Employer who uses a contractual term to bring forward the date of resignation did not dismiss the employee

EAT decision paves way for appeal on tricky interpretation of PILON clauses.

It is commonly agreed that where an employee resigns from their job and the employer then unilaterally terminates the employment before the notice period expires, the employer is, in effect, dismissing the employee. This can include situations where the employer decides to end the employee's notice period early by paying them in lieu of the unworked notice 

This seemingly trivial distinction can have important implications as it leaves the employer open to claims arising from that dismissal

However, where the contract specifically provides an option for the employer to bring the termination date forward if the employee resigns, then there is no dismissal by the employer.

A recent EAT case looked at this issue once again.

Case:  Fentem –v- Outform EMEA Limited [2022]

Mr Fentem resigned from his position with OEL in April 2019, with his last day to take effect in January 2020. Mr Fentem’s resignation letter highlighted his dissatisfaction with his new working arrangements. In December 2019 OEL invoked a clause in Mr Fentem’s contract to terminate the contract immediately and pay him in lieu of the month’s unworked notice.

Mr Fentem subsequently brought an unfair dismissal claim against OEL on the basis that by terminating his contract early, OEL had, in fact, dismissed him and terminated his employment before the notice period had been completed.

Mr Fentem’s contract contained the following provisions:

3.1 This Agreement shall commence on […] and will, subject to earlier termination below, continue unless and until it is terminated by either party giving the other 9 months’ prior written notice.

[…]

19.5 Where [Mr Fentem] serves notice to terminate his employment with the Company, the Company shall at any time during the period of notice be entitled to terminate [his] employment forthwith and in full and final settlement of [his] claims under this Agreement by paying to [Mr Fentem], the 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.

OEL therefore defended the claim on the basis that the normal rule regarding dismissal for terminating the contract early when the employee resigns did not apply because they had a contractual right to bring the termination date forward and pay in lieu of unworked notice.

OEL directed the Employment Tribunal to the leading case on this issue – the EAT’s decision in Marshall (Cambridge) Limited v Hamblin [1994]. Ultimately, the tribunal found it was bound to follow that precedent and Mr Fentem’s case dismissed.

Mr Fentem appealed to the EAT where he tried to argue that the decision in Marshall should not be followed because it was ‘manifestly wrong’.

The EAT noted that there were arguments both for and against the decision in Marshall which would not be the case if the decision was clearly wrong and unjust as Mr Fentem argued.  For that reason, the EAT concluded it was bound by the precedent and Mr Fentem’s appeal was dismissed.

Comment

The arguments of this case have revisited a number of the critiques of Marshall. Key factors in the debate are that (1) an employee cannot insist on remaining in employment once they give notice, and (2) the wording in s.95 Employment Rights Act 1996, which makes clear that a dismissal includes where the contract of employment is ‘terminated by the employer’.

In Mr Fentem’s case, there is clearly an argument to say that, regardless of what his employment contract provides, if OEL chose to end the contract early then OEL was dismissing him. The counterargument set out in Marshall is that a contractual right to bring the termination date forward and pay in lieu of notice means that OEL only changed the date of the termination and the contract was therefore not ‘terminated by the employer’.

Whilst PILON clauses are fairly common, it is unusual to see the type of contractual right that OEL had in Mr Fentem’s contract. There would always be uncertainty caused by an employer using it inadvertently leaving themselves open to unfair dismissal claims and certainly it would be sensible for employers to take specific advice if faced with this situation. Employers can avoid forcing the issue by seeking the employee’s agreement to terminate early and pay in lieu of unworked notice. However, there may be situations, such as Mr Fentem’s, where an employee and employer are unable to agree on severance payments where issues such as commission and bonuses are a factor.

It is suggested that Mr Fentem may appeal, which will allow further scrutiny of the Marshall principles by the Court of Appeal.