Our thoughts on the world of employment law - and beyond.

Pay Progression – Contractual or Not?

This was the position faced by the Equality and Human Rights Commission in a claim brought by Ms Earle for arrears of pay following the EHRC's decision not to conduct pay reviews for its staff following a pay freeze as a result of severe financial constraints, despite its usual practice of incremental pay progression dependent on performance.

The facts are straightforward: - Ms Earle accepted a job with the EHRC which provided for a salary range within which there were a number of incremental steps from the lowest level (at which she started) to the top, described as the "rate for the job" .  As part of the recruitment process, Ms Earle was told by an HR officer of the EHRC that she would be granted progression through the incremental steps if her performance was satisfactory. 

The contract stated as follows:

"Progression through the salary range will be reviewed annually on or around 1 October in each year until the maximum 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 any subsequent years".

The contract also contained an entire agreement clause, stating that it superseded any previous oral or written agreement between the EHRC and Ms Earle in relation to the matters dealt within the contract.

Due to financial constraints arising from a tightening of government funding, the EHRC did not award Ms Earle (or anyone in her position) either pay progression or an annual progression review, and she therefore pursued a claim in the Employment Tribunal for arrears of pay.

At first instance, an Employment Tribunal determined that Ms Earle had a right to pay progression up the payscale subject only to satisfactory performance, and therefore awarded her arrears of pay.  That decision was overturned by the Employment Appeal Tribunal on the basis that the relevant clause of Ms Earle's contract had not been properly construed.  In particular, the EAT determined that the contract did not confer an automatic contractual right to pay progression, subject only to the employee's satisfactory performance, and that while the EHRC was in breach of contract by failing to hold a review, the reality was such that Ms Earle would not have been awarded an incremental increase because the EHRC's finances would not allow for such an increase to be awarded.  Furthermore, the verbal assurance given by the HR officer in the process of recruitment was superseded by the entire agreement clause in the contract, and was not binding the EHRC. 

This case serves as a useful reminder to employers to look back at the express terms of the employment contract as the starting point in determining your obligations with regard to pay review and pay progression.  Of course, in many cases, an incremental pay scale will be contractually binding on the parties, but it was not so in this case (albeit it took an appeal to the EAT to reach that decision!), despite the fact that expectations were not managed as carefully as they could have been at the outset of employment.   The case also highlights that a carefully drafted entire agreement clause can be very useful in avoiding arguments that promises made on recruitment have not subsequently been met.  

Clearly, if employees have a contractual right to pay progression, employers will face a much tougher job in trying to impose a freeze in salary outside of the terms of an incremental pay-scale.  Where there is severe financial pressure (and indeed for some employers a government mandate) to implement changes, it may be possible to implement changes, but care needs to be taken in how this is handled (ideally by agreement with staff, or if terms are subject to a collective agreement, with the union); otherwise, there is a real risk of successful claims for arrears of pay.

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