Panama v Hackney

When assessing compensation after an unfair dismissal, an employment tribunal must consider not only what would probably have occurred at a hypothetical disciplinary hearing, but also whether the hypothetical dismissal would have been fair under section 98(4) of the Employment Rights Act 1996. The misconduct inquiry requires a genuine belief in guilt, reasonable grounds for that belief, and as much reasonable investigation as the circumstances permit. A serious allegation of fraud must be made clearly and sufficiently early to give the employee a proper opportunity to answer it. Where the employer has not obtained evidence linking the employee to the alleged fraud and has failed to make obvious inquiries, the reasonable-grounds and investigation requirements are unlikely to be met.

Felicia Panama was employed by the London Borough of Hackney and was dismissed while allegations concerning outside legal work and a conflict of interest were being investigated. The Employment Tribunal dismissed her discrimination complaints but found that the dismissal was unfair because proper procedures had not been followed. It nevertheless concluded that she would probably have been dismissed shortly afterwards for gross misconduct if disciplinary proceedings had continued, and awarded no compensation for the intervening period.

The Employment Appeal Tribunal dismissed her appeals, holding that the Tribunal was entitled to reach that conclusion on the hypothetical question. The appeal concerned whether the finding of fraud was reached without sufficient evidence or notice, and whether the Tribunal had properly assessed the fairness of the hypothetical dismissal.

The Court of Appeal unanimously allowed the appeal, with costs.

1. Hypothetical dismissal. In deciding whether compensation should be reduced because an employee would have been dismissed later, a tribunal must ask not only what conclusion a disciplinary hearing would probably have reached. It must also determine whether the hypothetical dismissal would have been fair under section 98(4) of the Employment Rights Act 1996.
2. Fair notice of fraud. Fraud is a particularly serious allegation. Applying the principle in Hotson v Wisbech Conservative Club [1984] IRLR 422, an allegation of dishonesty must be made with sufficient formality and early enough to give the employee a full opportunity to understand and answer it. It was unfair for the allegation to emerge for the first time in cross-examination.
3. Misconduct fairness requirements. The Tribunal had to apply the requirements identified in British Home Stores Ltd v Burchell [1978] IRLR 379: the employer’s genuine belief in guilt, reasonable grounds for that belief, and as much reasonable investigation as the circumstances required when the belief was formed.
4. Application. Although the Tribunal was entitled to conclude that the appellant had written the letters, the finding of fraud required a further finding that she was the solicitor who advised Mrs Daramola to make a false claim. There was no direct evidence establishing that link. The employer had not asked obvious questions, including the solicitor’s identity and whether the solicitor knew the children were not brain-damaged. A simple telephone inquiry might have resolved the issue. The second and third Burchell requirements were therefore unlikely to be satisfied, and a dismissal for fraud would not have been fair.

• Court of Appeal (Civil Division): Allowed the appeal from the Employment Appeal Tribunal, with costs.
• Employment Appeal Tribunal: On 12 March 2002, dismissed the appellant’s appeals from the Employment Tribunal’s decisions.
• Employment Tribunal: In decisions dated 2 June and 2 November 2000, dismissed the discrimination complaints, found the dismissal unfair, and awarded no compensation for the period before the hypothetical later dismissal.