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Resignation, Bonus and Payment and Lieu of Notice

on Thursday, 17 March 2022.

Will a pay in lieu of notice (PILON) clause exercised after an employee has already resigned, change a resignation into a dismissal?

No, held the Employment Appeal Tribunal in a decision that may prompt employers to review the terms of their bonus policies for the reasons set out below.

Contractual PILON Clause

In the case of Fentem v Outform EMEA Ltd, Mr Fentem resigned on nine months' notice which was due to expire on 16 January 2020. His contract of employment contained a PILON clause and provided that he needed to work his entire notice period in order to receive his bonus.

On 19 December 2019, his employer decided to bring his employment to an end with immediate effect, making a payment in lieu of the outstanding period of notice as permitted under the PILON clause.    

What Does the Law Say?

Section 95 of the Employment Rights Act 1996 sets out the circumstances in which an employee will be treated as dismissed for the purposes of unfair dismissal. One of those circumstances is if "the contract under which [the employee] is employed is terminated by the employer (whether with or without notice)". On the face of it, this would appear to apply when an employer exercises a contractual PILON clause, even if the employee has already resigned.    

However, in the 1994 case of Marshall (Cambridge) Ltd v Hamblin the EAT held that an employee's resignation was not subsequently converted into a dismissal under Section 95 when the employer exercised its contractual right to make a PILON.    

Unfair Dismissal Claim Rejected

Mr Fentem sought to bring an unfair dismissal claim in light of his termination date having been brought forward. The Tribunal found that, being bound by the Marshall case, there had also been no dismissal in Mr Fentem's case, and his employment had terminated by reason of resignation.

Mr Fentem appealed unsuccessfully to the EAT. The EAT found that the effect of a PILON in cases where the employee has already resigned will be to alter the date on which the resignation takes effect, rather than to replace the resignation with a dismissal in law.  

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A Note of Caution

As part of its decision, the EAT in the Fentem case analysed the reasoning in the Marshall case. The EAT remarked that it found fault with some of the reasoning in that case. However, despite there being flaws in the reasoning of the Marshall case, the EAT found the outcome of the case was not 'manifestly wrong'. This meant the EAT was bound by the Marshall case when considering Mr Fentem's claim, so that his appeal was dismissed.    

We understand Mr Fentem is seeking permission to apply to the Court of Appeal against the decision. 

How Could the Dispute Have Been Avoided?

This case demonstrates the way a PILON clause might be used to avoid a dismissal in law where an employee has resigned on notice and their end date is subsequently brought forward. Perhaps the more practical learning point for employers is to consider whether to make bonus schemes accessible to staff working out their notice periods. In Mr Fentem's case, if no bonus was payable due to the fact Mr Fentem was working out his notice, his employer might not have invoked the PILON clause, and might have avoided the dispute altogether. 

For more information about PILON clauses and bonus schemes, please contact Michael Halsey in our Employment Law team on 07554 432829 or complete the form below.

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