Discovery of earlier gross misconduct won't undo a PILON

Updated June 2012

Can an employer withhold a payment in lieu of notice if it uncovers earlier gross misconduct by the employee?

In the case of Cavenagh v William Evans Ltd, the Court of Appeal has held that an employer who exercised a contractual right to terminate an employee's employment with a payment in lieu of notice (PILON) could not rely on the subsequent discovery of the employee's earlier gross misconduct to avoid liability for the payment.

Background

Ever since the case of Boston Deep Sea Fishing v Ansell (1888), it has been clear that an employer who dismisses an employee wrongfully (and therefore faces a claim for damages for breach of contract) will successfully defend the claim if it subsequently uncovers evidence of earlier gross misconduct by the employee, even if it was unaware of the misconduct when it terminated the employee’s employment. The issue in this case was whether the same defence applies where the employer has failed to make a PILON in accordance with the terms of a contract of employment.

Facts

Cavenagh v William Evans Ltd

Mr Cavenagh was made redundant as part of restructuring at William Evans Ltd. In terminating his employment the company relied upon a contractual clause permitting it to make a payment in lieu of notice. Shortly afterwards, and before it had made the payment, the company discovered that Mr Cavenagh had transferred approximately £10,000 of company monies into his pension fund without authority some two months before termination. The company refused to make the payment in lieu of notice and Mr Cavenagh sued.

Decision

The Court of Appeal held that, in the absence of contractual provisions to the contrary, the company was not entitled to avoid the consequences of opting to exercise the PILON clause on discovery that a summary dismissal could have been justified.

The court distinguished this case from Boston Deep Sea Fishing by pointing out that the latter provided an employer with a defence against a claim for damages for wrongful dismissal, as opposed to Mr Cavenagh's claim for payment of a contractually accrued debt.

Comment

If employers want to have a PILON clause in the contracts of their staff, they should consider including a provision enabling them to recover or avoid payments under the clause in the event that earlier misconduct by an employee comes to light which would have permitted summary dismissal.

Similarly, where a compromise agreement is used, employers should ensure that it is a condition of the agreement that the employee has not committed any act which would have allowed the employer to summarily terminate the employment contract.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2012. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.