410: PILON payments and termination dates

The case of Fentem v Outform EMEA Ltd is a useful reminder for employers to review what their employees may be entitled to during their notice period and to consider whether contracts should be varied to expressly exclude certain payments.

Pay in lieu of notice (PILON) clauses allow an employer to shorten an employee’s notice period without being in breach of contract by making a payment in respect of notice not worked. These clauses can be exercised either when the employer dismisses the employee or when the employee resigns. Without a contractual PILON, if an employer unilaterally brings forward an employee’s termination date after they have resigned (for example, to avoid having to pay a bonus or commission), this will amount to a dismissal. However, the 1994 Employment Appeal Tribunal (EAT) decision in Marshall (Cambridge) Ltd v Hamblin established that where an employer invokes a contractual PILON after an employee has resigned, this remains a resignation and will not amount to a dismissal.

In the recent case of Fentem v Outform EMEA Ltd, Mr Fentem resigned on 16 April 2019, following a change in Outform’s ownership, giving nine months’ notice as required by his contract of employment. His last day was due to be 16 January 2020 however, on 19 December 2019, Mr Fentem was told that Outform was terminating his employment immediately. Outform exercised the contractual PILON clause allowing the payment of salary, excluding any bonus, in lieu of the remainder of his notice period. Mr Fentem subsequently brought a claim of unfair dismissal and unauthorised deduction from wages in respect of a bonus for the 2019 financial year. Outform relied on the Marshall case to argue that Mr Fentem’s employment had terminated by reason of his resignation, not dismissal.

The Employment Tribunal ruled that it was bound to follow Marshall and held that Mr Fentem had not been dismissed. The EAT has since upheld this decision, and while they expressed some doubts about the reasoning in Marshall, ultimately they had to remain bound by it because it did not meet the high bar of being manifestly wrong. Therefore, Outform invoking the PILON clause after Mr Fentem had resigned did not change his resignation into a dismissal; it simply altered the date on which his resignation took effect.

This case illustrates how PILON clauses can be used by employers to bring forward a dismissal date after an employee has resigned, although it is important to note that this must be a clear and unambiguous power. In order to avoid similar disputes arising, it is recommended that employers consider expressly excluding employees who are in their notice periods from receiving bonuses, commissions, or other incentive payments.