Easing the burden on employers
Payment in lieu clauses in cases of dismissed employees have often placed a heavy cost on employers, but, write Georgina Keane and Susannah Perry, a recent decision by the Court of Appeal could change all that
Can unjustified summary dismissal ever be good news for an employee? For more than a year the answer has been ‘yes’, provided the contract of employment had a pay in lieu of notice (Pilon) clause and the employee could get a new job quickly. Following the Employment Appeal Tribunal’s (EAT’s) decision in Cerberus Software v Rowley  IRLR 690 the employee in such a situation could claim the full amount of money due under the Pilon clause (subject to taxation) and keep any money they might have earned during the notice period.On 18 January the decision of the EAT in Cerberus was overturned by a majority of the Court of Appeal. This is good news for employers, since the EAT’s decision had placed a heavy burden on them, especially when deciding whether an employee’s behaviour justified summary dismissal. The question considered by the Court of Appeal was as follows. Where the contract of employment provides for Pilon and the employer summarily dismisses the employee on grounds of misconduct, which are later held to be unfounded, is the employee’s claim in damages for breach of contract or in debt for the contractual right to a payment in lieu of notice? The importance of this question lies in mitigation. If the employee’s claim is framed in breach of contract they have a duty to mitigate their loss, thus obliging them to give credit for any monies earned during their notice period. If the claim is framed in debt there is no such duty to mitigate and the employee is entitled to the full payment in lieu, irrespective of whether they work during their notice period.In 1999 the EAT held that where there was a Pilon clause it was not open to the employer to elect to categorise the matter as a breach of contract so as to take advantage of the employee’s duty to mitigate. The effect of this decision was that where there was a Pilon clause and the employer was dismissed summarily without justification he would have to pay the employee the full amount due in respect of the notice period, irrespective of whether the employee got a job in the meantime. Rejecting the EAT’s purposive approach, the Court of Appeal focused instead on the construction of the contract. In Cerberus the Pilon clause stated “…the employer may make a payment in lieu of notice to the employee”. It was held that because the word used is “may” and not “will” or “shall” there is no promise to make payment in lieu of notice in the event of termination. The employee does not have a contractual right to Pilon, and their claim must be in damages for wrongful dismissal with the concomitant duty to mitigate. The effect of the Court of Appeal’s decision is to require a close inspection of the Pilon clause. The relevant question now is not “is there a Pilon clause?” but instead “what does the Pilon clause say?”. The employer may still not not be able to take credit for any sums earned during the notice period by the employee, but this will depend on the wording of the Pilon clause. The Court of Appeal’s decision turned on a narrow set of facts and its application is limited to cases with the same factual matrix: that the Pilon clause is drafted in permissive rather than mandatory terms and that the employee has been summarily dismissed without justification (whether in good faith or bad).
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