The Court of Appeal has confirmed that an employer has to stick to a contractual obligation to make a payment in lieu of notice (PILON), even it discovers serious misconduct after it has chosen to rely on a PILON clause. The Court of Appeal dismissed the employer’s argument that such misconduct could act as a defence to a claim for payment of the amount due under the contract.

In this case the employer had issued notice terminating the claimant’s contract on redundancy grounds, and elected to make a PILON, relying on an express provision of the employment contract. After communicating this decision to the employee, but before processing the payment, it had discovered that the employee, who was the company’s managing director, had wrongly diverted £10,000 of the company’s money into his personal pension fund. When sued for the payment due under the PILON clause, the company sought to rely on the employee’s gross misconduct as a defence.

The Court of Appeal overturned the trial judge’s decision that such a defence was possible. The judge had relied on the Boston Deep Sea Fishing case, which established that an employee’s gross misconduct could be used to defeat a claim for wrongful dismissal, even if the employer did not know about it at the time it repudiated the employment contract. The Court of Appeal said that the position in this case was not analogous, since the liability to pay the PILON in accordance with the contact had already crystallised when the misconduct was discovered.

While this decision can be seen as bad news for employers, there are a number of ways in which their position can be protected in a scenario like this. One option would have been to word the PILON clause so that the employer would have been relieved of liability to make the payment if misconduct were discovered after the termination notice had been issued. It is also possible that the employer could have defended the claim in a different way, by making a counterclaim based on the employee’s breach of his fiduciary duty, rather than relying on the employee’s gross misconduct directly.