Contract Bottling v Cave – unfair dismissal compensation

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Employment Appeal Tribunal - November 2014

The onus is on employers to prove claimants’ compensation should be reduced, according to the EAT in a case which confirms the ground rules for applying the Polkey rules in unfair dismissal cases.

A so-called Polkey reduction in an employee’s compensation for unfair dismissal can have the effect of reducing a sizeable compensation claim to nothing and is, therefore, a significant part of any tribunal decision.

On the face of it, the financial loss suffered by employees who have lost their jobs is open-ended and should be calculated at their full pay rate prior to dismissal. However, employees are likely to have other job opportunities post-dismissal and compensation is designed to reflect this. If employees act unreasonably in failing to obtain alternative employment, their compensation will be reduced accordingly. When assessing an appropriate level of compensation, a tribunal will look at whether a substitute job is likely to be at the same rate, and when the employee is likely to obtain such a job.

In some cases, the employee’s income may not have continued at the same level regardless of whether dismissal occurred. For example, the pay rate for the employee’s existing job may have gone up because of promotion, or changed because of following a partner moving elsewhere, or gone down because of ill-health or retirement, or because the employer has reduced the employee’s pay rate as a result of changed business circumstances or restructuring. It is to this final category of compensation assessment that the Polkey principle applies.


The company in this case was brought out of administration by new owners who saw an urgent need to reduce staffing costs. Ten employees were placed in a pool, from which four were selected for redundancy and dismissed. The two claimants won their claim for unfair dismissal because of failings in the employer’s redundancy selection procedure. They were awarded compensation but no deduction for Polkey was made. The employer appealed the Polkey deduction issue.


The Employment Appeal Tribunal held that there was plainly an established need to reduce manpower in the company, and there was evidence to suggest that the claimants would have been dismissed anyway. The case was remitted to the employment tribunal which reduced the employees’ compensatory award by 20 per cent. The respondent appealed again.

The EAT allowed the appeal and decided the appropriate deduction should be 33 per cent, taking into account the employer’s need to make savings, and that the redundancies were genuine. Four out of 10 in the workforce had lost their jobs. Furthermore, there was good reason for thinking that those employees who had worked on the financial arrangements for bringing the company out of administration might be more at risk of redundancy.

Note for employers
This case re-emphasises some important points about how tribunals should assess the right level of compensation for unfair dismissal. The EAT confirmed that a tribunal is trying to determine the likelihood in percentage terms of a future event (for example, a dismissal) occurring when assessing a percentage reduction in compensation.

The EAT also said it is for the employer to show the need for a Polkey reduction is a real one and to produce sufficient and satisfactory evidence to that effect. Without sufficient evidence, there can be no Polkey deduction on the amount of compensation to be paid.