What are the potential ramifications for an employer who makes an employment offer and then rescinds it?
As has been reported recently, the Spanish banking giant Santander took the controversial decision to withdraw an employment offer it made to then-head of investment banking at UBS, Andrea Orcel.
The case, although extreme, highlights the potential ramifications that can arise when an employee does not accept such a withdrawal. Indeed, despite never actually starting his new position with Santander, Orcel is now challenging the legality of Santander’s actions and alleging a breach of contract.
Santander announced in September 2018 that it intended to appoint Orcel as its new chief executive. A ‘contractual letter’ was agreed between Orcel and the bank which would result in his total remuneration being around €50m. Santander then withdrew the offer. The reasoning for this remains unclear, although it appears Santander underestimated the costs of the benefits Orcel had accumulated and therefore appointing him had therefore become unaffordable. Further, it is suggested recent changes in the Spanish political environment also influenced the decision.
It follows that both Santander and Orcel are now gearing up for a high-profile legal dispute over his alleged contractual entitlements.
With the current political uncertainty, some UK employers may wonder what consequences will follow where an offer of employment is made and later withdrawn.
Withdrawing an offer
There have been many examples of where an employee has received an employment offer which is then withdrawn, the employee then having left a good existing job, effectively, nothing.
The employer may wish to withdraw an offer of employment for several reasons, for example, because:
• Its business requirements have changed;
• It has unexpectedly received information about the applicant which casts doubt on the desirability of employing them;
• One of the matters on which the offer was expressed to be conditional, such as receipt of satisfactory references, has not been fulfilled.
However, if it withdraws an offer, the employer should be prepared for the disappointed applicant to allege that the employer’s reason for doing so was unlawful (for example, that it was an act of discrimination). Therefore, employers should document their reasons for withdrawing an offer and retain documentary evidence that supports the reasons for its decision.
Unless the employee has previous relevant continuous service they will not have sufficient continuous service to bring an ordinary unfair dismissal claim. However, there are exceptions to this rule, for example, claims for automatically unfair dismissal where an employee does not need to fulfil any qualifying period of service to bring an unfair dismissal claim. Employers must also be careful not to terminate the contract for a discriminatory reason.
The withdrawal of an offer may also have implications in contract law since an employee may have a claim for breach of contract if the offer is withdrawn after it has been accepted.
It is also theoretically possible that an employee could claim misrepresentation or negligent misstatement, in circumstances where an offer of employment was made with the intention or prospect of terminating the contract after the employee has served notice to their current employer, but prior to employment with the new employer commencing. However, there is no recorded judgement on this point, and such a claim is likely to face significant hurdles particularly if there is a comprehensive employment contract with an entire agreement clause in place.
Before acceptance by the employee
Applying normal contractual principles, an offer of employment can be withdrawn at any time before it has been accepted by the employee.
The employer will need to make sure they have clear evidence that it withdrew the offer before the employee had purported to accept it.
Further, the employer should also record and demonstrate the reasons for its decision to withdraw the offer, in the event that the employee brings a claim arising from the withdrawal.
After acceptance by the employee
Once any conditions to which the offer was made subject have been satisfied and the employee has accepted the offer, a contract of employment will be in existence.
In these circumstances, the only way for the employer to terminate the contract is to give the employee the notice to which they are entitled under the contract. Failure to do so will be a breach of contract, for which the employee can sue either in an employment tribunal or civil courts.
In the case of Sarker v South Tees Acute Hospital Trust 1997, the Employment Appeal Tribunal rejected the employer’s argument that, before the scheduled start date, there was merely an agreement to enter into an employment contract. In fact, the contract had been formed when the offer was accepted, and the parties had agreed to delay its performance. This analysis was approved by the Employment Appeal Tribunal in the case of Welton v Delux Retail Ltd 2013.
The employee’s loss in respect of such a breach of contract will normally only begin to accrue after the date on which their employment was due to start (because the employee will not generally be entitled to any benefits before they start work). As an example, if the employee has a four-week notice period, but the employer wrongfully terminates the contract one week before the employee was due to start work, damages will normally be limited to three weeks’ earnings.
The situation may be more complicated if the contract makes provision for a probationary period during which employment can be terminated on shorter notice. Many readers will appreciate that the inclusion of a probationary period is now very common, even where the recruitment is internal.
This situation was considered by the Employment Appeal Tribunal in cScape Strategic Internet Services Ltd v Toon 2008. Mr Toon entered a contract under which he was entitled to one month’s notice, but that employment could be terminated on one week’s notice “during or at the end of” the probationary period, defined as “the first three months” of employment. cScape terminated the contract before Mr Toon started work and paid him one week’s pay. An employment tribunal held that he had not been dismissed “during” the first three months of employment, and so was entitled to one month’s notice. This decision was overturned by the Appeal Tribunal, which described cScape’s actions as an anticipatory breach of contract.
Both sides should be conscious that when assessing damages for such a breach, it will be assumed that the employer would have lawfully terminated the contract in the way that was most advantageous (and therefore least expensive) to itself. CScape could have chosen to wait until the first day of employment and then taken advantage of the shorter one-week notice period that would have applied during the probationary period. Therefore, Mr Toon’s damages were limited to one week’s pay.
However, this decision should be treated with caution especially given the contractual principal that a contract is formed immediately on acceptance, regardless of the employment start date. If this is correct, then any withdrawal of the offer following acceptance would amount to an actual, rather than an anticipatory breach.
This is demonstrated in the case of McCann v Snozone 2015. Mr McCann thought that he had verbally accepted an offer of a job as a maintenance assistant at Xcape in Milton Keynes. However, the employer thought that they had not yet made a final decision. During a follow-up conversation with his recruitment agency, Mr McCann was made a verbal offer from Snozone, which he accepted. Subsequently, Snozone decided not to offer Mr McCann employment after all, due to a lack of suitable qualifications, and denied that a formal offer had been made. An employment tribunal found that Mr McCann had been offered, and had accepted, a role. Although no terms had been agreed as to salary, start date or notice period, the tribunal accepted that the salary was likely to be at the mid-point of the advertised salary range, and determined that a minimum reasonable notice period for the role would be one month. Accordingly, Mr McCann was awarded one month’s salary for the employer’s breach of contract.
Can an employer claim damages if the employee withdraws?
Once an employee has accepted an offer of employment, and any relevant conditions have been satisfied, a contract of employment will be in existence.
If the employee changes their mind and decides to retract their acceptance of the offer, they will be required to terminate the contract by serving the minimum period of notice under the contract. A failure to do so will mean that the employee is in breach of contract, and the prospective employer will have a potential claim against the individual.
However, it is rare for an employer to bring a claim against an employee in this situation, since the employer is likely to find it hard to show what loss it has suffered as a result.
In some cases, however, prospective employers may try and guard against the possibility of an employee’s withdrawal by including a “no show” clause in the contract of employment. In Tullett Prebon Group v El-Hajjali 2008 for example, an employer successfully recovered compensation from an employee who had entered into a binding service agreement, but subsequently failed to start work. This is a good example of how an employer can protect itself from the danger of an employee withdrawing from an offer post-acceptance. As the employer was able to quantify its losses under this clause, and such were deemed to be a genuine pre-estimate of loss, the employer was able to recover substantial damages. Such a clause could arguably work both ways, for either the employer or the employee.
It is essential that employers tread carefully when making offers for employment, even verbal ones.
It is critical that any offer made is ‘subject to contract’. If not, and the offer is accepted by the employee, there is a risk the employee may be successful in a breach of contract claim. Employers must take precautions when making job offers, especially to senior employees, which could lead to a substantial damage for breach of contract claim if such an offer is then withdrawn.
Where an employee decides to pursue the matter, the starting point lies in contract law, namely that where a set notice period is agreed, the employer may only terminate the contract in line with that notice period. Even where an employee has not yet started their role, the courts generally take the view that the contract was formed when an offer has been accepted by the employee.
Damages arising from a breach of contract are also not necessarily limited to salary for the period of notice only but are meant to place a claimant in the same position as if the contract had been properly performed.
A withdrawal of an (accepted) job offer therefore exposes an employer to claims for additional losses an employee may have sustained, which flow from the breach and are not limited to their notice period. These could include future losses, where equivalent employment is not quickly obtained, or loss of bonuses to which the employee may have been entitled had they remained.
For many roles, a ‘no show’ damages clause or something similar may also be appropriate, although this would require careful drafting and attention.
While Orcel’s case is in the extreme, it serves to demonstrate how costly a poorly managed recruitment process can be.
Real Employment Law Advice appreciate that ultimately, the selection of an employee or colleague is down to the company’s executive team. However, our team can help you stay afloat in the murky sea of recruitment.