Payment in lieu of notice after resignation – dismissal or not?

The Employment Appeals Tribunal (‘EAT’) held that an employee had not been dismissed for the purposes of section 95 of the Employment Rights Act 1996 (‘ERA’) where the employer had exercised a contractual right to make payment in lieu of notice (‘PILON’) after the employee’s resignation.

Background Facts

Mr Fentem had begun employment with Outform EMEA Ltd in October 1990. He resigned from his role on 16 April 2019 and was due to end his employment on 16 January 2020 after a nine month notice period. On 19 December 2019, Mr Fentem was informed that Outform would be exercising their contractual right to pay Mr Fentem in lieu of his remaining notice period and bring his employment to an end on the same day. Mr Fentem claimed that the use of the PILON pay clause constituted a dismissal on 19 December 2019 and, consequently, he had the right to bring a claim for unfair dismissal.

The Law

Mr Fentem’s chances of success in a claim of unfair dismissal hinged on what was found to be the operative reason for the termination of his employment: was it a resignation or a dismissal? If it was the former, there would have been no dismissal, and he would not be able to bring an unfair dismissal claim.

The EAT had previously ruled in the case of Marshall (Cambridge) Ltd v Hamblin (in 1994) that an employee’s resignation was not converted into a dismissal where an employer chooses to exercise a contractual right to make a payment in lieu of notice after the employee’s resignation: the termination remains one by reason of resignation, however the date of termination is moved forward to the date of the PILON.

The Decision of the Employment Tribunal and EAT

The Employment Tribunal followed the earlier case law and ruled that Mr Fentem’s termination remained one of resignation rather than dismissal. Mr Fentem appealed to the EAT, who upheld the decision of the Tribunal.

The currently accepted position is therefore that an employer is permitted to use a contractual right to pay in lieu, in order to cut short an employee’s notice period and that this does not alter the operative reason for termination from resignation to dismissal. It is important to remember however that this right to payment in lieu of notice must be expressly set out in the contract of employment.

Whilst in many cases the only real effect will be that employment terminates at a relatively earlier date, we can also think of potentially bigger consequences: for example, by having the date of termination brought forward the employee could potentially miss out on bonuses as they are no longer employed at the time of award. This could be applied to other benefits such as share schemes and pension contributions. Employees should therefore think carefully about the timing of their resignation with consideration that their date of termination may be brought forward through a payment in lieu of notice. Employers should think carefully about what terms to include in a PILON pay clause in their contracts, as well as how and when they exercise a right to PILON.

It should also be noted that HHJ Auerbach, giving his judgment in the EAT, expressed some considerable concerns regarding the current position of the law and permission to appeal from the EAT in this case is currently awaited. This issue may therefore be liable to change in the future.

Blog written by Michael Green, Trainee Solicitor at didlaw.