PILON following an employee’s resignation could amount to unfair dismissal

A recent employment appeal tribunal (EAT) case shed new concerns on the possibility that bringing forward an employee’s termination date after they resign, by utilising a contractual pay in lieu of notice (PILON) clause, could amount to an unfair dismissal.

In Fentem v Outform EMEA Ltd, the employee resigned from his role giving nine months’ notice, in accordance with his contractual terms and conditions. One month before his notice period was due to end, the respondent informed him that they were enforcing the PILON clause in his contact to bring forward his termination date; he was paid in lieu for the remainder of the unworked notice. In doing so, the employee would not be eligible for a bonus under the organisation’s scheme.

The employee (Fentem) argued that the early termination of his contract amounted to an unfair dismissal by his employer; he raised this claim to the employment tribunal (ET). Under previous case law (Marshall Ltd v Hamblin), it is widely recognised that an employee’s resignation is not a dismissal if an employer exercises their contractual right to utilise a PILON clause. Fentem believed this outcome to be unfair so asked the Employment Appeal Tribunal (EAT) to reconsider the position.

The EAT agreed that the use of PILON in his situation should amount to a dismissal, but did not have the authority to overturn the initial EAT decision in the Marshall-Hamblin case. For the decision to be overturned, it must be heard by a higher court, such as the Court of Appeal or UK Supreme Court. As such, the EAT could not uphold the claim but an appeal to the Court of Appeal (CoA) has been permitted.

Until a judgement is made by the CoA, employers are allowed to continue to use existing PILON clauses to bring forward the termination date of an employee who resigns, but should be careful when doing so to avoid the risk of unfair dismissal claims in the future. It’s also important to remember that where there is no contractual PILON clause, bringing forward an end date will likely amount to unfair dismissal, unless explicit agreement is sought from the employee to do so. It is best for an agreement of this nature to be confirmed in writing and at no point should an employer refuse an employee’s request to work their notice, nor persuade them to leave early. Doing so could increase the risk of successful unfair dismissal and/or breach of contract claims.

Employers should also keep in mind the reluctance of the EAT judge to not uphold the appeal and prepare for the potential that the CoA will overturn the original decision. This would create new issues for employers, as it would likely mean employees would, in every case, have to be allowed to work their entire notice period. The only other options available to employers may be to utilise existing garden leave clauses, whereby the employee continues to be paid for the duration of their notice, but is not expected to come to the workplace nor complete any work. An employee’s length of service continues to accrue as usual on garden leave, so any related benefits may have to be offered to them.

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