It seems that there is some uncertainty about an employer’s obligations when dismissing, writes Peter Done, managing director of Peninsula.
With the relatively rare exception of gross misconduct dismissals, all dismissals require the employer to give notice of the ending of the contract. (This does not currently apply where an employee retires on the normal retirement date laid down in his or her contract, since this is not technically a dismissal – but government proposals on age discrimination will require advance notification of retirement, and this is good practice which clients should already be following.)
The notice that you as the employer must give to terminate the employment contract is the period laid down in the employee’s contract (which will be set out in their statement of main terms), subject to the minimum periods set by statute. These minimum periods are: one week if the employee has been continuously employed for one month or more but less than two years, and one week (up to a maximum of 12 weeks) for each complete year of service if employment has been two years or more. There is no statutory notice entitlement if an employee has less than one month’s service at the date of dismissal, but you must of course give any contractual notice to which they may be entitled.
In most cases the employee will work normally during this notice period and leave your employment on its completion. But sometimes you may prefer the employee not to remain in their job – you may be concerned about their access to sensitive information, or potential damage they could cause to customer relationships, or in redundancy situations you may simply not have any work for them. In this event you have two options – garden leave, if your contracts contain such a provision, or immediate termination with pay in lieu of notice.
‘Garden leave’ refers to the situation where an employee under notice is instructed not to attend work. He or she remains employed until the notice period expires, and is entitled to all their normal benefits – for example to retain their company car if they are normally allowed private use.
If any part of their remuneration varies with work actually done (for example sales generated), a fair sum must be calculated and paid if by not attending work they are unable to earn this remuneration – usually a suitable average would be calculated on the basis of past earnings. It is important to note however that if the employee’s contract does not give you the specific right to place him or her on garden leave, to do so may be a breach of the contract.
In exceptional circumstances (for example where the notice period is long and the employee risks losing valuable skills by not being allowed to do their job) this may give grounds for the employee to resign during the notice period and claim constructive dismissal. It also means that as you, the employer, breached the contract you would not be able to rely on any other contractual clauses, for example you would not be able to enforce restrictive covenants
‘Pay in lieu of notice’ is the generally used term where the employer dismisses without any (or with inadequate) notice but pays a sum of money instead. Employers sometimes believe that they cannot pay in lieu of notice unless they have this right written into the contract. This is not correct – pay in lieu can still be given, but if the employer does not have the contractual right, and is therefore in breach of the contract, they will be unable to rely on any post-termination clauses in the contract (as in garden leave, such as restrictive covenants).
This is the usual reason why some employers prefer to have the right to pay in lieu included in employment contracts thus creating a contractual right. Consequently, it does however have the somewhat odd result that payments in lieu then become subject to income tax and National Insurance deductions since they are payments due under the contract.
If there is no contractual authority for such payments, the payment still tends to be referred to as pay in lieu of notice but is technically liquidated damages. Whether the employer has a contractual right to pay in lieu of notice or not the employee must not receive less, i.e. net, in pay in lieu or liquidated damages, than they would have received in total it they had worked their notice.
Consequently, any benefit which is lost, e.g. car, private medical insurance, pensions, etc., must also be “paid” either by an equivalent cash sum or perhaps continuing the medical insurance or allowing the use of the car until the date the notice would have ended had not the exercise of pay in lieu occurred.
The Inland Revenue will in most cases regard them, liquidated damages, as non-taxable termination payments (but only up to £30,000 – beyond that income tax will be levied) – it is important to note however that there is no statutory authority for this and individual tax officers occasionally try to challenge the tax status of payments in lieu. In calculating the £30,000 limit, incidentally, any redundancy payment will count towards that maximum.
Note that any payment in respect of untaken holidays must be taxed as income in the normal way, as must any pay earned during employment but not paid until, or after, termination (such as commission payments which cannot be calculated until after the employee has left). In general, any payment in lieu of notice must be paid to the employee on termination or very quickly afterwards – it is not acceptable, unless you have the employee’s agreement (in writing!), to withhold any payments until the date when termination would have taken place if notice had been worked.
It is worth noting that the ‘effective date of termination (EDT)’ (which applies to determine whether an employee has sufficient service to bring various Employment Tribunal claims, and the relevant time limits) will depend on how the employment is terminated. If notice is given and worked (or garden leave applies), the EDT will be the date on which that notice expires.
If a payment in lieu of notice is made, the EDT will be the date of termination, except that it can be projected forward by the period of minimum statutory notice to which the employee is entitled (but not by any additional contractual notice period). Thus an employee dismissed short of a year with no notice will have statutory notice of one week (not contractual notice) added to their service to calculate the EDT. Thus they may in fact qualify to bring an unfair dismissal claim by virtue of this additional week extending their ‘just under one year’ to ‘just over one year’s service’!
A third alternative may suggest itself in those cases where the employer does not want the employee to do their normal job during the notice period (or no such work is available). Can you require the employee, during notice, to undertake alternative work? This will in part depend on the employee’s contract (for example, the wording of any flexibility clause), but you cannot simply insist on the employee doing whatever work you can provide, even if the alternative is to pay them to do nothing. This is a highly sensitive area and you should seek professional advice if this situation arises.
Where the employee is serving notice but decides not to turn up for work, what can the employer do? What you cannot lawfully do is simply to withhold pay. You should instead write to inquire the reason for the employee’s absence – if this is not satisfactory, or no reply is received, disciplinary action may be appropriate, but you should consult legal advice in such a situation before taking any action.
Do you agree with this advice, we’d like to hear your thoughts, comments and opinions on the legalities of dismissing workers – simply post your comments in the box below.
