Dismissals - how to avoid making gross misconduct pay

13 July 2012

Occasionally employers discover gross misconduct after they have dismissed an employee and sometimes after they have already paid the employee compensation. The Court of Appeal looked at this recently in Duncan Cavenagh v William Evans Limited. Before looking at that case, here is a quick summary of some earlier decisions.

Boston Deep Sea Fishing and Ice Company v Ansell (Court of Appeal): an employee was not entitled to damages for wrongful dismissal even though the employer did not discover the employee’s gross misconduct until after the dismissal.

Devis v Atkins (House of Lords): the employer could not rely upon an employee’s gross misconduct discovered after dismissal to argue that the dismissal was fair, as fairness is determined on the basis of what the employer knew when it decided to dismiss. However, the gross misconduct could be taken into account when deciding what compensation for unfair dismissal (if any) should be awarded to the employee.

Bell v Lever Brothers (House of Lords): the employer could not recover from an employee the compensation for loss of employment it had paid before discovering the employee’s gross misconduct. Compromise agreements now often contain a warranty that the employee has not committed gross misconduct so that if it does subsequently come to light, the employer can bring a breach of warranty claim to recover the compensation paid.

In Cavenagh the employer terminated employment on the basis that the employee was redundant and relied on a pay in lieu of notice clause (PILON) in the employee’s contract of employment. The employer discovered Mr Cavenagh’s gross misconduct (arranging an unauthorised payment of £10,000 to his own pension) after employment had terminated but before making the payment in lieu of notice. The employer argued that the situation was the same as in Boston Deep Sea Fishing so it did not have to make the payment. At first instance the judge agreed but, on appeal, on the basis of the pleaded issues, the Court of Appeal reversed this decision; once the employer had dismissed in reliance on the PILON, the payment in lieu was due as a contractual debt irrespective of Mr Cavenagh’s earlier gross misconduct.

This is not to say that an employer will never be able to recover a payment made under a PILON in this situation. Mummery LJ pointed out in his judgment two arguments which the court was not able to consider because the employer had not pleaded or argued them:

1. that the employer was entitled to counterclaim damages from Mr Cavenagh because of his failure to inform the employer of his own gross misconduct in breach of his duty as an employee and as a director; and

2. that the agreement to make the payment was void or voidable by reason of the employer’s mistake, known to Mr Cavenagh, about its right to terminate the contract.

As a director, Mr Cavenagh owed a fiduciary duty to disclose his own wrongdoing and, if the employer had pleaded this argument, on the facts of the case it should have won. Only directors and very senior employees are likely to owe this fiduciary or contractual duty to disclose their own wrongdoing. Employers can, however, ensure they are able to recover a payment in lieu in any case by revising their PILONs so that it is a condition of payment that the employee has not committed gross misconduct and any payment which has already been made is repayable on demand if gross misconduct does come to light.
 

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