What You Should Know About Terminating Employment Agreements

While it is every employer’s hope that each hire will be a successful one, there may be times when you find this isn’t the case, and you need to prepare for terminating employment agreements. This note will give you an overview of the key points to note to limit the possibility of the employee making a claim against you. Be sure to also check out our Offer Letter and Employment Agreement Package on Cooley GO Docs.

1. Give notice to your employee

Unless the employee has committed gross misconduct (which is not considered in this article), you will need to give notice for the termination to be valid. Check whether the employment agreement specifies the notice period that needs to be given.  If the agreement is silent, you must give a ‘reasonable’ amount of notice, to be determined by taking into account the employee’s seniority, length of service, any express notice provisions in the agreements of similar employees and the typical length of notice for that role in the industry.

2. Ensure you comply with the statutory minimum notice requirements

If your employee has continually worked for you for at least one month, they are entitled to a minimum period of notice based on service time.  This minimum notice may be exceeded by the contractual or reasonable notice requirements described above.  The following rules apply:

• employees that have worked between one month and up to two years are entitled to one week’s notice;
• employees that have worked between two years and up to 12 years are entitled to one week’s notice for each complete year worked; and
• employees that have worked for more than 12 years are entitled to 12 weeks’ notice.

3. Payment in lieu of notice (“PILON”)

A well drafted employment agreement will include a PILON provision, enabling you to bring the employment to an immediate end by paying the employee their basic salary only for the period that they would otherwise have been on notice.

Should you choose to rely on the PILON provision, you should make it clear to the employee that this is what you are doing and that the payment made to them is made in exercise of the contractual right to terminate the employment with immediate effect.

If there is no PILON clause in your agreement, and the employee does not agree to be paid in lieu of working out their notice, any payment made to the employee to bring their employment to an immediate end will represent damages for breach of contract. If you decide to take this approach, ensure that the payment to the employee includes other benefits that would have accrued during the notice period (e.g. pension contributions) to ensure there is no outstanding claim for wrongful dismissal (see 7 below for an explanation of wrongful dismissal). Your breach of contract may also result in the employee being released from any restrictive covenants, which could be damaging to your business.

4. Ensure you give clear notice to the employee

It is important that when notice of termination is given to an employee, it is clear and unequivocal and that both parties understand that the employment will come to an end on a certain date. You should review the employment agreement to assess whether a method of notice is defined, but it is best practice to record this in writing and hand it to the employee. The notice period will start from the day after you provide notice to the employee.

5. Ensure you comply with your obligations during the notice period

Unless you agree otherwise with your employee, the employment agreement will continue to operate as normal during the notice period. This means that, unless there is a PILON provision that is being relied upon, or gardening leave is in operation (see 6 below), the employee is obliged to attend work and perform their role up until the termination of the agreement, and you are obliged to pay the employee their salary plus any other contractual benefits (unless the employment agreement provides otherwise).

6. Consider placing the employee on gardening leave

You may not like the idea of the employee attending work during their notice period. An alternative to relying on a PILON clause is to rely on a gardening leave clause, whereby the employment agreement continues to operate, but the employee is required to stay at home (i.e. not attend the office).

A well drafted employment agreement will include this provision. If the agreement is silent, while you can still place the employee on gardening leave, they may challenge this through the courts. The courts will assess whether the employee has a right to work, i.e. whether they have a right to attend the office and perform their role up until the date of termination. Factors taken into consideration include whether the skills required to perform the role require regular use, whether the employee would be deprived of part of their remuneration (e.g. commission fees) and whether the role the employee has is unique within the company.

7. Be aware of wrongful dismissal

A wrongful dismissal claim is a contract-based claim. This could arise if you terminate the employment of an employee in breach of your contractual obligations, e.g. by failing to give proper notice. Note that an employer may only terminate the employment agreement without giving proper notice where it has a contractual right to do so or if the employee commits gross misconduct.

Claims for wrongful dismissal can be brought either in the courts or the employment tribunal.  There is no maximum award in the courts but an employment tribunal may only award up to the £25,000 limit for breach of contract claims.  The award of damages is usually the loss of salary and benefits the employee would have received had he worked out his notice period.

8. Be aware of unfair dismissal

An unfair dismissal claim is a statute-based claim. An employee is entitled to bring such a claim if their employment is terminated without a potentially fair reason and/or you fail to follow the correct process or on the expiry and non-renewal of a fixed term contract.  In general, an employee must have two years’ continuous employment to bring an unfair dismissal claim.

Any statutory claim for unfair dismissal is in addition to any claim for wrongful dismissal. To defend a claim for unfair dismissal, you must be able to show that the dismissal was due to one of the five prescribed potentially fair reasons for dismissals (conduct, capability, redundancy, breach of a statutory restriction and some other substantial reason) and prove that you acted reasonably in all the circumstances of the case.

Certain dismissals will be automatically unfair. This includes dismissals relating to pregnancy, health and safety, trade union memberships, the making of a protected disclosure (whistleblowing) or asserting a statutory right.  In some circumstances, special awards also apply.  There is usually no qualifying period of continuous employment required to bring a claim of automatically unfair dismissal.

An employee who alleges that he has been unfairly dismissed must generally bring a claim at the employment tribunal within three months of dismissal.

If a complaint for unfair dismissal succeeds, the employment tribunal may make a declaration, an award of compensation or make an order requiring the employer to take action.  Compensation is made up of a basic award and a compensatory award.  A basic award is calculated by reference to the employee’s age, length of service and a week’s pay, subject to caps on maximum amounts. In very rare cases, the tribunal may make an order for reinstatement or re-engagement.  If the order is not complied with then the tribunal can award additional compensation.