number of alternative methods of terminating a contract of employment lawfully, it is permitted to choose the least burdensome method of termination.
Mr MacKenzie’s contract included three different ways that his contract could be terminated by the employer:
- By giving 12 months’ notice;
- By making a payment in lieu of that notice (or any unexpired part of it) equal to basic salary only plus payment of any accrued but untaken holiday;
- With immediate effect if Mr MacKenzie committed an act of gross misconduct.
Mr MacKenzie was involved in an altercation with a colleague following a dinner at a strategy away day which resulted in what was described as ‘an unprovoked assault on a subordinate colleague’. Mr MacKenzie immediately resigned and asked to be released from his obligation to give notice. That request was refused and instead he was dismissed immediately for gross misconduct. That dismissal brought with it a number of serious financial consequences for Mr MacKenzie including the loss of valuable performance related shares which were forfeited on an immediate termination. Mr MacKenzie, who was suffering from ill health at the time of the incident challenged his dismissal and asserted a claim for wrongful dismissal (a breach of contract claim) in the High Court as well as a personal injury claim (which was struck out).
Mr MacKenzie’s wrongful dismissal claim was based on the fact that the incident with the colleague did not amount to gross misconduct and if the Court found in his favour on that question, the Court would have to consider what damages were payable to him over what would have been his 12 month notice period (given that he had resigned and his request for short notice had been refused by the AA). Mr MacKenzie claimed he would be entitled to his salary, his bonus, the value of other benefits and his shares. The AA argued that it would have exercised its right to terminate his employment by paying him in lieu of that notice and that obligation only entitled him to loss of salary and accrued but untaken holiday (see option 2 above).
There was a preliminary hearing on that question and whether or not Mr MacKenzie’s claims for bonus, benefits and shares should be struck out. The AA argued that even if he won the argument, that his dismissal for gross misconduct was wrong, at trial (such that he would have a successful breach of contract claim), he would never be awarded the bonus, benefits and shares as part of his ‘loss’ for that breach, because his measure of damages would assume that the AA would follow the ‘least burdensome’ method of contractual termination.
Whilst there was some argument as to which of the 3 termination options was the ‘least burdensome’, Mr MacKenzie also challenged the application of the long established principle that the damages that might be payable by the employer for breach of contract, should be calculated on the basis that the employer would adopt the ‘least burdensome’ form of termination (in this case, by making a payment in lieu of notice) which would simply result in the payment of salary and any accrued holiday but not bonus, benefits or shares.
This ‘least burdensome’ principle is well illustrated by one of the main cases that articulated the principle, Lavarack v Woods of Colchester Ltd . In that case, the employee was on a 5 year fixed term contract. His contract was terminated by his employer in year 3. He brought a breach of contract claim for the payment of salary he would have earned over the remaining part of the 5 year term. Whilst the proceedings were on-going, the employer awarded pay rises to staff and Mr Lavarack argued that he should get the balance of his salary over the 5 year term, including the value of the pay rise he would have received had his employment not been wrongly terminated early by his employer. This claim was made on the basis that the employee should be put in the same position he would have been in had the employer not been in breach of contract; that would entail an examination of whether or not he would have got a pay rise like the other employees. The Court found however that he had no contractual entitlement to a pay rise and that it should be assumed that the employer would perform its obligations under the contract of employment in a manner which is the ‘least burdensome’ (ie without giving him a pay rise).
In the MacKenzie case, the Court of Appeal accepted that whilst there were some circumstances where there would be a derogation from the ‘least burdensome’ principle, where there are alternative methods of the lawful performance of a contract (for example, terminating a contract of employment), the least burdensome rule will continue to apply. In short, if the employer has the contractual right to terminate an employee’s contract in lieu by giving notice of that fact and paying basic salary only, that will be the level of damages payable and the Court will not entertain arguments about the ‘loss’ of other benefits such as bonus and shares if the contractual entitlement is clear.
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