Exactly when does a dismissal take effect?

Recent case law has helped clarify exactly when an employment contract ends after the three most common types of dismissal.

Introduction

For many decades the law surrounding the termination of an employment relationship had been uncertain, particularly when it came to working out when a dismissal takes effect. As a result of a series of important decisions from the Supreme Court, the last of which was published in April this year, things are now considerably clearer.

In this briefing we explain what recent case law says about the three most common ways of terminating an employment relationship: 

• Summary dismissal without a payment in lieu of notice 
• Making a payment in lieu of notice 
• Termination on notice

There are a number of other ways in which an employment contract can be brought to an end. With the possible exception of termination by expiry of a fixed term contract, these are less common, and are outside the scope of this note.

Summary dismissal

When an employee has committed an act of gross misconduct, or is otherwise in fundamental breach of contract, the employer is entitled to bring the contract to end by summary dismissal. That means a dismissal without giving notice or making a payment in lieu of notice. Typically this is communicated orally to an employee and then confirmed in writing.

The precise legal analysis of a summary dismissal scenario has been unclear until relatively recently. It is now thought that it equates to the employer’s “acceptance” of the repudiation of the contract by the employee. So it follows that if there is a dispute about the factual situation, an attempted summary dismissal may not in fact bring the contract to an end.

Since employees can sue for damages if they have been wrongfully dismissed, in most circumstances they will not have any significant incentive to keep the contract alive. But sometimes they may wish to extend the employment, for example to qualify for a bonus that depends on their still being in employment on a specified date. In that situation they may choose not to accept what they argue is the employer’s repudiation of the contract in attempting to dismiss them without good cause. If they are not themselves in fundamental breach of contract, this will have the effect of keeping the contract alive and thwarting the employer’s plans, at least for a limited period.

Payment in lieu of notice

Partly to avoid disputes for this nature, many employment contracts have a clause which allows the employer to end the contract by making a payment in lieu of notice (PILON). Such clauses define the way the PILON is to be calculated, and provide that the contract can be brought to an immediate end by making the correct payment.

However, simply making the payment is unlikely to be enough, particularly if the payment is made direct into the employee’s bank account. The employee also needs to be told that the payment is being made and why.

Termination on notice

If the employer has no dispute with the employee, but needs still needs to bring the contract to an end (most commonly in a redundancy situation) then it is normal to operate the notice clause in the contract of employment. This defines the length of notice that the employer is required to give to bring the employment to an end. In some circumstances the contractual notice period will be extended by the statutory minimum notice period.

In either case it is normal for this notice to be given in writing. But if the written notice is not personally handed to the employee, when does the notice period start to run? The answer is that unless the contract provides otherwise (and most standard contracts don’t) then a written notice must normally be received by the employee before it takes effect. So for example if a notice is posted to an employee’s home address while they are away on holiday, the notice period will not normally start to run until they get back home, unless the contract explicitly states that the notice is treated as given when it hits the doormat.

Communication is key

Despite being technically wrong in almost every other respect, the “Apprentice” series has got one thing right about employment law: dismissal is best communicated face to face. Most of the litigation in recent years about this corner of employment law has arisen because there was no face-to-face meeting to break the bad news.

In the absence of a straight-talking Alan Sugar-style dismissal, recent case law has clarified that in most circumstances a dismissal will not take effect until an employee actually knows of the employer’s decision, or failing that, has had a reasonable opportunity to find out about it. This principle applies whether the dismissal is without or without notice or a payment in lieu. Different rules however apply where a dismissal that takes effect on the expiry of a fixed term contract; ironically enough, most contracts of apprenticeship fall into this category.