PILON and Discovery of Pre Termination Gross Misconduct

If an employer dismisses a member of staff with payment in lieu of notice ("PILON") but then later learns that prior to termination of employment they had committed an act of Gross Misconduct, can they withold that PILON payment?

No, says the Court of Appeal. They have recently handed down their judgement in Cavenagh v William Evans Limited.

This concerned a Managing Director who had been made redundant and was due to be paid a payment in lieu of 6 months notice.  Prior to making the payment the company discovered that the MD had committed an act of gross misconduct and witheld the payment of notice on the basis that had he still been in employment and discovered the gross misconduct they would have been entitled to dismiss him summarily without notice.

The Court of Appeal held that the MD had acquired an accrued right to the PILON payment as his contract had been terminated lawfully under relevant provisions of his contract of employment (or service agreement) - They further held that there was no general principle in contract law barring him from exercising his right to recover the payment as a debt owed to him.  The principle that a claim for wrongful dismissal could be defeated by relying on evidence of misconduct after dismissal did not provide the company with a defence to the MD's claims to a money claim.

One observation from this is that, had the company dismissed him unlawfully they would have had a defence to his claims (Boston Deep Sea Fishing v Ansell (1888)) but because they did not wrongfully dismiss him, they are considerably worse off.

To prevent similar situations employers should consider updating their contract of employment to include a clause that enables them to withhold notice pay should the employer discover prior acts of gross misconduct.