Payment in lieu of notice

Notice is normally needed in order to lawfully end an employment contract. A failure to give notice - by either party - will usually be a breach of contract.

Many employers include PILON - payment in lieu of notice - clauses in employment contracts to enable them to end employment early provided they pay the correct notice pay. If an employee resigns, there will be no dismissal. However, s95 Employment Rights Act 1996 says that an employee is dismissed if the employment contract is terminated by the employer, with or without notice. The EAT has looked at a case where the employee resigned but the employer ended the contract before the notice period had ended by making a payment in lieu of notice. The employee said he had been dismissed and was therefore entitled to bring an unfair dismissal claim.

In Fentem v Outform, the employee was employed for almost 20 years and required to give 9 months’ notice. He resigned on 16 April 2019, so his last day was due to be 16 January 2020. In December 2019, the employee was called into a meeting and told his employment was being terminated with immediate effect and that he would be paid for the remainder of his notice period in lieu. The employee brought a claim for unfair dismissal.

The tribunal had to decide whether there had been a dismissal. The employee said that the PILON - which cut short his employment after resignation - was a dismissal according to section 95. However, the employer relied on a case called Marshall v Hamblin, where the EAT had decided that a resignation is not converted into a dismissal if the employer exercises their contractual right to make a payment in lieu of notice. Marshallsaid that kind of termination is still a resignation and all that changes is the termination date. In Fentem, the employment tribunal agreed with Marshalland said that the employee had resigned rather than being dismissed. The employee appealed, saying Marshall was manifestly wrong and should be overturned.

The EAT disagreed. To overturn Marshall and be able to give a judgment that effectively went against it, the EAT had to show that the decision had been obviously wrong. The EAT clearly had problems with the reasoning in Marshall, given that terminating employment and paying a PILOIN in any other circumstances is a dismissal under section 95. However, the EAT could not say that the judgment was manifestly wrong and so dismissed the appeal.

This case confirms that a decision to make a payment in lieu of notice, in accordance with a contractual right to do so, will not turn a resignation into a dismissal. All the employer must do is pay the balance of the notice period. However, the employee in this case has asked for permission to appeal to the Court of Appeal. There may yet be confirmation of the legal position from a higher court, one way or the other, in due course.

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