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In a dispute concerning the correct interpretation of contracts of employment, the Employment Appeal Tribunal found that the contracts were to be construed as providing that food and housing allowances were not paid on top of, but included within, basic wages for reasons of tax efficiency.
The appellant employer (Q) appealed against an employment tribunal's decision that it had made unauthorised deductions from the wages of the respondent employees (L), while they cross-appealed against its decision on the amount of the deductions.
Q was a United Kingdom subsidiary in a group of companies. L had been seconded to it from an Australian subsidiary in the same group. Q gave them a contract which stated that their total salary would include food and housing allowances and that they would be paid relocation benefits of £5,000. A month later, they signed a second contract which stated that their basic salary would include food and housing allowances and that they would be paid relocation benefits of £14,500. After they were paid, L complained that their allowances should have been paid on top of their basic salary and the benefits should have been based on the higher rate. Q maintained that the relevant contract was the second one, but that the higher relocation benefit figures had clearly been an error. L brought their claim and the tribunal found that the relevant contract was the first one. On that basis, the tribunal found in favour of L on the food and housing allowances but against them on relocation benefits; it also found the higher rates for relocation had been an error.
HELD: (1) The second contract represented the true agreement between the parties. However, if that was wrong, the first contract's use of the term "included" indicated that the payments of food and housing allowances were not to be on top of salary. Furthermore, the first contract sought to promote tax efficiency and so, construed in that context, the relevant clauses meant that for the purposes of tax structuring, the whole of the payment forthcoming to L would be presented and a notional figure within it would be earmarked to the allowances and those figures would not attract tax. In other words, the clauses had the same meaning as the versions in the second contract (see paras 47, 55 of judgment). (2) (Obiter) L's claims did not relate to wages, within the meaning of the Employment Rights Act 1996 s.27(1), but to expenses, within the meaning of s.27(2)(b). Their salaries included an element of payment for the cost of living in London for a period of time. It followed from the fact that it was tax efficient and tax would not be levied upon it in Australia that it was in respect of expenses and not wages (para.56). (3) The higher figures for relocation in the second contract were a mistake: they appeared once correctly and once incorrectly in that contract. In the light of the first contract and the information subsequently given to L, they knew there was a mistake, and so as a matter of construction the higher figures were incorrect. Since the tribunal had held that the correct document was the first contract, L could not possibly mount an argument based upon the higher figures which occurred only in the second contract (paras 60-61).