30 May 2012 #Employment
Employers frequently need to make redundancies. Where an employee’s contract allows for a payment in lieu of notice (“PILON”), it is not uncommon in a redundancy situation for the employer to agree to pay the employee a PILON instead of requiring them to work through their notice period. However, in these circumstances what happens if the employer discovers the employee has committed gross misconduct after they have agreed to pay the PILON? Do they still have to pay the promised PILON to the employee?
Yes, says the Court of Appeal in Cavanagh v William Evans Limited.
When Mr Cavanagh was made redundant, William Evans Limited (“the Company”) agreed to pay him a PILON for his 6 month notice period. However, the Company subsequently found out that Mr Cavanagh had committed gross misconduct by wrongly procuring Company funds to pay to his pension provider. Had the Company known about his misconduct it would have accepted Mr Cavanagh’s repudiatory breach of contract and regarded itself as discharged from the liability of paying a PILON. The Company withheld the PILON and Mr Cavanagh sued.
The Court of Appeal held that Mr Cavanagh had acquired a right to the PILON. Mr Cavanagh had been sent a termination letter which stipulated that the Company were exercising its contractual power to pay Mr Cavanagh a PILON. At this point a debt to Mr Cavanagh accrued. There was no provision in the contract denying him the right to the PILON if the Company subsequently discovered a prior act of gross misconduct. Therefore, the Court of Appeal found Mr Cavanagh’s employment had been terminated in accordance with the relevant contractual provisions and an after-discovered misconduct was not a defence for non-payment of a debt which had accrued.
Given the above decision, employers may wish to review the drafting of their PILON clauses.