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Pay in lieu of notice: How to protect yourself


Breach of contract?

Can an employer force an employee to not work their notice? Barrister Charles Price has the answers.

The question as to whether an employer can ensure their employee doesn’t work their notice was inadvertently put before the Court of Sessions in Scotland in the case of Morrish v NTL Group Ltd [2007], which considered whether a company could lawfully terminate its employee’s contract summarily by making a payment in lieu of notice (PILON) when no such clause existed in the contract.

Mr Morrish had an express term in his contract entitling him to 12 month’s written notice but no PILON provision. However, he was dismissed by NTL without notice and was instead given a payment in lieu.

Mr Morrish argued that he would have been entitled to a bonus and commission had he worked the 12-month notice period and brought a claim for breach of contract and loss of opportunity.

“Failure by an employer to give the minimum notice required is a breach of contract and therefore amounts to wrongful dismissal. The period of loss ends at the time when the employer could have terminated the contract lawfully.”

NTL argued that it was not in breach because Mr Morrish’s contract included an implied term giving it the right to lawfully terminate his contract by making a payment in lieu of notice.

The Scottish Court of Sessions was not prepared to accept NTL’s argument as Mr Morrish’s contract already contained an express clause dealing with his notice period. It commented that it had “strong reservations as to whether, in the 21st century, there is any scope for the implication of such a term”.

It also referred to s86 of the Employment Rights Act (ERA) 1996, which sets out minimum statutory notice periods of termination in employment contracts. Section 86 sets out statutory entitlement to employees for minimum periods of notice and the court was reluctant to imply a term into the contract where a statutory term already existed. The court referred to the decision of Lord Hoffmann in Johnson v Unisys Ltd [2003] 1 A.C. 518 who said:

“Any terms which the courts imply into a contract must be consistent with the express terms. Implied terms may supplement the express terms of the contract but cannot contradict them. Only Parliament may actually override what the parties have agreed.”

Failure by an employer to give the minimum notice required by ERA 1996 s.86 is a breach of contract and therefore amounts to wrongful dismissal. The period of loss ends at the time when the employer could have terminated the contract lawfully.

The result of the case highlights the importance of having an express PILON clause in the contract of employment. Without an express clause, employers will be open to a breach of contract claim by employees who have missed the opportunity to enjoy benefits or other payments during the notice period.

Employers should also be aware that if an employee’s employment is terminated by a payment in lieu of notice, and no express provision exists in the contract, then there will have been a breach and therefore any post-termination restrictions contained within the contract will not normally be enforceable.

Garden leave

So how does a prudent employer protect itself? One answer is to include a term in the contract to place an employee on ‘garden leave’ during their notice period. This means that the employee is still employed but is normally required to stay away from the workplace during the period of leave, which is often the notice period to terminate the contract. As long as the clause is reasonable, there will be no breach of contract and therefore no right by the employee to claim additional damages.

However, although there is a general right at common law to tell most employees not to turn up for work as long as they are paid, the courts have indicated a willingness to make an exception to the general rule and imply a duty to provide a reasonable amount of work in order that the employee maintains his or her particular skill set.

“A garden leave clause will allow an employer to keep an employee away from the workplace whilst retaining their express and implied duties towards the organisation.”

This implied term can be very relevant when considering the enforceability of garden leave, if it would lead to a diminution in an employee’s marketable skills.

A garden leave clause will allow an employer to keep an employee away from the workplace whilst retaining their express and implied duties towards the organisation, for example, not to set up in competition with the employer’s business and to maintain a duty of confidentiality, both during and after employment.

Express provision

Employers should note that garden leave can only be invoked when there is an express provision in the contract as no such implied term exists.

For most employers, the effect of the decision in Marrish v NTL Group Limited [2007] will not cause too much concern, except to ensure that a PILON clause includes compensation for car use and other benefits so as not to be unreasonable, and therefore unenforceable.

However, with executive contracts, bonus entitlements may be affected and an employee could bring a claim based on failure to pay bonus or loss of entitlements. There may be an adverse effect on accrual of pension rights (beyond the loss of premiums) if the notice period is sufficiently lengthy.

Of most significance is that a breach of contract by the employer can nullify the enforcement of restrictive covenants, rendering them inoperable.

Employers should also note that an employee who is wrongfully dismissed does not have to give credit for sums earned from other employers during the notice period as established by Norton Tool Co. Ltd v Tewson [1972] and supported in the Court of Appeal recently in the case of Burlo v Langley [2007].

From a practical point of view, before putting an employee on garden leave, employers should consider the length of the notice period and the nature of the employees skills sets. The longer the notice period and the more skilled the employee, the more likely it is that the employee could challenge the requirement to stay at home and ‘garden’.

Employers should also consider the tax position. The revenue has indicated that where a PILON clause exists, any payment under it to the employee is taxable, any payment in lieu of notice where there no such provision exists is effectively compensation for breach of contract, which does not normally give rise as a taxable payment.

Employers are therefore lawfully able to force their employees not to work their notice periods if express provision allows for it in the contract. If not, employers run the risk of a claim for damages for losses up to the point where they could have legitimately terminated the contract.

One Response

  1. Express PILON not in interest of the employee
    It seems to me unfortunate that arguments and rulings which are really about executive bonuses and benefits now are likely to be detrimental to junior staff who would benefit from a PILON which could be paid free of tax. In a redundancy situation the payment of the notice period in lieu often provides a welcome source of extra income for people losing their jobs. If employers now have to put a PILON term into the contract and this payment becomes taxable it is another case of the more junior and lower paid suffering.

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