In Cavenagh v William Evans Limited, the Court of Appeal has held that a former MD, whose appointment was summarily terminated by reason of redundancy, was entitled to payment in lieu of notice even though it was subsequently discovered that he had committed an act of gross misconduct.

What does this mean?

Had the company in this case known about the gross misconduct before terminating the employment contract, it could have accepted the director’s repudiatory breach of the service agreement and so discharged itself from liability for payment in lieu.

However, since it had elected to terminate the service agreement by reason of redundancy the company had to live with the contractual consequences of its election for a “clean break”. The Court pointed out there was no provision in the contract which entitled the company to withhold payment where an act of gross misconduct was subsequently discovered.

What should employers do?

Check for misconduct issues before terminating on other grounds or risk it being too late to stop pay in lieu of notice. If this is likely to be a wider problem, take specific legal advice about including a clause in employment contracts in future to allow withholding or recovery of payment in lieu of notice.