A company can terminate an employee's contract by dismissing him or her. If the company terminates the contract with immediate effect, this is known as a summary dismissal. (A summary dismissal may well be in breach of the employee's contract, as discussed further below). Alternatively, the company may give the employee notice that his or her contract is to be terminated.
For a notice of dismissal to be effective, it must be possible to identify the date the contract will end. The notice could specify, for example, that the contract will terminate in six months' time or on a specified date. If, on the other hand, a company informs an employee that he or she will be dismissed 'shortly' or 'by the end of the year', that amounts to a warning to the employee that he or she is soon to be dismissed, rather than a notice of dismissal. Therefore an employee who left the company in response to a warning of this nature would have resigned rather than have been dismissed.
If a company uses clear words of dismissal, the employee is entitled to view himself or herself as having been dismissed. Furthermore, once a company has given an employee notice of dismissal, it cannot usually withdraw that notice unless the employee agrees. If the words that the company uses are ambiguous, such as when a manager tells an employee to 'get out' during a heated exchange, the test is whether a reasonable employee would have understood the words used as amounting to dismissal, in the light of all the surrounding circumstances.
If an employer notifies an employee that he or she has been summarily dismissed in a letter, the dismissal takes effect on the date the employee reads the letter, or has had a reasonable opportunity of reading it.
Where a company uses disciplinary or other procedures that allow for an employee to appeal against a decision to dismiss, it should ensure that the procedures make clear what effect the lodging of an appeal has on the termination of the employee's contract. The procedures could state, for example, that the lodging of an appeal postpones the date of the dismissal until the appeal is decided. More probably, the employer will wish to confirm that the lodging of an appeal does not prevent the dismissal taking effect on the date originally notified.
Employers who observe the EEF national procedural agreements should note that an employee who is dismissed is entitled to call for an external conference. In cases other than summary dismissal for gross misconduct, the employee is entitled to remain in employment until agreement is reached or the procedure is exhausted, or until his or her notice expires, if that is later.
A company is usually obliged to give an employee notice of the termination of his or her contract. The exception to this is where the employee is in serious breach of his or her obligations under the contract, such as where the employee has committed an act of gross misconduct. In these circumstances, the company is legally entitled to dismiss the employee without notice. It is always advisable, however, to conduct a proper investigation before deciding to summarily dismiss an employee for misconduct, in order to confirm that he or she really is in serious breach of contract, and to avoid liability for unfair dismissal. (The management of discipline is covered elsewhere in this Guide ( Discipline ).)
It is advisable for a company to set out in its disciplinary rules the acts of misconduct that will be treated as gross misconduct justifying summary dismissal. However, disciplinary rules cannot hope to cover all eventualities, and serious acts of misconduct may well justify summary dismissal even if not specified as gross misconduct in the rules. A company should, nevertheless, state in its rules that they are intended to illustrate the acts that will be viewed as gross misconduct rather than amount to an exhaustive list.
The length of notice that a company must give to terminate an employee's contract is likely to be set out in the contract itself. Under the Employment Rights Act 1996, a company must notify employees, within two months of starting work, of the length of notice that the company must give to terminate their employment. If an employee is covered by the minimum period of notice laid down in the Act (set out below), then the company can, if it wishes, refer the employee to the Act for details of his or her notice period. Alternatively, if the employee's notice period is contained in a collective agreement, the company can refer the employee to that agreement, provided it is reasonably accessible to the employee.
In the unlikely event that there is no express term on notice in the employee's contract, a term will be implied that the company must give a reasonable period of notice. What period is reasonable will depend on all the circumstances, including in particular the nature of the employee's job and his or her length of service. It might be reasonable, for example, for the company to give a senior executive with long service six months' or a year's notice of dismissal, but an unskilled manual employee with a few weeks' service only a week's notice.
The Employment Rights Act 1996 sets down minimum periods of notice. After one month's continuous employment an employee is entitled to one week's notice. After completing two years' continuous employment, an employee is entitled to one week's notice for each complete year of continuous employment, up to a maximum of 12 weeks. These minimum notice periods effectively override any shorter notice period in an employee's contract, but do not affect any longer contractual notice period to which an employee may be entitled.
The statutory minimum notice periods do not affect a company's right to summarily dismiss an employee who is in serious breach of contract, nor do they prevent an employee giving up his or her right to notice or accepting a payment in lieu of notice (see 'Payments in lieu of notice' below).
For employees who are entitled to at least one week more than the statutory minimum notice of dismissal (minimum notice periods ), their rights during their notice period depend solely on the terms of their contract. For example, if an employee is on long-term unpaid sick leave when he or she receives notice of dismissal, he or she will not be entitled to be paid during the notice period.
Employees who are entitled to a shorter period of notice, on the other hand, must be paid during their statutory minimum period of notice in certain circumstances, regardless of whether they are entitled to be paid under their contract. They must be paid if:
- they are ready and willing to work but no work is provided by the employer; or
- they are unable to work because of sickness or injury; or
- they are away from work wholly or partly because of pregnancy or childbirth or on parental leave; or
- they are on holiday.
Any payments that the company makes to the employee during the notice period, including sick pay, maternity pay, paternity pay, adoption pay or holiday pay, go towards meeting this liability.
If a company dismisses an employee in a way that breaches the employee's contract, this is termed a wrongful dismissal.
The most common example of a wrongful dismissal is where an employer dismisses an employee without giving him or her the proper notice of dismissal. However, a dismissal can also be wrongful if the company has disregarded other terms of the employee's contract. For example, if the company's disciplinary procedure were part of the employee's contract, it would be wrongful for the company to dismiss the employee for misconduct without going through that procedure. (This is one reason why it is advisable to ensure that disciplinary procedures are not part of employees' contractual terms.) And if the employee is entitled to sickness benefits under his or her contract, it would be wrongful for the company to dismiss the employee for ill-health before those benefits were exhausted, unless the contract made clear that the company had that right.
An employee who is wrongfully dismissed can claim compensation, known as damages, from the employer. This claim can be made either in the civil courts or in an employment tribunal (but a tribunal cannot award more than £25,000 in damages) (remedies for unfair dismissal).
When assessing the amount of damages to award, the court or tribunal aims to put the employee in the position he or she would have been in had the employer observed the terms of the contract. For example, if the employer has dismissed the employee without proper notice, the employee will be awarded his or her loss of earnings and other benefits for the notice period that should have been given, net of tax and National Insurance contributions. The employee is under a duty to minimise his or her loss by looking for another job, and any earnings that the employee receives from other employment in what should have been the notice period will reduce the damages awarded.
If a company wrongfully dismisses an employee, the employee is released from all his or her obligations under the contract, including any terms in the contract that restrict the employee's activities after employment has ended. This is discussed elsewhere in this section (wrongful dismissal and enforceability ).
It is important not to confuse the concept of wrongful dismissal with the concept of unfair dismissal. A wrongful dismissal is a dismissal in breach of contract, while a dismissal is unfair if the employer has not acted reasonably in deciding to dismiss. It is possible, though not common, for a wrongful dismissal to be a fair dismissal. And a dismissal can be unfair even if it does not breach the employee's contract.
In some circumstances, a company may prefer to dismiss an employee with immediate effect, even though this is in breach of the employee's right to notice. If the relationship between the employee and the company has broken down, for example, the company may consider that there is no benefit in the employee working out his or her notice period.
If the company does not give the employee notice of dismissal, it should make him or her a payment in lieu of notice (unless the employee has forfeited the right to notice by committing an act of gross misconduct). This payment represents the damages that a court or tribunal would award the employee for the company's failure to respect his or her notice rights. It should therefore reflect not only the employee's wages or salary for the notice period but also the value of any other contractual benefits to which the employee would have been entitled during that time, such as a company car, health insurance and pension contributions.
Since the employee would have been paid net of tax and National Insurance contributions during the notice period, the payment in lieu can also be calculated on that basis. That is, the employer can choose to pay the net amount only, retaining the notional tax and National Insurance contributions. Nevertheless, many employers choose to base the payment on gross pay, since that is no more than the expense they would have incurred had the employee worked out the notice period. The first £30,000 of a payment in lieu is usually tax-free in the hands of the employee (tax).
Some employers include a clause in their employment contracts entitling them to terminate the contract either on notice or without notice but with a payment in lieu. The advantage of a term like this is that the employer can dismiss the employee without notice and still enforce any terms in the contract that restrict the employee's activities after the employment has ended (wrongful dismissal and enforceability ). The disadvantage from the employee's perspective is that, because the payment in lieu is made under a contract term, it is taxable in full and does not qualify for the exemption that usually applies to the first £30,000 of a termination payment (tax).
Advice on termination payments and their taxation is available from your Association.
When a company gives an employee notice of dismissal, it may tell the employee not to come into work during the notice period. This is often described as giving the employee garden leave. A company may want to put an employee on garden leave because it fears that he or she may harm the employer's operation in some way during the notice period. Or it may prefer to put the employee on garden leave, rather than summarily dismiss him or her with a payment in lieu of notice (payment in lieu of notice ), to prevent the employee going to work for a competitor.
Provided the company continues to pay the employee his or her wages or salary and other benefits during the notice period, putting the employee on garden leave is usually lawful, and the employee's employment contract continues until the notice period expires. Some employees might argue, however, that they have the right not only to be paid but also to be provided with work while their employment continues. This argument would be valid only for those employees whose pay depended on them working, or whose value in the labour market would be severely prejudiced if they were not allowed to continue to maintain their network of contacts and their visibility in the marketplace. Nevertheless, a company might wish to pre-empt the argument by including an express term in its contracts of employment entitling it to put employees on garden leave during their notice period.
If a company were breaching an employee's contract when it put him or her on garden leave, it would be unable to enforce any terms in the employee's contract restricting his or her right to work for a competitor after leaving the company (wrongful dismissal and enforceability ). A company that is considering putting an employee on garden leave but is concerned about the effect this might have on these restrictive covenants may wish to contact its Association for advice.
In some circumstances, the law views an employee who has resigned as having been dismissed. This is termed a 'constructive dismissal' and it arises where an employee resigns because the company's actions have made his or her situation untenable. An employee who has been constructively dismissed is entitled to resign without giving notice, but may decide to give the company notice of resignation. The employee may claim that the dismissal was wrongful, unfair or both. Before being able to present a tribunal claim that he or she was constructively dismissed, the employee must have raised his or her grievance with the employer and waited 28 days.
In order to prove that he or she has been constructively dismissed, the employee must be able to show that the company has acted in serious breach of his or her contract, in a way that goes to the root of the employment relationship or which shows that the company does not intend to be bound by one or more of the essential terms of the contract. This is sometimes referred to as a 'fundamental' or 'repudiatory breach' of contract. A company can constructively dismiss an employee not only through a one-off single act that is in serious breach of contract, but also by a course of conduct involving several minor incidents that cumulatively amount to a fundamental breach of contract.
A constructive dismissal can result from the breach of an express term or an implied term of the contract. An implied term of particular importance here is the employer's duty not, without reasonable cause, to act in a way that undermines the mutual trust and confidence that is essential to the employment relationship ( Employer's implied obligations ). A breach of this term will always be a fundamental breach of contract. A company can constructively dismiss an employee by breaching trust and confidence even if it was not aiming to force the employee out. The test is whether the company's conduct, objectively considered, was likely to damage the relationship of trust and confidence between itself and the employee.
Whether a company's actions amount to a fundamental breach of contract depends on all the circumstances, but courts and tribunals have accepted that these types of act are capable of leading to constructive dismissal:
- reporting an employee to the police for dishonesty without having reasonable grounds for the accusation;
- failing to give an employee reasonable support against harassment;
- downgrading an employee;
- imposing a disciplinary sanction on an employee that is grossly out of proportion to the offence he or she has committed;
- instructing an employee to transfer to another workplace when the employee's contract does not contain a mobility clause;
- instructing an employee to carry out a task that is unsafe.
In order to establish that he or she has been constructively dismissed, an employee must be able to show that the company's breach of contract was the effective cause of his or her resignation. For example, if an employee resigns because he or she has been offered a job with another employer and would not have left the company otherwise, he or she has not been constructively dismissed, even if the company has breached the employee's contract.
If the employee does not resign promptly after the company's breach of contract, the employee may lose the right to claim constructive dismissal. A court or tribunal is likely to accept, however, that an employee can take a few weeks to look for alternative work before handing in his or her resignation.
It is possible for an employee to be constructively dismissed before the company has actually breached the contract. If the company has indicated clearly that it intends to breach the employee's contract in the future, this amounts to what is termed an anticipatory breach. If the breach is serious enough, the employee can resign and claim constructive dismissal, without needing to wait until the breach actually occurs. For example, if the company has informed the employee that it intends to impose new shift patterns at the end of the month even though it has no contractual right to do so, or to withdraw the employee's contractual overtime premium in six months' time, the employee may be entitled to resign immediately and claim constructive dismissal. If, however, an employee 'jumps the gun' by resigning on the strength of a rumour and before the employer has indicated its clear intention to breach the contract, that amounts to an ordinary resignation and not a constructive dismissal.
It is worth noting that if a company unilaterally imposes radically different terms and conditions of employment on an employee, that could be viewed as the termination or withdrawal of the original contract and the imposition of a new one - that is, an express dismissal rather than a constructive dismissal. In these circumstances, the employee could claim unfair dismissal in relation to the original contract while continuing to work under the new terms. The legal issues arising from the variation of employees' contractual terms are covered elsewhere in this Guide ( Changes to contracts ).