The Court of Appeal has held in the recent case of
Cavenagh v William Evans Ltd [2012] that where an employer decides to pay an employee in lieu of notice in accordance with that employee's employment contract, the employer still has to make that payment even where the
employer later finds out that there has been gross misconduct by the employee.
Mr Cavenagh worked as the Managing Director of William Evans Limited, with a substantial annual salary and a six-month notice period. The company had been making losses for a number of years and it decided to restructure, with Mr Cavenagh's job therefore becoming
redundant. The company ended Mr Cavenagh's employment and relying on a term in his employment contract, decided to pay him in lieu of his six month notice period, rather than having him work that notice period.
However, shortly after ending Mr Cavenagh's employment but before making the payment in lieu of notice, the company discovered that Mr Cavenagh had, two months earlier, transferred £10,000 of the company's money into his pension fund, which he had no entitlement
to do. On discovering this, the company withheld the notice payment and Mr Cavenagh then sued the company for his six months' notice pay. The company argued that if the misconduct had been discovered before Mr Cavenagh's employment ended, then this would have
entitled the company to dismiss him without notice and so the company should not now have to pay him the six months' pay in lieu of notice.
The Court of Appeal decided that Mr Cavenagh's contract had been terminated by the company using the payment in lieu of notice provision in his employment contract and therefore he was entitled to his payment in lieu of notice (which was owed to him as a debt).
There was nothing in Mr Cavenagh's contract (or otherwise in law) which released the company from this debt where it subsequently found out that there had been gross misconduct and so the company was obliged to make the payment despite the gross misconduct
on Mr Cavenagh's part.
Alison Loveday of Berg comments: "This case highlights the importance of ensuring that your organisation regularly reviews its employment documentation to ensure that it is up-to-date with legislation and HR best practice. During the course of any such review,
and in light of this decision, businesses should ensure that they have suitable termination provisions in place in all their contracts of employment. A clause in the contract entitling the employer to get out of having to make a payment in lieu of notice where
gross misconduct is subsequently discovered would have avoided the problem in this case.
Similarly, where a compromise agreement is used on termination (as they often are when dealing with the exit of senior employees), it could be made a condition of the agreement and of any termination payment that the employee has not committed any act of gross
misconduct. If the employee was then found to have breached that condition, this would put the employer in a good position to withhold payment."
To discuss how we can provide further advice in connection with these issues, please contact Alison Loveday, Partner and Head of our Employment team, by email to
alisonl@berg.co.uk or alternatively you can call Alison on 0161 833 9211.
The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice. No responsibility for article's accuracy or correctness is assumed by Berg or any of its partners or employees.
Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.