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Case update (3): Resignation – changing the date

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Summary:  If an employee resigns and the employer brings forward their termination date by making a contractual payment in lieu of notice, does this change the resignation into a dismissal?

No, says the EAT in Fentem v Outform (available here), not under the law as it currently stands. However, the EAT made clear it has strong reservations about whether the law is correct on this and that it may well be overturned by the Court of Appeal. So watch this space…

Background: When an employee resigns with notice, the contract of employment continues to operate as normal and the employee should continue to work, receive pay, and (along with the employer) act in accordance with the terms of the employment contract.

If the employer does not want an employee to come to work during their notice period, they may have the contractual right to put the employee on ‘garden leave’ and require them not to attend work (but the employee continues to receive their normal pay and benefits).

If the employer does not have the contractual right (or otherwise the employee’s agreement to do so) to put the employee on garden leave, the employer may prefer instead to agree with the employee to reduce the notice period and  bring forward the date on which the employment ends. However, if the employee will not agree to this it becomes tricky as unilaterally reducing the notice period and changing the termination date will likely amount to a dismissal and could be unfair under s98 of the Employment Rights Act 1996.

That said, if the employer exercises its contractual right to make a payment in lieu of notice (PILON) to end the contract, this may not be a dismissal, but rather it merely alters the date on which the employee’s resignation took effect (Marshall (Cambridge) v Hamblin).  However, whether this is correct in law has been questioned over the years and has recently been revisited by the EAT in this case.

Facts: Mr Fentem was employed by Outform EMEA Limited, the employer. Mr Fentem resigned on 16 April 2019 by giving nine months’ notice (in accordance with his contract) due to expire on 16 January 2020.

However, on 19 December 2019 the employer exercised a PILON clause in Mr Fentem’s employment contract which stated that, where an employee resigns on notice, the company shall ‘at any time during the period of notice be entitled to terminate the employee’s employment forthwith[…] by paying salary (excluding bonuses) to which he would have been entitled during the notice period or any part of it in lieu of such notice or any part of it’. The employer paid Mr Fentem his salary for the remaining notice period, notified him of this and by doing so brought an immediate end to his employment. In accordance with the PILON clause, the employer did not pay Mr Fentem the bonus that he would have otherwise been eligible for if he had remained employed during his notice.

Mr Fentem brought a claim in the Tribunal for unfair dismissal. He argued that where employment is terminated by an employer (no matter what the circumstances) this constitutes a dismissal. Further, the manner in which he was dismissed was unfair. His claim for compensation included the loss of the bonus which he had not been paid.

Tribunal decision

The Tribunal held that Mr Fentem had not been dismissed. His employment terminated by reason of resignation and the employer’s reliance on the PILON clause to bring forward the termination date did not change this.

Mr Fentem appealed.

EAT decision

The EAT reluctantly upheld the Tribunal’s decision. It considered that it was bound to follow its earlier decision in Marshall (see ‘Background’). This is because the EAT is only able to depart from its own previous judgments where it was previously ‘manifestly wrong’ and the EAT did not consider that this threshold had been met.

This meant that the reason for the termination of Mr Fentem’s employment was resignation. He was not dismissed and his claim for unfair dismissal failed. He was also not entitled to any award for compensation, including his bonus.

However, the EAT pointed out that the Court of Appeal would be free to depart from the decision in Marshall and could change the law.

Implications: For now, the law remains that employers can rely on a PILON clause to bring forward the termination date of an employee who resigns without it becoming a dismissal. However, given the EAT’s strong reservations about this (and the likely appeal to the Court of Appeal) it may not remain the law for long. Therefore employers who rely on a PILON in this way are at risk of an unfair dismissal claim, particularly from employees who have been deprived of high value rewards by early termination.

The good news is that an easier way to avoid expensive pay-outs during an employee’s notice period is to ensure eligibility for benefits (such as bonus, commission, or share scheme entitlement) is conditional on an employee not being on notice at the date of entitlement.

Return to Menzies Law Newsletter 2022 Issue 2

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