Termination of Employment

How does employment terminate?

Termination of employment may occur for a number of reasons.  For legal purposes, relevant reasons are usually either:

• resignation: termination by the employee’s resignation
• dismissal: termination of employment by the employer

Resignation

An employee who wishes to resign must give notice to the employer.  The period of notice will usually be set out in the employment contract and may also require notice to be given in writing.

As an alternative to the employee working out their notice period, the employer may choose one of the following alternatives (and particularly for a senior employee or an employee with valuable client and supplier relationships):

• PILON: to accept the resignation and bring the employment to an immediate end by making a payment in lieu of notice (PILON).  An employer will be able to exercise this as a right if this is expressly included in the employee’s employment contract.  If not, the early termination of employment with a PILON will require the employee’s agreement.  The amount of the PILON is usually equal to the base salary which the employee would have been entitled to receive for the duration of the notice period
• garden (or gardening) leave: to choose to require that the employee remains away from the workplace for all or part of the notice period.  The employment does not end as a result of the employee being put on garden leave.  The employer must still pay salary and other benefits.  The employee remains employed and cannot commence employment with a new employer.  The right for an employer to place an employee on garden leave should also ideally be included as an express term in the employee’s contract of employment.  Otherwise there is a risk that doing so might amount to a breach of contract, giving rise to a right for the employee to resign and bring a claim for constructive dismissal.

Dismissal

Dismissal may take place for a number of reasons and will amount to either “fair” or “unfair” dismissal depending on the facts and circumstances.

What are fair dismissal reasons?

Reasons for dismissal by an employer which can result in the dismissal being “fair” include:

• capability/qualifications: an employee who is not capable of performing the job properly
• illness: long-term illness resulting in it being impossible for the employee to do the job
• redundancy: the employer needs to reduce the workforce due to a cessation of or reduction in business
• conduct: an employee who is summarily dismissed (without notice) for gross misconduct
• breach of statute: continuation of employment would result in a breach of a duty or restriction imposed by a statute. An example of this would be an HGV driver who loses their driving licence
• another substantial reason justifying dismissal: for example, dismissal of an employee who is sentenced to a term in prison for a criminal offence

What is unfair dismissal?

Employees have a legal right not to be unfairly dismissed.  Notwithstanding that the reason for dismissal could fall within one of the reasons which might justify a fair dismissal, the dismissal could amount to “unfair” dismissal if the employer acted unreasonably in the circumstances in treating that reason as a sufficient reason for dismissing the employee and did not follow a fair dismissal procedure.  The procedure which should be followed will be the employer’s own disciplinary procedure but also reference will be made to the ACAS Code of Practice on disciplinary and grievance procedures.

For example:

• capability/qualifications: in the case of a dismissal for capability-related reasons, the dismissal might be unfair if the employee did not follow the disciplinary procedure, did not give one or more warnings as to the need for the employee to improve performance or to specify what might amount to improved satisfactory or did not provide training and assistance to the employee to assist with improved performance:
• illness: in the case of dismissal for long-term illness, the employer should provide support to the employee, including investigating whether the job itself is causing or aggravating the illness. give the employee a reasonable time to recover and should not discriminate for disability reasons
• redundancy: an employee who is made redundant must be selected for redundancy in a fair manner (and not chosen for reasons such as age, gender, disability or pregnancy)
• gross misconduct: an employee who is dismissed for gross misconduct should still be entitled to a disciplinary hearing in accordance with the employer’s disciplinary proceedings and given a right to appeal against dismissal   

In addition, the dismissal of an employee for certain specified reasons are treated as being automatically unfair.  These include:

• jury service: dismissal because of absence on jury service
• dismissal for pregnancy, childbirth or maternity reasons
• dismissal by reason of having made an application for maternity, paternity, shared parental or adoption leave
• dismissal for whistle-blowing

A claim for unfair dismissal may generally only be made by an employee who has been employed for more than two years.  However, this period is reduced to one month in cases of automatic unfair dismissal.

Claims for unfair dismissal should be made to an employment tribunal within 3 months commencing with the effective date of termination of employment.

Remedies for unfair dismissal include:

• reinstatement/re-engagement
• compensation consisting of a basic award and a compensatory award:
  • basic award calculated by reference to period of employment and a multiple of weeks’ pay depending on the length of service
  • compensatory award (subject to a statutory maximum in most cases) calculated by reference to what the tribunal considers to be just and equitable in the circumstances having regard to the loss sustained by the employee and which is attributable to the action of the employer

What is constructive dismissal?

Constructive dismissal occurs when an employer breaches the express or implied terms of employment in such a manner that the employee is entitled to terminate the employment contract and does so– effectively, the employee is left with no choice but to resign.  

Examples of such conduct include:

• failure to pay salary or to provide other contractual benefits
• changing the employee’s duties
• verbal abuse or bullying of the employee by the employer

As a dismissal and assuming that the employee qualifies to bring a claim for unfair dismissal, the circumstances giving rise to constructive dismissal are likely to mean that the employee has a statutory claim for unfair dismissal as well.

What is wrongful dismissal?

Wrongful dismissal occurs where the employer has breached the employment contract in relation to its termination, usually by failure to give the correct notice period to terminate employment or by not following the employer’s other contractual obligations with regard to termination of employment.  

Examples of acts giving rise to a claim for wrongful dismissal include:

• putting a resigning employee on garden leave where there is no express contractual right for the employer to do so
• terminating the employment contract without notice or on shorter notice than expressly provided in the agreement

Unlike a claim for unfair dismissal, a claim for wrongful dismissal is a contractual claim and may be brought by an employee with less than two years’ continuous service.  It may be brought either in an employment tribunal (in conjunction with a claim for unfair dismissal) or in the general courts.

As a contractual claim, the employee’s remedy (if successful) will be in damages.  Also, the employee is required to mitigate its loss.  If the employee takes up a new job during what would otherwise have been the period of notice under the employee’s former employment, a wrongful dismissal claim against the former employer for dismissal without notice will take into account the salary from the new employment.

When use a settlement agreement?

A settlement agreement (in the context of employment) is an agreement usually between an employer and an employee for the settlement of a potential employment tribunal claim or other court proceedings.  Settlement agreements used to be called compromise agreements.  The terms of the settlement agreement will also usually deal with a financial payment to be made to the employee in return for the employee agreeing to settle the relevant claim or other proceedings.

A settlement agreement is a voluntary agreement entered into between the employer and the employee. 

Settlement agreements are commonly used to bring an employment relationship to an end in a mutually agreed manner.  By entering into the settlement agreement (and depending on its terms):

• the employer will have the benefit of certainty that the employee will not be able to bring relevant employment claims in the future, notably claims for unfair dismissal and wrongful dismissal
• the employee will usually receive a higher financial payment than the employee may be entitled to recover in legal proceedings and without the risk of the employee being unsuccessful in legal proceedings.  The settlement agreement will also usually include an agreed form of reference from the employer

claim in legal proceedings for unfair dismissal putting a resigning employee on garden leave where there is no express contractual right for the employer to do so

What are the legal requirements of a settlement agreement?

The form of settlement agreements is regulated and the following is required in order for a settlement agreement to amount to a valid waiver of the employee’s claim(s):

• the settlement agreement must be in writing
• the agreement must relate to a particular complaint or particular proceedings
• the employee must receive independent legal advice on the terms and effect of the settlement agreement 
• the adviser must have a current insurance policy or professional indemnity insurance covering the risk of a claim by the employee in respect of loss arising from the legal advice
• the agreement must identify the legal adviser
• the agreement must state the statutory provisions which set out the above legal requirements have been satisfied