Payment in Lieu of Notice

Notice is normally needed in order to lawfully end an employment contract. A failure to give notice - by either party - will usually be a breach of contract. Many employers include PILON clauses in employment contracts to enable them to end employment early provided that they pay the correct notice pay. If an employee resigns, there will be no dismissal. However, section 95 Employment Rights Act 1996 says that an employee is dismissed if the employment contract is terminated by the employer, with or without notice. The EAT has looked at a case in which the employee resigned, but the employer ended the contract before the notice period had ended by making a payment in lieu of notice. The employee said he had been dismissed and was therefore entitled to bring an unfair dismissal claim.

In Fentem v Outform, the employee was employed for almost 20 years and required to give 9 months’ notice. He resigned on 16 April 2019, so his last day was due to be 16 January 2020. In December 2019, the employee was called into a meeting and informed that his employment was being terminated with immediate effect and that he would be paid in lieu of the remainder of his notice period. The employee brought a claim for unfair dismissal. The Employment Tribunal had to decide whether there had been a dismissal. The employee said that the PILON - which cut short his employment after resignation - was a dismissal according to section 95. However, the employer relied on a case called Marshall v Hamblin, where the EAT had decided that a resignation is not converted into a dismissal if the employer exercises their contractual right to make a PILON. Marshall said that kind of termination is still a resignation and all that changes is the termination date. In Fentem, the Employment Tribunal agreed with Marshall and said that the employee had resigned rather than being dismissed. The employee appealed, saying Marshall was manifestly wrong and should be overturned.

The EAT disagreed. To overturn Marshall, and be able to give a judgment that effectively went against it, the EAT had to show that the decision had been obviously wrong. The EAT clearly had problems with the reasoning in Marshall, given that terminating employment and paying a PILON in any other circumstances is a dismissal under section 95. However, the EAT could not say that the judgment was manifestly wrong and so dismissed the appeal.

This case confirms that a decision to make a PILON, in accordance with a contractual right to do so, will not turn a resignation into a dismissal. All the employer must do is pay the balance of the notice period. However, the employee in this case has asked for permission to appeal to the Court of Appeal. There may yet be confirmation of the legal position from a higher court, one way or the other, in due course.

If you have a concern about any aspect of employment, we have a team of highly experienced and approachable employment solicitors who will assess your particular circumstances and provide you with clear practical advice on your rights and options. Speak to one of our team on 0118 978 0099, email or complete our online contact form.

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