In a recent case. the Employment Appeal Tribunal (EAT) found that the Employment Tribunal (ET) made a legal error when it assessed the Polkey reduction. The ET used the wrong hypothetical scenario when deciding whether compensation should be reduced.
The Polkey reduction, after the House of Lords decision in Polkey v AE Dayton Services Ltd [1987] IRLR 503, is a reduction in the compensatory award made to an employee in a successful claim for unfair dismissal to reflect the likelihood that there would have been a fair dismissal in any event. It may be expressed as a percentage reduction or as a cap on future loss.
Written by Frankie Ng, Litigation Supervisor
Background
The case involved an unfair dismissal claim. The claimant had endometriosis and brought the claim against a global professional services firm. The employer’s firm operated a performance model that required employees to continually progress towards the next level. The claimant was dismissed in accordance with the firm’s ‘up or out’ performance model while experiencing significant symptoms, sickness absence, and medical treatment linked to her illness.
The ET did find that the dismissal was unfair due to breaches of the employer’s disciplinary policy. However, the ET applied a 100% Polkey reduction.
The claimant argued that the 100% reduction was legally wrong and inconsistent with the finding of unfair dismissal. It could not be certain she would still have been dismissed, or dismissed at the same time. She also challenged the finding that the employer’s progression-based model was fair. She argued that the ET was wrong to conclude she was not disabled, that the employer lacked knowledge of her condition, and that her dismissal was not linked to her endometriosis.
The employer argued that the claimant could not challenge the progression model because she had already succeeded in her unfair dismissal claim. It also contended that, when applying Polkey, the ET should assume the employer would have corrected the procedural error, which justified a 100% reduction in compensation.
The Legal Framework and EAT Findings
The EAT relied on Employment Rights Act 1996, Equality Act 2010, and considered relevant case law including Polkey v A.E. Dayton Services Ltd [1987] UKHL 8.
The EAT allowed the appeal.
It held that the ET had incorrectly applied a counterfactual in which the employer would have introduced a new policy mirroring its actual process, despite no evidence that the employer would have done so.
A Polkey reduction must be based on what the employer would or might have done had it had the opportunity to remedy the defect that made the dismissal unfair. The assessment is to consider the chances of what the actual employer would have done, not what the Tribunal would have done.
The ETA clarified that capability for dismissal must be assessed against an employee’s current contract, not their potential for future roles. As a result, an ‘up or out’ model requiring constant promotion may not constitute a valid dismissal if current duties are performed satisfactorily.
The EAT overturned the original ruling because the ET failed to properly evaluate the claimant’s disability. It neglected to consider the likelihood of symptom recurrence or the effects of the condition without treatment. The ET did not adequately assess whether the employer had constructive knowledge of the disability, noting that following internal policies likely would have revealed her medical status. Finally, the EAT found that the ET failed to determine if the claimant’s disability-related absences directly influenced the decision to dismiss her, potentially leading to discrimination arising from disability.
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