Friday 25 May 2012

PILONs, Notice Pay and After-Discovered Conduct

[Thanks to Catriona Stirling of Cloisters for preparing this case summary]

Is an employer entitled to withhold a payment in lieu of notice if it dismisses an employee under an express term in his service agreement which provides for summary termination with pay in lieu, but later discovers that the employee had committed gross misconduct prior to the dismissal?

No, says the Court of Appeal in Cavanagh v William Evans Ltd.

The company decided that Mr Cavenagh was redundant and summarily terminated his service agreement, which provided for six months of pay in lieu of notice. It subsequently discovered that Mr Cavenagh was guilty of gross misconduct pre-termination and did not make the payment. Had it known about the gross misconduct when it exercised its contractual power, it would have accepted the repudiatory breach of the service agreement and regarded itself as discharged from liability for pay in lieu of notice.

The Court of Appeal held that Mr Cavanagh had acquired an accrued right to the payment, as his contract had been summarily terminated under the relevant contractual provision. There was no provision in the service agreement denying him the right to the payment in lieu if the company subsequently discovered that he had committed a prior act of gross misconduct. Nor was there any general principle of contract law barring or extinguishing his right to recover the pay in lieu as a debt from the company. The principle that a claim for wrongful dismissal could be defeated by relying on evidence of misconduct discovered after the dismissal did not provide the company with a defence to a debt claim.

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