The concept of unfair dismissal became part of UK law in 1971 and shortly afterwards the courts decided that compensation payable for unfair dismissal should be limited to financial losses only.
But in a 2001 case before the House of Lords, Lord Hoffman issued an opinion suggesting that this should be extended to cover the non-economic losses – such as distress caused by bullying – suffered by the dismissed employee.
The Employment Rights Act of 1996 states that compensation for unfair dismissal should be:
"such amount as the tribunal considers just and equitable in all the circumstances having regard to the loss sustained by the complainant in consequence of the dismissal in so far as that loss is attributable to action taken by the employer".
The question of whether this is limited to financial losses alone had to be considered later in 2001, when a Mr Dunnachie took Hull City Council to an employment tribunal for unfair dismissal.
Dunnachie had worked for the Council for fifteen years, working his way up through the environmental health department until, when acting principal environmental health officer, he was forced to resign. The tribunal found that the resignation was the result of harassment and undermining by Dunnachie's former line manager, and that this was a clear case of workplace bullying. It followed that Mr Dunnachie had been constructively and unfairly dismissed.
The tribunal then awarded damages, which included £10,000 for the emotional distress suffered by Dunnachie.
The Council appealed to the Employment Appeals Tribunal (EAT), arguing that the remarks in the House of Lords case were not part of the main reasoning of that case and should therefore be disregarded. The law was, said the Council, that compensation in unfair dismissal cases should cover only financial loss and the sum of £10,000 should not be awarded. The EAT agreed, but gave leave to appeal.
Last month the Court of Appeal approved the award. In a majority decision it ruled that, while Lord Hoffman's comments were not binding on any other court, the restriction of compensation to financial loss only was "not good law".
According to Lord Justice Sedley:
"To hold this is not to hold that every upset caused by an unfair dismissal carries a compensatory award. The power is there to permit tribunals to compensate an employee for a real injury to his or her self-respect. It is likely to become material principally in cases of constructive dismissal where the employee has been driven from his or her job. For the ordinary case of unfair dismissal, assuming that there is no reinstatement or re-engagement, it is the basic award which is there to compensate for the unfairness."
Hull City Council has been granted leave to appeal to the House of Lords.
Robyn McIlroy, employment lawyer with international law firm Masons said:
"This is an extremely important case and, if not appealed, will materially affect the way in which employers have to think about quantification of damages for unfair dismissal."
"In essence, if Employment Tribunals can consider the compensation for damage to 'self respect' it will take the certainty out of estimating potential awards of damages."