The Court of Appeal has ruled that, in certain circumstances, an employer will still have to pay an employee in lieu of notice even if it discovers, after dismissal, that the employee committed gross misconduct whilst still employed.
In Cavenagh v William Evans Ltd, Mr Cavenagh was managing director of William Evans Ltd. The company decided that Mr Cavenagh's role was redundant and dismissed him with immediate effect by exercising a PILON (pay in lieu of notice) clause in his contract of employment. Under the PILON clause, Mr Cavenagh was entitled to the equivalent of six months' salary. The company wrote to Mr Cavenagh informing him of the decision to terminate his contract with immediate effect. In this letter, it specifically stated that he was to be paid in lieu of notice. Before it made the payment in lieu of notice, the company discovered that Mr Cavenagh had transferred £10,000 of the company's money to himself, in the full knowledge that he had neither the authority to do so nor an entitlement to the money. This amounted to gross misconduct. The company therefore refused to make the payment in lieu of notice to Mr Cavenagh.
Mr Cavenagh sued the company for breach of contract as a result of its refusal to pay him in lieu of notice. The company argued that it was entitled to withhold the payment because his gross misconduct amounted to a repudiatory breach of contract, despite being discovered after termination. The company tried to rely on a well-known case called Boston Deep Sea Fishing v Ansell. In that case, the company was permitted to rely on the employee's gross misconduct to defend a claim for wrongful dismissal, even though it only found out about the misconduct after the employee had been dismissed.
The Court of Appeal reluctantly held that, despite Mr Cavenagh's objectionable behaviour, the company did have to pay him in lieu of notice. The company's choice to terminate Mr Cavenagh's contract with immediate effect was in accordance with an express term of the contract. Having chosen to terminate the contract under that term, the company could not escape the contractual obligation which that course of action triggered. As such, the exercise of the term gave rise to debt to Mr Cavenagh. There was no provision in the contract allowing the company to escape its contractual obligations in these circumstances. The court said that, when choosing to make a payment in lieu, an employer inevitably takes a risk that any previous misconduct may come to light after the dismissal.
The Court of Appeal explained why this case differed from the Boston Deep Sea Fishing case. It said that a subsequent discovery of gross misconduct is not a defence to non-payment where a clause of the contract has already been used lawfully to terminate the contract. In contrast, where a contract has already been terminated 'unlawfully' (ie without notice or payment in lieu of notice), the unlawful termination (refusal to pay in lieu etc) can be justified by a subsequent discovery of the employee's gross misconduct.
PILON clauses undoubtedly provide employers with certainty, the option for a 'clean break' and the ability to hold an employee to his post-termination restrictive covenants. However, there are some interesting points to think about as a result of this decision. Firstly, the decision calls into question the sense of relying on a PILON clause to terminate a contract. It might make more sense, depending on the circumstances, to rely on a garden leave clause for example. Not only could an employee be held to his restrictive covenants (if any), but any misconduct discovered during a period of garden leave would allow the employer to dismiss the employee summarily and without further payment. Secondly, employers might like to think about re-drafting their current PILON clauses to include the right to 'claw back' money paid in lieu of notice if a breach of contract by the employee is discovered after termination. This will prevent an employee from benefitting from a payment in lieu which he would not have received had his misconduct come to light before his contract was terminated. Thirdly, employers should consider re-drafting their standard compromise agreements to ensure that money to be paid out either as payment in lieu or ex gratia is conditional upon the employee warranting that he has not committed a repudiatory breach of contract.
The correct course of action will always depend on the precise circumstances as well as the terms of the contract. Nevertheless, the case is a useful reminder to employers to consider carefully how best to terminate an employment contract, and the risks associated with the possible courses of action.