Gross misconduct and withholding payments

In a recent case an employer dismissed a senior employee due to a breakdown in the working relationship with a payment in lieu of notice.  It was then discovered that the employer could have dismissed the employee for gross misconduct. Could the employer have withheld payment in these circumstances?

The case concluded that unless there is a provision in the contract permitting the company to avoid or recover payment in the event of a breach discovered after termination, the payment is owed as a debt.

The Court of Appeal held that a former managing director was entitled to six months’ pay in lieu of notice on the basis that the employer, having terminated his contract lawfully, was not entitled to withhold the payment when it emerged that he had committed an act of gross misconduct before dismissal.

The principle established in the case of Boston Deep Sea Fishing v Ansell that an employer can rely on gross misconduct discovered after dismissal to defend a claim for damages for wrongful dismissal, does not apply to a payment that is accrued as a debt (which occurs in circumstances where the contract is terminated under a lawful PILON clause).

The company in the instant case would have actually been better off “acting badly”, by wrongfully dismissing the director and escaping liability by relying on the Boston Deep Sea Fishing principle after the event.

The case demonstrates that if a company is in doubt as to whether or not to investigate any potential circumstances of misconduct prior to dismissal it is best not to make a payment in lieu of notice and effect a clean break, as this will create an inescapable contractual liability in the absence of any express contractual provision dealing with such circumstances.

For further advice on this and other questions of employment law, contact DFA Law Associate Gary Lee.