UK: Termination - payment in lieu of notice payable despite subsequently discovered gross misconduct

Employers should review any precedent payment in lieu of notice (PILON) clauses and compromise agreement wording to ensure that any payment will not be payable or can be recovered if, having dismissed an employee, the employer subsequently discovers the employee's prior gross misconduct.

The Court of Appeal has ruled that, where an employer exercised its contractual right to terminate with a PILON payment, that payment remained payable as a debt even though the employer subsequently discovered that the employee had committed gross misconduct which would have entitled it to dismiss summarily.  While choosing to exercise the PILON clause will ensure the termination is lawful and therefore preserve the right to enforce any covenants, it also creates a contractual debt from which the employer cannot resile unless the contract expressly permits this.  

A carefully drafted PILON clause may therefore present a solution.  The case also highlights the importance of compromise agreements including a warranty from the employee that there has been no prior breach of contract.

The position contrasts with that where an employer has terminated unlawfully and faces a claim for wrongful dismissal: here the employer can justify the dismissal by relying on after-acquired knowledge of the employee's gross misconduct.  It therefore highlights the need for employers with a discretionary right to terminate by making a PILON to carefully consider whether to exercise this right or instead to dismiss summarily, bearing in mind the likelihood of subsequently discovering repudiatory breaches by the employee.

The Court noted that in this case the employer had failed to plead claims which might have provided it with a remedy.  It may have been able to claim for the return of the PILON as damages for the employee (the managing director)'s breach of fiduciary duty in failing to inform the employer of his wrongdoing.   It might also have been able to plead that the employer's agreement to make payment in lieu was void or voidable by reason of a vitiating unilateral mistake by the employer as to whether it had grounds to terminate summarily.  These arguments might present options for other employers in this situation.  (Cavenagh v William Evans, CA)