Frettens Update: Employment Law Q & A — Notice to terminate employment
Q What are the legal obligations upon both the employer and employee in terms of the giving of notice to terminate the employment relationship?
A There are two types of legal obligation relating to the giving of notice — statutory and contractual.
- Statutory — these obligations relate to the duration of the notice that must be given in order for either party to terminate the employment relationship. These only apply once the employee has been continuously employed for at least one month and are as follows: a minimum of one week’s notice must be given by the employee; and a minimum of between one and twelve weeks’ notice (depending upon the length of the employee’s service) must be given by the employer.
- Contractual — the remaining legal obligations relating to notice are those (if any) set out in the contract of employment, whether verbal or written. In the absence of either a contract of employment or a term in a contract setting out the duration of notice to be given, a tribunal or court will imply an obligation that the employer must give the employee ‘reasonable notice’ of termination. It is important to note that this may be greater than the statutory minimum notice requirements. In considering what reasonable notice is, a tribunal/court will take into account factors such as:
1.custom and practice as to the length of notice typically given to employees within the industry the employer operates in;
2.the duration of notice given by the employer in the past to employees in similar positions; and
3.the employee’s length of service and seniority.
- It is therefore advisable to ensure that all provisions relating to notice that the employer wishes to be able to rely upon, including its duration, are set out in the contract of employment.
There is no obligation on either party to give the other either statutory or contractual notice if the employer or employee has acted in such a way so as to justify the other terminating the employment relationship summarily, e.g. gross misconduct on behalf of the employee or a fundamental breach of contract by the employer.
Q What happens if the employer fails to give the requisite notice to terminate an employee’s employment?
A If the employer fails to give an employee their full notice entitlement, the employee will be entitled to bring a wrongful dismissal claim in the Employment Tribunal, or a breach of contract claim in the courts, in both cases for the financial losses arising from inadequate notice. In reality this will usually be confined to a claim for lost pay and benefits for the duration of the notice period.
Q What options does an employer have where an employee fails to give the requisite notice terminate his or her employment?
A The short answer is that other than ceasing to pay an employee who gives inadequate or no notice with effect from the last day that the employee worked, an employer’s options are limited when faced with this situation.
In certain circumstances it may be possible for the employer to obtain an injunction preventing the employee from working for a competitor for the remainder of the notice period.
Alternatively, providing the contract contains an obligation upon the employee to give a specified period of notice to terminate the contract, the employer may be able to bring a breach of contract claim against the employee for any financial losses it suffers as a result of the employee failing to serve out his or her notice. However, this type of claim is rare as it is generally difficult for the employer to quantify the loss suffered as a direct result of the employee’s early departure. It is usually only a worthwhile pursuit on the employer’s part in circumstances such as where the employee occupied a critical role and the employer had no option but to hire a temporary employee/consultant to fulfill that role at a much higher rate of pay than was being paid to the employee. This is because the amount of the claim would be for the difference in cost between the employee’s remuneration package and that paid to the temp/contractor.
Q Does notice have to take a particular form?
A There are no statutory requirements as to the form that notices to terminate employment should take, in order to be effective. Basic legal principles simply require that the notice be communicated to the employee. However, the contract of employment usually sets out some rules as to how notice should be given, the most common being a requirement that notice be given in writing.
Even in the absence of any contractual requirement to do so, employers should always give and/or confirm any verbal notice in writing in order to avoid any disputes arising as to whether or when notice was given to the employee. It is also good practice to set out any obligations that will apply during the notice period and to specify the date that employment will end, bearing in mind that unless the contract states to the contrary, the day that notice is given does not count towards discharging the notice period (e.g. the notice period will commence the following day).
Employers will also need to be very careful about the way in which letters terminating employment are drafted and in particular, the terminology that is used to describe the nature of any termination payments.
Q When does termination of employment actually take effect?
A A recent case highlighted that there can be a distinction between when a contract of employment terminates for general legal and contractual purposes, and the date that employment will be deemed to end for the purposes of the time limits for bringing certain statutory employment claims such as unfair dismissal, known as the ‘effective date of termination’ (‘EDT’).
The terms of a contract will often set out rules as to when notice given in accordance with the contract will run from (e.g. two days after it has been posted/the same day if delivered by hand). It is therefore generally straightforward to calculate when the contract will come to an end for the purposes of each party fulfilling their respective contractual obligations.
However, employers should be aware that determining the EDT for the purposes of calculating the time limit for bringing certain statutory employment claims can be more difficult. The courts have recently said that, in the case of summary dismissal effected by letter, the EDT for the purposes of calculating the date that the three month time limit for bringing an unfair dismissal claim runs from, will be the date that the employee actually reads the letter, even if through no fault of the employer that date is some time after the letter has been sent. This is the case even if for contractual purposes, the contract comes to an end at an earlier date, in accordance with the rules set out in the contract for when notice is deemed to have been served. Therefore, in order to avoid inadvertently extending the period employees have to bring claims such as unfair dismissal, employers may wish to consider personally handing notice to the employee at a face to face meeting.
Q What can an employer do if it does not wish an employee to serve out their notice?
A An employer in this situation potentially has two options:
- If working for a competitor is an issue for the employer and the contract permits it, place the employee on gardening leave. As a result, the employee is excluded from the workplace and from contact with clients/customers but remains an employee for the duration of the notice period and is therefore prevented from working for a competitor for this period; or
- The employer can bring the employee’s employment to an end immediately and pay the employee in lieu of his or her notice entitlement, either in accordance with a payment in lieu of notice (PILON) clause, or by way of an advance payment of damages for what would be a breach of contract for failing to give the notice set out/implied in the contract (see below).
Q Should a PILON clause always be included in a contract of employment?
A A PILON clause is one which permits the employer to terminate the contract of employment immediately without being in breach of its contractual obligation to give notice. This is achieved by an express provision in the contract allowing the employer to pay the employee a sum of money in lieu of the notice entitlement he or she would otherwise be entitled to.
As mentioned in the answer above, there does not have to be a PILON clause in the contract of employment in order for the employer to be able to make a payment in lieu of notice. However, where there is no PILON clause, any PILON will technically be a breach of contract.
The distinction as to whether or not PILON is a breach of contract has a number of consequences that need to be considered in relation to each employer’s circumstances. As for the advantages of having a PILON clause in the contract; subject to the way the clause is drafted, these can include the ability to pay only basic salary for the duration of the notice period (as opposed to an additional sum in lieu of any benefits) and the ability to retain any post termination obligations in the contract, such as restrictive covenants. The disadvantages relate mainly to the tax treatment of the payment in lieu. Any sums paid under a PILON clause will be fully taxable; as opposed to the potential ability to make a payment in lieu of notice, without the deduction of tax, if paid as damages for breaching the contract. A further disadvantage is that, once activated, an employee is generally entitled to be paid in full under a PILON clause, irrespective of whether or not they have found an alternative job.
If a PILON clause is being considered or the employer has an existing clause, it is very important that it is carefully drafted:
- It should be drafted so that the employer retains the option of making a payment under the PILON clause, as opposed to it being an automatic obligation to do so in the event that insufficient notice is given by the employer;
- As highlighted by a recent case, the relevant clause should also make it clear that termination of employment takes effect when notice of termination is given by the employer, not when the PILON payment is made, which may not be until several weeks later, resulting in the employer having to pay the employee for longer.