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Can an employer still end employment with a PILON when the employee has resigned?

The recent Employment Appeal Tribunal decision of Fentem v Outform EMEA Ltd has held that there was “no dismissal” where an employer brought forward the termination date of an employee who had resigned by subsequently paying them a payment in lieu of notice (PILON).

Mr Fentem resigned by letter dated 16 April 2019. Mr Fentem continued to work his notice period and was due to leave employment on 16 January 2020. In December 2019, the employer informed Mr Fentem that they were going to make a PILON payment and terminate his employment with immediate effect. The employer told Mr Fentem it was exercising its contractual right to make this payment. This contractual term stated that if an employee resigns on notice the company shall ‘at any time during the period of notice be entitled to terminate the employee’s employment forthwith’.

Mr Fentem brought a claim of unfair dismissal against his employer. The Employment Tribunal had to determine whether Mr Fentem had been dismissed, as defined by s95 ERA 1996. The Tribunal found that Mr Fentem had not been dismissed. The Judge found that normally, where an employee resigns and an employer unilaterally brings forward the termination date this would amount to dismissal. However, in this case the Judge found that he was bound by the EAT’s decision in Marshall (Cambridge) Ltd v Hamblin which stated that there was no dismissal where the employer had relied on a contractual term which allowed it to waive or shorten the period of notice originally given by the employee. Mr Fentem appealed to the EAT.

The EAT dismissed Mr Fentem’s appeal. The Tribunal considered that whilst the decision in Hamblin was wrong, it could only depart from its previous decisions in very strict circumstances. This includes where it decides that a previous decision is ‘manifestly wrong’. The EAT stated that the outcome of the decision in Hamblin was not incorrect but rather it was the reasoning which led to the decision which was wrong. Therefore, the EAT held that the decision in Hamblin must be followed. The EAT also stated that it was arguable that a provision of the contract could provide for an employer, without needing the express agreement from the employee, to end the employment sooner by making a contractual payment by reference to the unexpired period of notice and therefore alter only how and when the resignation takes effect. The EAT therefore upheld that the employer’s decision to bring forward Mr Fentem’s termination date by exercising a contractual right to make a PILON payment, did not amount to a dismissal in law; rather Mr Fentem’s employment had been terminated by resignation.

Employers are therefore able to exercise a contractual right to make a PILON payment and terminate an employee’s employment earlier if they do resign, without it amounting to a “dismissal” in law. In doing so, the employer should have a clear PILON clause in the contract and should exercise this reasonably. An employer must be aware that a PILON payment, if made, should be made to the employee promptly to ensure the employment contract has been effectively terminated.

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