Employee Entitled to PILON Despite Prior Gross Misconduct

An employer was not entitled to rely on an employee’s gross misconduct discovered after termination as a ground for not paying a payment in lieu of notice.

In Cavenagh v William Evans Limited, C was the managing director of William Evans Limited and was made redundant.  His employer decided to terminate his employment immediately, using a payment in lieu (PILON) provision in the contract which allowed it terminate with immediate effect by paying six months’ salary and benefits in lieu of notice.  It wrote to him informing him of this fact.  However, before making payment, it discovered that C had been guilty of gross misconduct prior to termination and it decided not to pay the PILON.  C issued proceedings for its recovery.

The employer argued that he was not entitled to payment because of his prior misconduct.  The Court of Appeal disagreed.   By exercising its contractual right to terminate immediately by making a PILON, C had become entitled to recover the PILON as a debt.  The previous case of Boston Deep Sea Fishing v Ansell did not provide the employer with a defence to a debt claim.  It only applied to wrongful dismissal claims (i.e. claims for breach of contract for failing to give notice) – it provides an employer with a defence to a wrongful dismissal claim by allowing it to rely at trial on evidence of misconduct not known to it at the time in order to justify dismissal.   It was of no assistance in a debt claim. C was therefore entitled to payment of the PILON.

The Court had some sympathy with the employer in this case but could not accept that the principle established in the Boston Deep Sea Fishing case could be extended to cases such as this where the claim was for payment of a debt.  The employer may have had a better chance of defending the claim by arguing that its agreement to make the PILON was voidable on grounds of mistake.  Alternatively, it could have argued that C’s failure to inform it of his gross misconduct was a breach of his fiduciary duties entitling it to damages for any loss suffered as a result, in this case payment of the PILON. 

Employers could also include a provision in employment contracts denying an employee the right to receive a PILON if they are subsequently discovered to have committed an act of gross misconduct.