Termination of employment in England and Wales

Termination indemnities to be paid in the case of the termination of an employment contract by the employer
Background

There are two main rights on the Termination of employment in England and Wales. The first is a statutory right not to be unfairly dismissed (referred to as unfair dismissal) and the second is a common law right not to be dismissed in breach of contract (referred to as wrongful dismissal). The fact that an employer may be entitled to terminate the contract of employment by giving the employee his contractual notice does not mean that the termination will necessarily be "fair" and the employee may be entitled to claim unfair dismissal even if he is dismissed in accordance with the terms of the contract.

Termination payments (in some European countries such payments are referred to as "indemnities")

Whether an employee is entitled to a payment on termination will depend on the specific circumstances of the termination.

If an unfair dismissal claim is successful then a payment will be made. If there are no grounds for an unfair dismissal claim then there will be no award or payment required to compensate the employee for an unfair dismissal.

If the employer terminates the employment contract in breach of contract then a compensation payment for wrongful dismissal is likely. If the employment is terminated by the employer giving the employee the correct notice of termination required under the employment contract (for example informing him that the employment will terminate on the expiry of the correct notice period) then there will be no breach of contract and so no award of compensation or payment. Some employment contracts include "pay in lieu of notice" clauses (often referred to as PILONS) and when employers rely on these clauses they will make a payment (often equivalent to what the employee would have earnt had he been required to work out his notice period) to the employee instead of giving the employee his notice under the contract.

If the employment is terminated by reason of redundancy then there may be a termination payment in recognition of the fact that the employee has been made redundant. This will depend on certain factors such as the employee's length of service.

If the employment is terminated summarily (in other words immediately) because of the employee's gross misconduct then the employer does not have to make any payment to the employee, even though he is not giving the employee his notice period under the contract.

Sometimes payments are made on termination which are not related to the reason for the dismissal. For example payments are often made for arrears of holiday pay.

Unfair dismissal

An employee must have at least one year's continuous employment at the effective date of termination to bring a claim of unfair dismissal, except where the employee has been dismissed for an automatically unfair reason which does not require a qualifying period.

Making an Unfair Dismissal Claim

The employee must first prove that he has been dismissed. This can occur in three ways:

• if the employment contract is for an indefinite period, termination by the employer with or without notice
• on expiry of a fixed-term contract (i.e. where the employment contract is for a definite duration) without renewal
• where the employee terminates the contract (either a contract for an indefinite or definite duration), either with or without notice, in circumstances in which he is entitled to do so without notice by reason of his employer's conduct (i.e. where he claims to have been constructively dismissed).

Termination by the employer
Termination arises where the employer makes it clear (in writing, orally or by his actions) that he wishes the employment relationship to end. In assessing the employer's intention, regard may be had to the way in which a reasonable employee would view the employer's actions.

Expiry of a fixed-term contract (contract for a definite duration)
An employee is dismissed where his fixed term contract (i.e. where the maximum length of the contract is specified) expires without being renewed under the same contract.

Constructive dismissal
Constructive dismissal arises where the employee terminates the employment contract (either with or without notice) in circumstances in which he is entitled to do so without notice by reason of the employer's conduct.

• There must be a fundamental breach of the employment contract by the employer which the employee accepts by resigning.
• The employee must also accept, by words or conduct, the employer's repudiation as terminating the employment contract. Without acceptance, there is a risk that the employee will be deemed to have waived the right to claim constructive dismissal.
• The constructive dismissal of an employee does not necessarily mean that he has been unfairly dismissed. Once a tribunal has determined that the employee was constructively dismissed, it must then consider, in the usual way, whether the employee was dismissed for a potentially fair reason and whether the employer acted reasonably in the circumstances.

The Effective Date of Termination (EDT)
The EDT is particularly important in assessing the employee's period of service (e.g. in calculating whether there is sufficient service to claim unfair dismissal) and for calculating compensation. The EDT will also determine the time limit within which certain claims must be brought. The EDT is determined as follows:

• where the employment contract is terminated by notice, it is the date on which the notice expires
• where the employment contract is terminated without notice, it is the date on which the termination takes effect
• where a fixed-term contract expires without being renewed under the same contract it is the date on which the term expires.

Fairness of dismissal

• Section 98 Employment Rights Act 1996 ("ERA") establishes a two-stage test in determining whether an employee has been fairly dismissed:
• the employer must show the principal reason for dismissal was a "potentially fair" one.
• the tribunal must then consider whether in the circumstances the employer acted reasonably or unreasonably in treating that reason as a sufficient reason for dismissing the employee.

Potentially fair reasons for dismissal are:

• capability or qualifications
• conduct
• redundancy
• that the employee could not continue to work in that position without contravening a duty or restriction imposed by or under an enactment
• that there was some other substantial reason of a kind such as to justify the dismissal of an employee holding the employee's position
• The burden of proof in establishing a fair reason is on the employer. Where there is more than one reason for dismissal, the employer must show what the principal reason was.

Capability and qualifications
"Capability" is defined as "capability assessed by reference to skill, aptitude, health or any other physical or mental quality", and "qualifications" is defined as "any degree, diploma or other academic, technical or professional qualification relevant to the position" held by the employee. This definition encompasses incompetence or poor performance, or where it is discovered that the employee does not have the necessary qualifications. It is for the employer to show that he reasonably believed in the employee's lack of capability after making reasonable enquiry.

Capability may also be determined by reference to the employee's health, e.g. where the employee's illness makes it impossible for him to perform his duties.

Conduct
An employer may seek to rely on an employee's conduct (or misconduct) to justify a dismissal. A warning is the usual sanction for a first act of misconduct unless it is sufficiently serious to warrant instant dismissal. Examples of misconduct include dishonesty, harassment of fellow employees, absenteeism, and failure to obey lawful and reasonable orders. The employer must show the employee was dismissed by reason of the misconduct and that his belief in that reason was genuine. The employer's decision to dismiss must be based on reasonable grounds after reasonable investigation.

Redundancy
Redundancy of the employee is a potentially fair reason for dismissal.

Contravention of any enactment
This situation may arise for example where an employee who is employed solely as a chauffeur is disqualified from driving and loses his licence.

Some other substantial reason
An employer may seek to rely on "some other substantial reason" as justifying a dismissal where his reason does not fall strictly within one of the above four categories but where it is based on sound commercial reasons. Other examples could include customer pressure to dismiss a particular employee, or a breakdown in the relationship between two employees such that they could no longer work together.

Written reasons for dismissal
An employee who has attained one year's continuity of employment as at the EDT is entitled to request and to receive a written statement of reasons for dismissal, which must be provided by the employer within 14 days of the request. Written reasons for dismissal are required without any qualifying period or request on the part of the employee where she is dismissed while pregnant or where dismissal ends her maternity leave period.

Fairness of dismissal
Once the employer has shown that the reason for dismissal was potentially fair, the tribunal must consider whether the dismissal is fair or unfair.

The following points should be noted:

• The tribunal is specifically directed to consider the size and administrative resources of the employer's undertaking. Where the employer has a significant number of employees and has substantial resources at its disposal, it is likely to be expected to achieve a higher standard of fairness than a very much smaller operation.
• The tribunal has a significant degree of discretion in considering the fairness of the dismissal. The tribunal will consider how a reasonable employer would react to the circumstances. The tribunal will consider what is reasonable "in equity and the substantial merits of the case", but is not permitted to substitute its own decision for the decision made by the employer, provided the employer's decision was a reasonable one. In other words it is open to the tribunal to decide that it might have come to a different decision to that made by the employer - the so-called "range of reasonable responses" test.

Procedural fairness

• Disciplinary hearings should be conducted fairly and conform with the principles of natural justice.
• A tribunal will examine carefully whether the employer followed a fair procedure in dismissal. In particular, the tribunal will have regard to the ACAS Code of Practice on Disciplinary and Grievance Procedures in Employment (revised version May 2000) ("the Code").
• The Code suggests that the employer should follow a system of giving formal oral warnings, or where the offence is more serious, written warnings. These should set out the nature of the offence and the likely consequences of further offences. Further misconduct might warrant a final written warning which should advise the employee that any reoccurrence might lead to suspension, demotion or dismissal.
• There should be a right of appeal against disciplinary action. Failure to provide an appeal procedure may result not only in a finding of unfairness, but may also deny the employer the opportunity of correcting any procedural defects in the initial disciplinary hearing.
• A worker has the right to be accompanied to a disciplinary or grievance hearing by a trade union official or work colleague. Failure to allow this will result in a financial penalty of two weeks' pay (subject to the statutory limit, currently ?250). Such an official or colleague may address those present at the hearing but not answer questions on the worker's behalf. Both the worker and his companion are protected against detriment by the employer on the ground that the worker or companion sought to exercise this right or sought to accompany another worker. Dismissal on such ground would constitute an automatically unfair dismissal.
• The Code is most appropriate in relation to dismissal on the grounds of conduct. Where dismissal takes place on the grounds of capability, the employer should however note the provisions regarding the fairness of any hearing and the rules of natural justice.

The effect of procedural unfairness

• The employer's conduct must be examined in assessing whether he has acted fairly.
• The employer can only rely on facts known to him at the time of dismissal. Discovery of such facts after dismissal may however affect the compensation payable to an employee who wins his unfair dismissal claim.
• If an employer has failed to comply with a proper procedure, he cannot argue that if he had acted entirely in accordance with fair procedure, he would still have dismissed the employee. This rule is subject to a very limited exception where the offence is very grave (i.e. it would be utterly useless/futile to go through a full procedure) and the facts entirely undisputed.

Remedies
Once unfair dismissal has been established, a tribunal may order compensation, re-instatement or re-engagement.

Reinstatement/re-engagement
In considering these remedies, the tribunal will have regard to the employee's wishes, whether it is practicable to reinstate/re-engage and whether it would be just to make the order. These are discretionary remedies and a tribunal will take into account the disruption that might be caused by re-introducing the employee into the workforce. Failure to comply with a reinstatement or re-engagement order may result in an additional award of compensation against the employer.

Compensation
The tribunal may make an award of compensation comprising a basic award and a compensatory award with a statutory maximum in almost all cases, set annually. The maximum basic award is currently ?7,500 and the maximum compensation award is ?52,600. The basic award is calculated with reference to a formula based on the employee's age, length of service and weekly pay. The compensatory award is calculated on the basis of loss of net earnings, from the date of dismissal to the date of hearing and future loss. There may be additional elements such as compensation for loss of statutory rights. Principles of mitigation also apply, both actual and prospective. The employee's own contributory fault may reduce the award to him by so much as is just and equitable having regard to the degree of fault.

Beach of contract claims (wrongful dismissal)
Unless an employee is summarily dismissed for gross misconduct, a dismissed employee is entitled to receive notice of the termination of his employment. This will depend upon the contractual notice period subject to statutory minimum notice periods. If the contract is silent as to notice, "reasonable" notice is implied subject to the statutory minimum notice periods. All the factual circumstances (including pay, position and length of service) are relevant in determining what is reasonable.

An employee dismissed in breach of contract is entitled to claim damages to put him in the position that he would have been in had the contract been terminated lawfully i.e. the length of the notice period. Account must therefore be taken in all contractual benefits, such as the following:

• salary, including any contractual entitlement to an increase in salary during the notice period
• contractual commission or bonus payments falling due during the notice period
• fringe benefits provided for under the contract e.g. the provision of car and private mileage expenses, health, life or dental insurances, school fees, payment of private telephone bills, and subsidised meals. These benefits must be valued at the cost to the employee of replacing them
• loss of pension rights
• pay in respect of accrued but untaken holiday
• any other benefit accruing according to the terms of the contract, possibly including loss of share option rights. This will depend on the terms of the contract and particularly whether the contract excludes the employee's right to compensation in the event of dismissal

As a general principle, damages will not be recoverable for the manner of dismissal, for example to compensate an employee for injury to feelings or distress

For the purposes of assessing damages in a wrongful dismissal context, the reasonableness or otherwise of an employer's actions are irrelevant. Damages are subject to reduction in respect of the employee's duty to mitigate his loss (i.e. look for/find another job). Where the contract provides that termination can be lawfully effected by the payment of a specific sum to the employee, there will be no duty on the part of the employee to mitigate. Reductions may also be made in respect of double recovery and accelerated receipt (i.e. receiving the money early). There are also various tax considerations to be taken into account.

Dismissal during (or at the end of) a probationary period
Some employers require new employees to start work on a trial basis and give them a probationary period. If an employee is dismissed during or at the end of this period an employer must comply with the correct contractual termination provisions to terminate the employment lawfully. A notice period of one week is common. If an employer does not give the proper notice he may face a breach of contract (wrongful dismissal) claim. An unfair dismissal or redundancy claim is unlikely as the employee is unlikely to have the necessary length of service to be able to make such a claim.

Sex, race and disability discrimination claims
Employers need to be aware that if the reason for a dismissal is connected to the employee's sex or race or is connected to a disability then the employee may be able to make a claim for discrimination in addition to other claims. An employee does not need any specific length of service to make a discrimination claim and compensation awards can be very high as there is no statutory maximum for awards made to compensate an employee for discrimination.

Redundancy
Background
Redundancy is defined exhaustively as follows:
"... an employee who is dismissed shall be taken to be dismissed by reason of redundancy if the dismissal is attributable wholly or mainly to:

• the fact that the employee has ceased, or intends to cease -
• to carry on the business for the purposes for which the employee was employed by him, or
• to carry on that business in the place where the employee was so employed, or;
• the fact that the requirements of that business -
• for employees to carry out work of a particular kind, or
• for employees to carry out work of a particular kind in the place where the employee was so employed by the employer,
• have ceased or diminished or are expected to cease or diminish."

The dismissal must be wholly or mainly attributable to these situations.

Redundancy situations will cover, for example, reorganisation, the closure of a business (including temporary stoppages), the closure of the employee's workplace or a diminishing need for the employee to do work of a particular kind.

A three stage test has been devised:

• was the employee dismissed?
• if so, had the requirements of the employer's business for the employee to carry out work of a particular kind diminished, or was this likely to be so?
• if so, was the dismissal caused by the diminution?

Statutory rights
An employee who is dismissed by reason of redundancy may be entitled to receive a statutory redundancy payment subject to satisfying certain criteria. The most important is that he must have at least two year's continuous service.

The amount of the statutory redundancy payment depends on age, length of service and pay. The employee is entitled to:

• one and a half week's pay for each complete year of service after reaching the age of 41;
• one week's pay for each complete year of service between the ages of 22 and 40 inclusive; and
• half a week's pay for each complete year of service between the ages of 18 and 22 inclusive.

There is a statutory maximum on the amount of gross pay for one week for these purposes (currently ?250) and this amount is reviewed annually. No more than 20 years' service counts for calculating entitlement.

Statutory redundancy pay is paid tax free. If the employer fails to pay a statutory redundancy payment, the employee can pursue a claim in a tribunal within six months of the date of termination of employment.

An employee cannot contract out of his right to a redundancy payment. The only exception to this general rule is where the employee has a fixed term contract of two years or more and the employee agrees in writing to the contracting out before the dismissal. The dismissal must be the expiry of the fixed term and not for any other reason.

Enhanced redundancy payments
An employee may have enhanced redundancy rights (often contained in collective agreements with unions). An agreement with the employee to pay more than the statutory maximum will normally be enforceable. If the terms of the contractual redundancy scheme meet the approved necessary criteria, payment may be tax free up to an overall maximum of ?30,000 (which includes any non contractual pay in lieu of notice, statutory redundancy pay and any other ex gratia sums).

Unfair dismissal
Whilst redundancy is a potentially fair ground for dismissal, an employee with the necessary one years' qualifying service who is made redundant may bring an unfair dismissal application to an employment tribunal. An employer must show that it acted reasonably in effecting the redundancy. In practice, this involves demonstrating that the employee was warned of the approaching redundancies as soon as practicable, that he was consulted about the proposed redundancies and, if available, suitable alternative employment was offered to him. The employee must also be selected fairly in accordance with objective criteria.

Consultation
Where an employer proposes to dismiss as redundant at least 20 employees at one establishment over a period of 90 days or less, the employer must consult workers' representatives in good time with a view to reaching an agreement. This consultation should run concurrently with individual consultation. These representatives are either representatives of an independent trade union recognised in respect of that group of employees or elected representatives of the employees.

Sufficient elected representatives to represent the affected employees must be elected (by secret elections) in good time for consultation to be undertaken.

There are minimum periods for consultation which should begin within at least 30 days if between 20-99 employees are to be dismissed as redundant at one establishment over a period of 90 days, or within 90 days if 100 or more employees are to be dismissed as redundant at one establishment over a period of 90 days or less.

An employer must disclose certain information in writing, namely reasons for the proposals; numbers and descriptions of employees it is proposing to dismiss as redundant; the total number of employees of any such description employed at the establishment; the proposed method of selection; the proposed method of carrying out the dismissal, and the proposed method of calculating any redundancy payments other than statutory payments.

Consultation must include ways of avoiding the redundancies, reducing the numbers involved and mitigating the effect of the redundancies. It is not necessary that the parties should reach agreement but the employer should consult in good faith with a view to reaching agreement.

An employer has a special circumstances defence where it is not reasonably practicable to meet the minimum consultation periods.

Failure to consult may entitle representatives or an affected employee to complain to an employment tribunal within 3 months of the date of the last of the dismissals. If a tribunal decides in the employee's favour, it must make a declaration to that effect and may make a protective award (an employee's normal week's pay) for a protected period. The maximum length of the protected period will be 90 days.

Where an employer proposes to dismiss 20+ employees for redundancy at the same establishment within a 30-day period or 100+ within a 90-day period the employer must notify the Department of Employment and send a copy of form HR1 to the appropriate representatives. Notification must take place:

• At least 30 days before the first dismissal takes effect if between 20 and 99 employees are to be made redundant within a period of 90 days;
• At least 90 days before the first dismissal takes effect if 100+ employees are to be made redundant.
• The employer can be fined for breach of this requirement.

For further information, please contact Anthony Fincham at [email protected] or on =44 (0)207 367 3000 Click the links below to read about the termination of employment in other jurisdictions:

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