The Court of Appeal has held that, in the case of an employee who has been constructively dismissed, earnings during what would have been the notice period must be taken into account when calculating the compensatory award for unfair dismissal (Stuart Peters Ltd v Bell).

Ms Bell succeeded with a claim for constructive unfair dismissal against her employer. She had a contractual notice period of 6 months. The tribunal and the EAT did not deduct earnings during what would have been the notice period from the compensation she was awarded. Instead, it applied what is known as the "narrow principle" in the 1973 case of Norton Tool v Tewson, which held that it was "good industrial practice" to allow full compensation for the notice period without bringing into account earnings from elsewhere.

The Court of Appeal overturned the decision of the EAT and held that Ms Bell had to give credit for her earnings during the notice period. The Norton Tool principle should be treated as a limited exception to the principle that an employee should not recover more than their actual loss. It derives from perceived good industrial relations practice that an employer who has summarily dismissed an employee should pay their notice in full. The same cannot be said of constructively dismissed employees, where typically there will be a dispute as to whether there has actually been a dismissal. In those circumstances it cannot be said to be either general or good practice for the employer to pay in lieu of notice.

Impact on employers

  • It is good news for employers that employees who claim to have been constructively dismissed will no longer be entitled to a windfall at their expense if they obtain new employment during the notice period.
  • However, in cases of actual dismissal, the "narrow" Norton Tool principle still applies to entitle the employee to full compensation for the notice period even if they have been successful in finding new work.
  • The compensatory award for unfair dismissal is capped at £66,200 so dismissed employees whose loss of earnings for the notice period fall within that limit and who have to some degree mitigated their loss, will be more likely to bring claims for unfair dismissal so that they can benefit from a windfall. By way of contrast, if they claimed damages for breach of contract or wrongful dismissal, they would be required to give credit for earnings during the notice period.