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Are dishonest employees entitled to payment in lieu of notice

In this month’s ENews we consider the Court of Appeal decision in which a dishonest employee was allowed to walk away with his payment in lieu of notice; a European Court of Justice case which determined that an employee who became ill on holiday was entitled to take their annual leave at a later date; and a number of recent developments brought about under the government’s employment law review.

Are dishonest employees entitled to payment in lieu of notice (PILON)?

The Court of Appeal in the case of Cavenagh v William Evans Ltd has determined that sometimes they can be.

William Evans Limited made Mr Cavenagh redundant and sent him a letter terminating his employment. Mr Cavenagh’s service agreement provided for six months payment in lieu of notice, which equated to £65,000. The company subsequently discovered that Mr Cavenagh had wrongly procured a payment of £10,000 from the company into his pension scheme while still employed. In light of this conduct the company regarded itself as discharged from any liability to make the notice payment. Mr Cavenagh brought a claim in the County Court for the payment in lieu of notice. The County Court dismissed Mr Cavenagh’s claim for the payment in lieu on the basis that his prior gross misconduct gave the company a complete defence to the debt claim.

On appeal, the court found in favour of Mr Cavenagh determining that:

  • The company elected to exercise a contractual power to terminate the service agreement and Mr Cavenagh acquired a right to payment in lieu.
  • Having chosen to terminate the agreement, it was not open to the company to avoid the contractual consequences and follow the different common law route of accepting repudiation by relying, after the termination, on an earlier act of gross misconduct.
  • There was no provision in the service agreement denying Mr Cavenagh the right to payment if it was subsequently discovered that he had committed a prior act of gross misconduct.
  • Neither the general principles of contract law nor those laid down in the case law cited, state that prior unknown misconduct provides a defence to a debt claim arising from an employer’s election to summarily terminate an employee’s contract.

Although it found in favour of Mr Cavenagh, the court clearly sympathised with the company and alluded to the fact that the outcome may have been different had alternative arguments been advanced by the employer at first instance.

Despite the court’s suggestion that it would have reached a different conclusion in a differently pleaded case, employers should review their service agreements that they are able to avoid (or claw back) payments in lieu where subsequent gross misconduct is discovered. Indeed it will be particularly important to include such a provision when dealing with senior employees with long notice periods. Employers will also need to make sure that any payments due under settlement agreements are similarly conditional upon the employee not having committed any prior gross misconduct.

Will an employee who falls ill on holiday be entitled to take corresponding paid leave at a later date? The European Court of Justice has held that they will.

In the case of ANGED V FASGA, the ECJ determined that employees can reclaim their annual leave if they become ill whilst on holiday. This decision goes further than previous cases that had established that workers who were unfit for work before their holiday were entitled to take pre-booked leave at another time. Here, the ECJ has held that the Working Time Directive grants workers a right to at least four weeks’ paid annual leave, “even where such leave coincides with periods of sick leave” and that “the point at which the temporary incapacity arose is irrelevant”. The court highlighted that the purpose of annual leave is for rest and relaxation, whereas the purpose of sick leave is to give workers time to recover from illness that has caused them to be unfit for work. Workers on sick leave are entitled to take annual leave at a later date and it would therefore “be arbitrary and contrary to the purpose of entitlement to paid annual leave to grant workers the right to paid leave only if they are already unfit for work when the period of paid annual leave commences”.

Following the government’s consultation on Modern Workplaces in May 2011, it seems likely that the Working Time Regulations will be updated to reflect, amongst other things, this line of reasoning /rationale adopted by the ECJ. Given that employers will likely be acting in contravention of the Working Time Directive if they do not permit employees to take their annual leave at a later date in these circumstances, employers should update their holiday policies to ensure that they reflect the ECJ’s conclusions in this case. This potentially could leave to abuse and it may be prudent to amend policies which provide that employees are required to provide evidence of sickness before annual leave can be re-scheduled.

In the news…

It can be seen from the Resolving Workplace Disputes and Modern Workplaces consultations that the government is seeking a culture change in the workplace, with early resolution of disputes becoming the norm. In recent months the government has consulted over a range of recommendations including Adrian Beecroft’s compensated ‘no-fault dismissals’ proposals and ‘protected conversations’ to allow employers to discuss their concerns with employees without fear of such discussions being used against them in the tribunal at a later date.

There appears to have been a disconnect however, between the government’s reform aims in theory, and the proposals that were consulted over in practice. Indeed a number of the potential changes under consultation, including the controversial ‘no-fault dismissals’, have now been quietly shelved following the response received from practitioners, politicians and the media alike.

Other proposals have however worked their way into the Enterprise and Regulatory Reform Bill, which underwent its Second Reading in the House of Commons this month.

Settlement agreements

The government has confirmed that the proposed changes to compromise agreements will not be purely cosmetic and that the renamed ‘settlement agreements’ will allow employers to make settlement offers without fear of such offers being raised in tribunal proceedings.

Under the new section 111A (to be inserted into the Employment Rights Act 1996), employers will be able to hold meetings with employees about bringing the relationship to an end without worrying that the content of these discussions might be used against them at a later date. Thus, whilst the government’s original ‘protected conversations’ proposals have also been shelved, employers will now be able to utilise section 111A if they wish to hold pre-termination discussions in confidence. The employer’s ‘protection’ under section 111A will however be limited in that:

The employee’s claim must be for unfair dismissal; other claims will not be affected by the new rules.
It will not apply in an automatic unfair dismissal situation (e.g. if the employee is asserting a statutory right).
It will not apply where the behaviour of the employer is “improper”, although it remains to be seen what kind of behaviour will be deemed improper.

Whilst these proposals will protect employers from employees using the settlement offer as evidence in unfair dismissal claims, it remains open to the employee to decline the offer in the first place.

The government has confirmed that further consultations regarding the guidance and model templates will take place in the coming months, following which employers will need to start reviewing their procedures and implementing any changes. It is essential that as and when these reforms occur, employers do not view them as a means of avoiding the performance management procedures that they already have in place.

Amongst the other proposed reforms in the Enterprise and Regulatory Reform Bill were:

  • Compensatory award in unfair dismissal claims – these proposals would give the secretary of state the power to reduce the compensatory award to the lower figure of an employee’s annual earnings or national median earnings.
  • Compulsory conciliation by ACAS – the Bill proposes compulsory conciliation by ACAS before any claim can proceed.

Equal pay audits

The government has announced that it has decided to proceed with the Modern Workplaces proposal to give employment tribunals the power to order equal pay audits where an employer is found guilty of gender discrimination in relation to contractual or non-contractual pay matters.

Under the proposals, tribunals will be obliged to order an employer to conduct a pay audit in cases where continuing discrimination is ‘likely’. However, the tribunal will not make an order where:

  • An audit has been completed in the last three years
  • The employer has transparent pay practices
  • The employer can show a good reason why it would not be useful.

Further, micro businesses will initially be exempt from the proposals.

The Government Equalities Office (GEO) has advised that a further consultation will take place later this year on publication requirements and how the audits will operate in practice. It seems that as and when they are implemented, employers will be keen to do what they can to avoid the compulsory audits by introducing regular audits and / or transparent pay practices. Further, the threat of an equal pay audit will undoubtedly incentivise employers to settle and seek alternative methods of resolving their disputes.

If you require any information please contact

Sejal Raja
t: 020 7227 7410


This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.

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