Payment in lieu

Employers are contractually bound to make a payment in lieu of notice if there is a term in the employee’s contract to that effect, but what if the employer later discovers that the employee had committed an act of gross misconduct before they were dismissed? The Court of Appeal said in Cavenagh v William Evans Ltd that they still have to pay up if they have lawfully dismissed the employee.

Basic facts

Mr Cavenagh had been employed as the company’s managing director from February 2003 until March 2010 when he was dismissed by reason of redundancy.

Under the terms of his service agreement, he was entitled to six months’ pay in lieu of notice. On 12 March the company wrote to him confirming that it would make “all appropriate payments” to him.

However, it then discovered that on 12 January 2010 Mr Cavenagh had made an unauthorised withdrawal of £10,000 from the company’s bank account to his pension provider.

It refused to make the payment arguing that his action constituted a fundamental and serious breach which meant that the company could treat the contract at an end. Mr Cavenagh claimed the money as a debt.

County court decision

The county court judge found in favour of the company and made an order dismissing Mr Cavenagh's £65,000 claim for pay in lieu, along with his other claims for pension arrears and pension contributions.

She said that the company would have dismissed him summarily for his misconduct, had it known about it at the time.

Mr Cavenagh appealed the point about whether the gross misconduct meant that the company could avoid liability for the payment in lieu of notice.

Decision of Court of Appeal

The Court of Appeal found in his favour, saying that as the company had triggered the pay in lieu of notice clause the money was owed as a debt.

The company could not rely on the principles laid down in the case of Boston Deep Sea Fishing and Ice Company v. Ansell. This 1888 case, said the Court, applied to damages claims, not debt claims, and did not go as far as to say that “after-discovered misconduct” provided an employer with a defence to an action for payment of an accrued debt.

As his contract did not contain any clauses releasing the company from its contractual obligation to pay the debt if it subsequently discovered that he had committed a prior act of gross misconduct, Mr Cavenagh was entitled to it in the same way as other sums that were due to him at the date of dismissal.

Instead, Boston was to do with an employee's claim for damages for wrongful dismissal which the employer successfully resisted by relying on evidence of misconduct that they had not known about at the time of dismissal. However, in this case, the Court said the company had lawfully terminated Mr Cavenagh’s employment so there was no claim of wrongful dismissal.

This was, therefore, as a matter of legal analysis, quite a different situation than that facing the Court of Appeal in Boston Deep Sea Fishing. As a result, the company was contractually bound to make the payment.