Discretionary clause

Although an employee was given verbal assurances that she would receive incremental pay increases as long as her performance was satisfactory, the Employment Appeal Tribunal (EAT) held in The Equality and Human Rights Commission (EHRC) v Earle that those assurances could not override a discretionary clause within the contract itself.

Basic facts

Ms Earle started work for the EHRC in 2009 as a senior legal advisor (level 5) at an annual starting salary of £43,680. Within level 5, there were five incremental points beyond the starting level rising to £53,093 per annum.

Her contract expressly stated that progression through the salary range would be subject to an annual review and would “include” an assessment of her performance during the preceding 12 months. The various points were described as performance points except for the highest, which was described as “rate for the job”. Although there was no contractual obligation on the EHRC to increase her salary following a review, she was assured by an HR officer prior to accepting the job that she would be granted progression through the incremental steps if her performance was satisfactory.

Subsequently, however, the EHRC did not award Ms Earle (or anyone in her position) either progression or a progression review because of funding problems. She brought a claim for arrears of wages arising out of a breach of contract.

Tribunal decision

The tribunal judge concluded that, as the wording of the contract was “absolutely obvious and clear”, Ms Earle had the right to receive a “starting salary”, followed by a series of increments, as long as her performance was satisfactory.

Applying the decision in Atrill and ors v Dresdner Kleinwort Ltd and anor, the judge held that the assurances given by the HR officer were contractual and therefore took precedence over the discretion contained within the written terms of the contract.

EAT decision

However, the EAT disagreed. It held that the clause in the contract stating that there was no obligation on the EHRC could not be clearer. Although performance was an important criterion in reaching a decision whether there should be progression or not, it was not the only criterion. The words “will include” allowed other considerations (albeit unspecified) to be taken into account as well. There was, therefore, no particular relationship between Ms Earle’s performance in one year and her award in the next.

Although the EHRC had not used the word “discretion” within the contract that was effectively what it was. And although there was plenty of case law making clear that employers cannot exercise their discretion “capriciously, arbitrarily or wholly unreasonably”, the EHRC was acting within the terms of this contract when it did not award an increment.

It also held that Ms Earle could not rely on the HR officer’s reassurances as the contract explicitly stated that it superseded any “previous oral or written agreement” between the EHRC and her in relation to the issues within it and contained the whole agreement between the two parties.

Finally the EAT found that although the EHRC had technically been in breach of contract in failing to hold a review at all, the reality was that Ms Earle would not have been awarded an incremental increase because the EHRC’s finances would not permit the payment of an increase to her or any other employees doing the same role.