Category: Employment Law

Why disregarding the minimum wage constitutes modern slavery

The National Minimum Wage (NMW) Act 1998 remains contentious, especially after the introduction of the NMW (Amendment) Regulations 2025, as it draws the legal line in the sand between employment and slavery, as highlighted by a recent case.  

The claimant was born in the Philippines in 1990 and travelled to the UAE in the employ of a diplomat and his family, after which she was relocated to London. Her three months of employment in the UK involved extreme exploitation, verbal abuse, threats and isolation, as she was effectively forced to work eighteen-hour days, with no breaks or rest days. Her movements were strictly controlled, as the family retained custody of her passport and frequently locked her inside the flat when they were away. She was further isolated by being denied access to a SIM card or the household Wi-Fi, while her compensation was almost non-existent, falling far below the statutory NMW.

It was concluded that, as she had been a victim of human trafficking and suffered from PTSD, she was granted leave to remain in the UK in 2015. The High Court awarded over £146,000 in ‘punitive’ damages in a “default” assessment, including £85,000 for false imprisonment and injury to feelings, £35,000 for psychiatric injury, and £15,000 in exemplary damages. Given the resurgence of modern slavery and human trafficking cases, this ruling renders “sub-clinical distress” a litigable tort in forced labour cases, potentially reaching the highest band of compensation.  

While the NMW Act allows for a “current rate” uplift in a standard Employment Tribunal, the Judge ruled that this does not automatically apply to a claim brought in tort. If a claimant sues for “servitude” or “negligence” rather than a straight breach of contract, they may only be entitled to the wage rates that existed at the time the work was done. This presents a claimant with a strategic choice between pursuing a statutory (i.e., for higher money) or a tort claim (for general damages, including PTSD).

Cases of severe harassment and abuse can result in a “loss of earnings” that can extend far beyond the period of employment, due to traumatic psychological damage or unwarranted references. Thus, HR departments should actively monitor ongoing workplace conflicts to safeguard against claims under the new Employment Rights Act and NMW (Amendment) Regulations. 

Intimidating claimants with costs orders may be at an end.

A claimant made allegations of unfair dismissal, discrimination, and detriment resulting from whistleblowing. While his claim against the Council was subsequently withdrawn early on, the claim against the private limited company proceeded.

The respondent, however, argued that the claimant was a volunteer and that his claims were vexatious, threatening to apply for a strike-out order and a costs award in the range of £2,500 to £3,000, although the case was postponed due to bereavement. The conflict escalated when the claimant sent two emails to the Tribunal, the first expressing extreme concern over the respondent’s costs warning, stating that, in the absence of certainty regarding the maximum costs the Tribunal might award, he was considering withdrawing his claim. Later that afternoon, after receiving no reply, he sent a second email declaring that he wished to confirm the withdrawal of his claim unless the Tribunal assured him that no costs order would be made against him.

However, the Tribunal’s internal processing of these emails was disorganised, and the Employment Judge, having seen only the first email, correctly identified it as a potential tactical withdrawal and invited the claimant to clarify his position within 14 days. However, a staff member who had seen the second email, but not the first, sent a letter treating the claim as having been fully withdrawn and cancelled the upcoming hearing, although the claimant had since explicitly stated that he wished to continue with his claim. The chaos continued with the Tribunal asserting that the claim had been unambiguously withdrawn and could not be resurrected.

However, the Appeals Tribunal ruled in favour of the claimant as he had made his intent to withdraw conditional upon receiving advice or guarantees regarding potential costs. This ruling means that employers and respondents can no longer immediately rely on a frustrated or conditional email from a claimant as a “get out of jail free” card. Thus, in future cases, Judges are expected to be more interventionist when an unrepresented party suggests they want to drop a claim due to fear or pressure rather than through a genuine desire to end the pursuit of justice.

This case marks a potential end to the prevalent tactic of sending “warning letters” over potential costs to pressure claimants into dropping ‘weak claims’. While these letters are legally valid and often necessary, the bar for such tactics has now been raised, and respondents should be wary of using the threat of costs to trigger an automatic procedural win, as judges may now be more sympathetic to those in financial distress.

Payments made into employee benefit trusts constitute taxable income

A Tribunal recently ruled that payments made for work into a third-party trust constitute immediate employment earnings. This decision effectively precludes employers from using loan-based structures to obfuscate remuneration.

Mr. Jack was employed by an offshore company based in the Isle of Man while living and working in the UK. Under this arrangement, the fees paid for Mr. Jack’s services were split into a modest basic salary and an employee benefit trust (EBT), which would then advance these funds to Mr. Jack in the form of interest-free loans. Because these payments were categorised as loans rather than salary, they were not initially reported as taxable employment income.

Following an enquiry into Mr. Jack’s self-assessment return, HMRC issued a closure notice concluding that the £48,034 transferred to the EBT actually constituted “redirected earnings” and was, therefore, taxable as employment income under Section 62 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003. Mr. Jack appealed, arguing that a significant portion of the funds should be exempt from tax since he had repaid approximately £23,479 of those loans in April 2011.

The Tribunal upheld HMRC’s closure notice and applied the Supreme Court’s decision in RFC 2012 plc. The Judge held that, when money was paid into the EBT for work done by Mr. Jack, it effectively became taxable employment income at that exact juncture as “redirected” earnings. Mr. Jack’s argument that he had “fixed” the tax issue by repaying the loans was also rejected, as the tax charge arose on the transfer to the EBT, and anything that happened to the money afterwards did not affect the tax already owed for the 2010/11 tax year.

This ruling confirms that the legal characterisation of a relationship or a payment in a contract is secondary to the reality of the work performed. Care must be taken when creating structures to minimise tax burden and maximise profits, as the full amount transferred to a trust could be seen as ‘earnings’. Based on the Rangers case, if money is paid in return for services, it constitutes remuneration. On the other side of the coin, if a court views a loan as salary, it may also come to view the recipient as a worker who is entitled to full statutory rights.

Take care when labelling a bonus as discretionary in a contract

The High Court recently ruled on the interpretation and enforceability of “discretionary” bonus provisions in employment contracts. Mr. Gagliardi brought a breach of employment contract claim against a former hedge fund which had contracted him as a senior portfolio manager. The contract in question included a salary, a sign-on payment, a new-issue bonus, and a discretionary bonus based on profitable revenues. Mr. Gagliardi was specifically recruited by the CEO to expand into the US market owing to his expertise in block trading and his valuable relationships with major US banks. The hedge fund’s primary goal was to secure the benefit of these relationships and scale its business quickly, with the CEO tacitly acknowledging that they were essentially “buying his relationships,” hiring Mr. Gagliardi on a “trade and get paid” basis.

Upon joining, Mr. Gagliardi immediately began actively trading in the A1 share class without completing his onboarding process or receiving formal risk limits, leading to conflict with the CIO and risk manager. However, the CEO consistently prioritised Mr. Gagliardi’s trading activity over internal procedure, despite him often exceeding specified trading limits, frequently granting retrospective approval. Mr. Gagliardi’s lack of attention to compliance was also overlooked, as the CEO continued to prioritise profitability. However, a market-wide regulatory inquiry into block trading led to subpoenas to the claimant and the hedge fund by early 2022, prompting the fund to withhold payment of his discretionary bonus. This led the claimant to sue the hedge fund for breach of contract.

The High Court ruled in favour of Mr. Gagliardi, awarding him $5.385m in damages (plus interest), determining that his former hedge fund had indeed breached its contractual obligations in failing to award him any discretionary bonus for his trading activities in 2021. The Judge ruled that the hedge fund’s contractual discretion (governed by Delaware law) was neither broad nor unfettered and, as such, was subject to prescribed contractual criteria.

Despite the use of the term “discretionary,” the High Court has affirmed the principle that an employer’s discretion is not absolute where a bonus is tied to measurable performance criteria such as revenue contributions and profits. This ruling emphasises that, where an employee delivers exceptional financial performance, an employer cannot arbitrarily or irrationally refuse to pay a bonus, as this would constitute a breach of contract, irrespective of any allegations of minor breaches, misconduct or poor attitude that did not reach the threshold for disciplinary action or termination over the period in question. Employers should thus take care over phraseology when structuring discretionary bonuses into contracts.

Suing whistleblowers for a breach of confidence is not a viable strategy

The Court of Appeal has ruled that the initiation of legal or arbitral proceedings by an employer against a ‘whistleblower’ who has made a protected disclosure constitutes an actionable detriment under the Employment Rights Act (ERA) 1996, effectively overriding the defence of Judicial Proceedings Immunity, or JPI. 

In November 2021, the claimant, initiated Employment Tribunal proceedings against his former employer for post-employment detriment as a consequence of whistleblowing. The claimant, who had worked at his employers’ London residence until his resignation in 2019, alleged that he made protected disclosures regarding instances of verbal and physical abuse by his employer directed at members of staff.

The respondent’s defence was that the claimant had made the allegations for financial gain rather than for altruistic reasons, had breached a confidentiality and independent consulting agreement under ICC Rules, and was effectively running an “extortion scheme” by making “false claims”.  

The Court allowed the appeal based on the protection of whistleblowers by the ERA 1996, concluding that this statutory protection overrides the common law doctrine of JPI. In the Court’s view, allowing an employer to use litigation as a shield against a whistleblowing claim would render the legislation meaningless, as Section 47B(1) of the ERA provides a right not to be subjected to “any detriment by any act” by an employer for making a protected disclosure, including any perceived breach of confidence, as such a mechanism would effectively enable employers to escape liability by suing whistleblowers. Moreover, under Section 43J of the ERA, any confidentiality agreement that precludes a protected disclosure is deemed to be void.  

Thus, the initiation of legal or arbitral proceedings by an employer against a worker, when executed on the ground of a protected disclosure, is actionable as a detriment under Section 47B of the ERA. This ruling effectively prevents employers from using litigation as a de facto penalty or “punitive tool” to harass or financially pressure a whistleblower. The Court has now established that this protection is not limited to threats, but also extends to the act of commencing proceedings. Employers should note that they cannot simply bypass Section 43J by enforcing a confidentiality clause through arbitration proceedings. 

Employers may now be personally liable for unfair dismissal claims

A recent ruling has increased the scope of statutory protection for whistleblowers to include covered detriments against co-workers under the Employment Rights Act 1996. A Mr. Rice was dismissed by his company owner on the grounds of redundancy in February 2021. Mr. Rice asserted that his dismissal was automatically unfair, given that it was motivated by his protected disclosures. He subsequently applied to amend his claim to include a detriment claim against his owner-employer, alleging that his dismissal was a detriment in contravention of Section 47B of the Act. The core issue arose when he sought to amend his claim to include an additional complaint, specifically that his dismissal constituted a detriment inflicted by a co-worker, for which the owner was vicariously liable under the 1996 Act.

This principle states that the exclusion (Section 47B) only bars a direct detriment claim against the employer for its own act of dismissal. However, it does not bar a claim against a co-worker (under S. 47B(1A)) for the detriment of dismissal. Consequently, if a co-worker is liable for the act of dismissal as a detriment, the employer automatically becomes vicariously liable for that act under Section 47B(1B). This effectively allows the employee to bring a detriment claim against the employer for the act of dismissal itself. 

The ruling creates a crucial pathway through which employees may obtain a more comprehensive remedy for the act of dismissal, no longer solely restricting whistleblowers to a claim of unfair dismissal. This significantly increases the potential value of any award for damages, particularly in distressing cases.

Employees can now pursue the individual co-worker who carried out the dismissal – in this case, the owner of the firm. This is an important concession, especially where a company becomes insolvent, as the personal liability remains. Employers should be wary of their conduct toward whistleblowers, as they may find themselves personally liable for their words and deeds.

When disciplinary processes and non-compete clauses implode

Many modern companies insist on the inclusion of restrictive covenants to limit the freedoms of employees upon the termination of their contracts. However, the High Court recently reinforced the stringent legal principles governing the enforceability of such restrictive covenants, suggesting that they often overstep.

A young man had been working as a salesperson for a UK subsidiary of an American company that sells made-to-measure suits and shirts manufactured in the USA. His original contract included restrictive covenants limited to 6 months. However, the contract was changed in 2022 to double the duration of the non-compete covenant to 12 months and remove the previous reliefs, significantly widening their scope. The employee asserted that he was not informed of these changes, and the claimant failed to produce any evidence to justify the widening of the scope of the limitations or the doubling of their duration.

The employee’s initial performance was strong, although following a conduct issue in January 2025, he was subjected to an addendum requiring humiliating and intrusive conditions, including weekly “counselling”, a ban from earned trips, and exclusion from leadership roles. The ex-employee had also raised product quality concerns, which he felt were ignored, and found the work culture ‘toxic’ and the disciplinary action both unfair and intrusive. As a consequence, he resigned in frustration in 2025, only to be subjected to an “insensitive, verging on brutal” retaliation. Within two days, the HR manager had cut off all IT access, threatened an investigation, and banned the defendant from the office. A day later, on Sunday, the claimant’s lawyers hand-delivered a threatening letter to the defendant’s home seeking to enforce a 12-month restrictive covenant. Moreover, there were claims that the defendant had breached his contractual duties, including running down his sales in the months prior to his resignation, and soliciting staff.

The High Court dismissed the claim for breach of contract and ruled that the 12-month restrictive covenant was unenforceable, as it far exceeded what was reasonably necessary to protect the claimant’s business. Moreover, the Court found the decline in performance to be stress-related and due to his inevitable demotivation.

This case reinforces the longstanding principle that courts will not uphold a covenant if it extends beyond what is strictly necessary to protect an employer’s legitimate business interests, which are typically delimited to confidential information and customer goodwill. The case serves as a warning in relation to the risks employers run when their conduct is perceived to be heavy-handed, humiliating, or toxic, particularly during disciplinary or exit procedures. HR departments should be wary of engaging in overtly humiliating or heavy-handed disciplinary rituals, as these may be viewed as a form of brutality.

Early termination of probation can constitute wrongful dismissal

The claimant began employment as a Contracts Coordinator on 23 January 2023, subject to a contractual 6-month probationary period, one which required 5 weeks’ notice for termination. The contract included a garden leave clause, but no clause permitting Payment in Lieu of Notice (PILON). 

Disputes soon arose over his work patterns and behaviour, and by 22 February 2023, the claimant had emailed the respondent detailing an irrevocable breakdown in trust and confidence. On 3 March 2023, HR obtained authorisation to dismiss the claimant, citing inflexibility, divergent values, negative communications, and uncooperative behaviour.

The decision to terminate his employment had in fact already been made, even though a “Formal Probation Assessment Meeting” had been scheduled for 15 March, on which date he was dismissed with immediate effect and paid 5 weeks’ notice monies. On 24 March 2023, he appealed the dismissal while seeking an assurance that he would not be reinstated, affirming that neither party wished the employment relationship to continue. The employment tribunal found that the claimant had not been wrongfully dismissed, despite accepting that the respondent had breached the contract by instituting a PILON.

The appeal tribunal found that the first tribunal had erred in law by failing to find that the claimant was wrongfully dismissed, as the employment contract did not contain a PILON clause and the employer’s action in dismissing the claimant with immediate effect and simply handing over the notice pay constituted a breach of contract. However, it upheld the earlier decision not to award compensation after applying established common law principles for assessing damages, which assume that the employer would have terminated the contract in the least burdensome way that was lawfully available. The appeal tribunal rejected the claimant’s argument that damages should be subject to the “Gunton extension” to cover the full 6-month probation period. As the issue was a fundamental breakdown of the employment relationship, the employer was entitled to rely on the simpler, contractual 5-week notice clause, rendering the lengthier procedural steps irrelevant in the calculation of damages.

This case offers a stark reminder that, if a company wishes to dismiss an employee with immediate effect and simply pay them in lieu of notice, then the contract must explicitly include a PILON clause, or any immediate dismissal (even with payment) is effectively a breach of contract. While no financial damages were awarded in this specific instance, it nonetheless positions an employer on the wrong side of the law and can complicate any prospective litigation.

Tread carefully when using temporary contracts to confer tax breaks

A recent ruling has established that temporary worker arrangements do not constitute a single, continuous employment relationship in which workers retain the unfettered right to refuse assignments. This effectively confirms the prerequisite for a mutuality of obligation when accruing tax breaks.

Mainpay engaged temporary workers in the service sector, contending that its employment relationship constituted a single, albeit discontinuous form of employment, effectively rendering its various workplaces transient. Based on this viewpoint, Mainpay reimbursed its workers for travel and subsistence expenses and deducted these amounts from their income for tax purposes. Mainpay also used rounded sums, or benchmark scales, for subsistence expenses without obtaining formal dispensation from HMRC.

HMRC argued that each assignment was a separate instance of employment, making each workplace permanent for the purpose of a given assignment. This meant that travel and subsistence expenses were likely non-deductible without dispensation.

As the two contracts in question (2010 & 2013) were issued more than four years after the relevant tax year, this required HMRC to prove that the loss of tax was "brought about carelessly" by Mainpay so as to justify a six-year extended time limit. The Tribunal ruled in their favour, finding that neither the 2010 nor the 2013 contract constituted overarching contracts of employment, as the workers retained the unfettered right to refuse assignments. This, in turn, meant they lacked the necessary mutuality of obligation in the gaps between assignments. The Tribunal held that each assignment was an instance of separate employment and that the workplaces were therefore, in effect, permanent, making the expenses non-deductible. The Tribunal also found that Mainpay was "careless" in claiming the deductions, particularly in relation to the 2010 contract, because it had relied on vague assurances from employment lawyers.

This contention was escalated to the Court of Appeal, which rejected Mainpay’s argument that the parties’ intention should be decisive in construing the contract, as what essentially mattered was the reality of the arrangement, which was one of intermittent employment. Thus, each assignment was effectively under a separate contract of employment for the purposes of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) and, therefore, created a permanent workplace. The Court further upheld the finding that the loss of tax was "brought about carelessly" by Mainpay, validating the extended assessment time limit permitted under the Taxes Management Act 1970 (TMA).  

The case provides a clear distinction between a general agreement that governs future work and an actual contract of employment that lays out the terms under which future, separate contracts of employment will be formed. This type of agreement alone does not create a state of continuous employment. Companies are thus advised to seek advice when creating discontinuous employment frameworks in an effort to minimise tax liabilities.

Beware of the risks of engaging employees as sham contractors

Recently, a clear legal precedent confirmed that the nature of an individual's work is determined by the reality of the actual employment relationship rather than by arbitrary titles. Mr. Gooch worked for the British Free Range Egg Producers Association (BFREPA) from 1 November 2011 until 26 April 2024, initially as a Policy Director on a "contracted services basis" for 2.5 days per week. The organisation, originally an unincorporated association, subsequently became an incorporated company in 2023 (BFREPA Ltd.), although the nature of its work was unaltered.

As Mr. Gooch's role evolved, so his compensation increased and, by 2016, he had effectively been promoted to Chief Executive of Services. Throughout his 12.5 years of engagement, he consistently submitted monthly invoices and was paid a retainer due to his self-employed status, without formally establishing a limited company. In February 2023, BFREPA's leadership expressed concern that their arrangement with Mr. Gooch looked remarkably similar to an employment relationship rather than a self-employed contract, even suggesting that the HMRC would likely classify him as an employee. As a consequence [of the evolving employment history of Mr. Gooch], in March 2023, BFREPA elected to give him 12 months' notice of termination, and he continued working until April 2024, at which point his email access was disabled, and he received a letter confirming that his contract would not be renewed. Mr. Gooch duly lodged claims against both defendants for unfair dismissal, unauthorised deductions from wages, unpaid holiday, wrongful dismissal for failure to pay statutory notice, and breach of contract relating to pension auto-enrolment. 

The Tribunal ruled that the claimant was a de facto employee, working under a contract of employment as defined by Section 230(1) of the Employment Rights Act 1996, Section 2 of the Working Time Regulations 1998, and Section 88(2) of the Pensions Act 2008. The Tribunal further concluded that personal service was a core requirement of the contract, one which contained no general substitution clause, and that the extent of the control was consistent with an employer-employee relationship for a senior employee alongside other strong indicators of a permanent employment relationship. The contracts also contained restrictive clauses that limited his ability to work for other companies in the same sector, a feature more commonly found in employment contracts than in contracts for service. 

This ruling provides a clear and detailed example of how a tribunal will look beyond the contractual terms to assess whether a person is an employee or a self-employed contractor. Employers cannot rely on a "contract for services" or a person's self-employed status to avoid the legal obligations of an employer. Instead, tribunals will scrutinise key factors such as the mutuality of the obligations, the degree of control, and the extent of integration in the business. Employers who treat long-term contractors like employees—providing them with a fixed monthly retainer, dictating their hours, and effectively integrating them into the business—risk having them reclassified as employees, and HR departments should ensure that contracts reflect the true nature of the relationship to avoid repercussions.