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Discovering Misconduct After the Event

A recent Court of Appeal decision highlights the need for employers to take care when drafting employment contracts and compromise agreements to make sure that they aren’t “caught out” by misdeeds discovered after the employee has left.  

In the case of Cavenagh v William Evans Ltd, when Mr Cavenagh was made redundant, Willams Evans Ltd (the Company) used a provision in Mr Cavenagh’s contract to make payment in lieu of notice (a PILON) rather than asking Mr Cavenagh to work during his notice period. 

Unfortunately, the Company then discovered that Mr Cavenagh had paid £10,000 into his pension fund that he wasn’t entitled too. With that discovery in mind, the Company refused to pay the PILON to Mr Cavenagh. Mr Cavenagh sued for breach of contract.

In the County Court, the judge decided that the Company was allowed to rely on knowledge acquired after the dismissal and to refuse to pay the agreed PILON to Mr Cavenagh because of his  misconduct. However, the Court of Appeal has now reversed this.

The Court of Appeal held that an employer that exercises an express contractual right to terminate using a PILON must still pay that PILON because the PILON had been paid in reliance on provisions in Mr Cavenagh’s contract. That contract had not contained any “get out” clause.

The Court of Appeal decided that there was no general legal principles that would release the Company from its contractual commitments in these circumstances just because, if the misconduct had been discovered during Mr Cavenagh’s employment, the Company would have been entitled to dismiss him without notice.  The contractual commitment with regard to the PILON was absolute and the Company could not get out of it just because Mr Cavenagh’s conduct made the payment unpalatable.

Although employers can use evidence of wrong doing to reduce the compensation that might otherwise have to be paid to an employee when the employee has been unfairly dismissed, there was no suggestion that Mr Cavenagh’s dismissal had been unfair.  The redundancy was genuine and a fair procedure had been followed.

The Court of Appeal was sympathetic to the Company’s position but pointed out that by making use of a PILON the employer is always taking a risk – the employee could have found another job or died during the notice period which would have brought the employer’s obligation to keep paying the employee’s salary to an end. The Court of Appeal felt that discovering a gross misconduct matter after agreeing to, or deciding to exercise a contractual right to, pay a PILON was just another risk that an employer had to accept when making such a decision.

However, there are steps that an employer can take to minimise the risks involved, for example:

• Including a provision in employment contracts that enable the employer to recover the PILON (or to avoid paying it) if a gross misconduct matter comes to light.
• Making it a condition of any compromise agreement that the employee has not committed any misconduct that the employer is not aware of.

Clauses like this should avoid the lack of a “get out” clause that caused such a problem for William Evans Ltd. Employers who want to check if their contracts are worded tightly enough to deal with this issue should contact Natalie Ruane at Burnetts on 01228 552222 or nr@burnetts.co.uk

About the author

Natalie Ruane profile photo

Natalie Ruane

Natalie is a Partner and leads the Employment Law & HR team and specialises in education.

Published: Monday 8th October 2012
Categorised: Education, Employment, Public Sector

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