Introductory guidance on dismissal focusing on unfair dismissal, including advice on how to follow a fair dismissal procedure
No specific legislation is devoted to wrongful dismissal. It is a branch of the law of contract derived from what is known as the ‘common law.’ Guidance on wrongful dismissal is based on contractual concepts, and generally speaking changes stem from case law.
Some legislation does have an impact on wrongful dismissal claims. For example, the Employment Rights Act 1996 affects the length of an appropriate notice period and may therefore affect damages for wrongful dismissal.
Similarly, legislation may govern jurisdictional aspects of wrongful dismissal claims, such as where claims can be brought or perhaps taxation issues – see, for example:
- The Industrial Tribunals Extension of Jurisdiction (England and Wales) Order (SI 1994/1623), or
- The Enactment of Extra-Statutory Concessions Order 2011 (SI 2011/1037).
However, most employment legislation since the 1960s and 1970s provides statutory employment rights (for example, unfair dismissal). Wrongful dismissal is an older contractual concept and should not be confused with unfair dismissal, which is a statutory right emanating from legislation in the 1970s.
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What is wrongful dismissal?
Wrongful dismissal happens when an employee is dismissed by an employer in breach of the oral or written terms of an employment contract. The dismissal can be an actual or constructive dismissal.
The most common example is a failure to give the employee the correct length of contractual or statutory notice. Cases of wrongful dismissal also occur if an employee is dismissed without adequate compensation in lieu of notice (see our Terms and conditions of employment Q&As).
Are wrongful and unfair dismissal claims based on the same concept?
No, they are entirely different. Wrongful dismissal is a long-established concept derived from contract law. Contractual wrongful dismissal cases have been around since the 18th century. By contrast, ‘unfair’ dismissal is less than 40 years old.
A wrongful dismissal claim is essentially based on what the parties agreed in their contract and whether the employer has reneged on that agreement.
Unfair dismissal is based on more arbitrary concepts of fairness. There is no qualifying period of employment for wrongful dismissal claims, whereas in most unfair dismissal cases the employee has to demonstrate one or two years’ continuity of employment.
Unfair dismissal can, and often does, happen without there being a wrongful dismissal claim. However, some dismissals will be unfair, some will be wrongful, and some will be both.
Annie has worked for XYZ Ltd for over two years. She has a three-month notice period in her contract. She has always felt that her working relationship with her line manager, Nira, was slightly strained, although they maintain a veneer of co-operation. One Friday, in a tense department meeting, Annie openly disagrees with Nira for the first time. Immediately after the meeting, Nira summons Annie to her office and dismisses her, saying she will be paid up to that Friday and not beyond. Annie will be able to claim:
- wrongful dismissal, relating to the salary and benefits for her three-month notice period, and
- unfair dismissal, because there appears to be no fair reason to dismiss, and the dismissal was not fair in all the circumstances. Because there is no good reason to dismiss and the correct procedures were not followed, the dismissal will inevitably be found to be unfair.
If Annie had been allowed to work her notice period or been paid in lieu, in accordance with a payment in lieu clause in her contract, then she would not have a claim for wrongful dismissal. Her claim would then be for unfair dismissal alone.
A real example from case law which illustrates the differences in the two claims is Autism Sussex Ltd v Angel (2014), where the claimant was dismissed for falsifying her time sheets. She claimed unfair and wrongful dismissal.
The Employment Appeal Tribunal found:
- That on the unfair dismissal claim the key issue was fairness and whether there was a fair reason to dismiss and if a fair procedure was followed. The employee won her claim for unfair dismissal because the employer had not carried out a reasonable investigation and the disciplinary process was procedurally unfair.
- That on the wrongful dismissal claim the employment tribunal should have focused on the key issue of whether the claimant was guilty of breaking the contract by falsifying the time sheets or not. If she had dishonestly falsified her time sheets this was a breach of contract and the employer was entitled to dismiss her summarily. The wrongful dismissal claim had to be reconsidered by the employment tribunal.
What are the differences between wrongful and unfair dismissal claims?
Wrongful dismissal and unfair dismissal claims are entirely different (see ‘Are wrongful dismissal and unfair dismissal claims based on the same concept?’).
In most unfair dismissal claims there is a qualifying period of either one year or two years’ continuous employment. The two-year continuous service period is required if employment began on or after 6 April 2012.
By contrast, for a wrongful dismissal claim an employee does not need a qualifying period at all. For example, an employee who has only been employed for one day may be entitled to bring a claim for wrongful dismissal. (Although there may still be an unfair dismissal claim available to employees who have not worked for two years if one of the exceptions to the qualifying period applies, for example dismissal for a maternity-related reason.)
Unfair dismissal is exclusively statutory, and can only be dealt with by employment tribunals, not the normal civil courts. Wrongful dismissal claims are dealt with in both the courts and the tribunals.
Costs are rarely recoverable in unfair dismissal claims. By contrast, a successful employer or employee may recover legal costs in a wrongful dismissal claim in the normal civil courts.
The concepts of compensation are also different. In wrongful dismissal claims, the measure of damages is based on putting the employee in the position they would have been in had they received payment for the proper notice to which they were entitled under their contract.
In unfair dismissal claims, there is a basic award based on a mathematical formula, and a compensatory award which will usually encompass loss extending beyond the end of the notice period. As a dismissal can be both wrongful and unfair at the same time, compensation paid by the employer for wrongful dismissal will normally be set off against the compensatory award part of an unfair dismissal award.
Another key difference is that in wrongful dismissal cases the employer can rely on facts which came to its attention after the employee has been dismissed. In unfair dismissal cases, what the employer knew at the time the employee was dismissed is the important factor to be taken into account.
(Note that, although employers can generally rely on a subsequent discovery of an employee’s earlier gross misconduct to entirely avoid liability for wrongful dismissal compensation, the position may be different where an employer has terminated an employee’s employment with a contractual payment in lieu of notice clause (Cavenagh v William Evans Ltd (2012)).
The difference between the concepts of unfair dismissal and wrongful dismissal can be illustrated where an employer has dismissed an employee who has committed a breach of contract. In a wrongful dismissal claim, the employee will not be entitled to pay in lieu of notice or notice pay at all, as the employee has broken the contract and cannot therefore rely on it to claim notice pay. With an unfair dismissal claim, the employer may still be liable to pay compensation depending on how it handled the dismissal (Benveniste v Kingston University (2009)).
Unfair dismissal involves considering what the employer reasonably genuinely believed to have happened. Wrongful dismissal requires consideration of what, as a matter of fact, did happen. The employer’s perception of what happened in wrongful dismissal is irrelevant – what matters is whether there was a fundamental breach of contract so as to justify instant dismissal (London Central Bus Company Ltd v Nana-Addai (2011)).
When can an employer dismiss an employee with no notice and avoid a wrongful dismissal claim?
Dismissing an employee without notice or inadequate notice will nearly always lead to the right to bring a wrongful dismissal claim (and probably an unfair dismissal claim as well). Wrongful dismissal claims can be avoided where there has been gross misconduct by the employee justifying the employer’s actions.
Dismissal without notice is often referred to as summary dismissal. Summary dismissals are justified if the employee has committed a serious breach of their contract (theft, fraud or violence towards another employee). The Acas Code of practice on disciplinary and grievance procedures states that a disciplinary procedure may allow for summary dismissal in cases of gross misconduct and that the procedures should define which acts of misconduct will be classified as ‘gross’ misconduct.
The contract of employment and the employer’s disciplinary procedures should usually clearly state examples of gross misconduct that will lead to summary dismissal. This may be accompanied by a non-exhaustive list of examples, to show when an employee will be dismissed without notice. The breaches which justify summary dismissal will usually go to the heart of the employment contract, even if the misconduct happened some time ago and the employer discovers it a long time after the fact. A very common reason which justifies a summary dismissal is action by the employee which undermines what is known as ‘the implied term of trust and confidence.’
Although contracts must give examples of gross misconduct, the right to summarily dismiss does not automatically kick in when one of those events happens. Employers must still consider the context and the severity of the breach before ending the contract.
Examples of gross misconduct may include fighting, being drunk on duty, harassing people or subjecting people to racial abuse. It is important to emphasise that even if gross misconduct exists, the employer must still go through proper procedures to avoid an unfair dismissal claim.
Where are wrongful dismissal claims heard and what are the relevant time limits?
Before 1994 wrongful dismissal cases were dealt with exclusively by the courts. Since 1994, employment tribunals have had jurisdiction to deal with all wrongful dismissal cases as long as they do not award more than £25,000. (In unfair dismissal cases tribunals can award greater amounts.)
In practice, an employee who has been wrongfully dismissed and whose net salary and benefits for their notice period would amount to less than £25,000, or who is prepared to limit their damages to that level, can choose between an employment tribunal and the civil courts.
If a wrongful dismissal claim is likely to be worth more than £25,000 and the employee wishes to pursue the full amount, the employee should choose the courts rather than the employment tribunal. A wrongful dismissal claim cannot be broken into two actions (that is, one for damages up to £25,000 in the tribunal, and another for the balance in the courts). If an employee wishes to claim more than £25,000 in the courts, then they must withdraw any claim in the tribunal before a judgment is given. An attempt by an employee to reserve the right to pursue the claim for the excess amount in the courts will not be effective once the tribunal has made a judgment.
Other factors to take into account include the fact that the time limit for a wrongful claim in the civil courts is six years from the dismissal, whereas the time limit in an employment tribunal is three months from the effective date of termination of the contract (subject to any power to extend that time limit, for example to accommodate Acas early conciliation). An employee who is late bringing a wrongful claim may therefore choose the civil courts for that reason.
A final point to emphasise is that recovery of legal costs by a successful party remains an elusive concept in the employment tribunal but is far more likely in the civil courts, so an employee with a strong wrongful case may prefer the civil courts as they can reinforce the threat of proceedings with an additional threat of recoverability of their costs.
Public funding (legal aid) is not available in tribunal matters, so an eligible employee with a wrongful dismissal claim may still choose to pursue the matter in a court rather than a tribunal.
How are damages calculated?
Damages in wrongful dismissal claims are calculated in the same way as they would be in any other breach of contract situation. The basic rule is that the employee must be placed in the same position as if the contract had been performed.
The employee will be entitled to their full net salary for the contractual notice period and loss of other benefits for the notice period (including, for example, employer’s pension contributions, loss of use of a company car, private health insurance, contractual bonuses, commissions, and so on).
Wrongful dismissal claims will normally comprise net salary and benefits for the notice period only. However, the amount payable may increase in appropriate cases where the employee has been dismissed without proper notice and without the benefit of a proper disciplinary process. In such cases the damages may include the income which would have been earned during the time the disciplinary process would have taken place, as well as during the contractual notice period.
In the vast majority of cases, claims for wrongful dismissal therefore consist of net wages and benefits that the employee would have earned during the contractual notice period.
In the important case of Johnson v Unisys (2001), the House of Lords decided that damages for wrongful dismissal were limited to payment for the relevant notice period, and must not include damages for loss of reputation or distress caused by the way in which steps leading to the dismissal were taken.
However, a recent case has suggested that in some very unusual cases it may be possible to claim further money beyond the notice period. In Edwards v Chesterfield Royal Hospital NHS Foundation Trust (2010) a consultant surgeon was dismissed for gross professional and personal misconduct amounting to a breach of contract. Edwards claimed damages of over £4.3 million for loss of his career following a NHS disciplinary hearing and his resulting inability to obtain permanent employment in the NHS. The Court of Appeal held that the usual limiting of damages to the notice period does not apply where the claim is for breach of an express term of the employment contract. The breach of contract was the defective conduct of the disciplinary hearing, which broke the terms of the NHS’s contractual disciplinary procedure.
Employers must follow the terms of a contractual disciplinary procedure before dismissing employees, otherwise any claim for loss of reputation or other loss attributable to the failure to implement the procedure may be recoverable over and above the notice period.
Employers need to take legal advice, or at least give careful thought to the correct tax approach when calculating damages for wrongful dismissal. It is necessary first to assess what the employee would have actually received had the contract been performed – this means their salary and benefits in hand net of tax. Once this has been calculated then the first £30,000 of any payment is tax free as compensation for loss of office. If the damages exceed £30,000 then the excess over that amount is taxable.
It is usual for employers to pay a ‘grossed up’ amount in order to ensure that the sum the employee receives as damages is sufficient to cover any tax liability in respect of the sum over and above the £30,000 limit.
Although the first £30,000 of a genuinely compensatory or ex-gratia payment made to a departing employee as compensation for loss of their job is free of tax, it is not free of tax if the employee has a contractual right to the payment (such as payment for a notice period). This has been a problem area for employers, because the extent to which notice period payments are taxable depends on the precise wording used in the employment contract. The law is due to change in April 2018 (see ‘Future developments’ and our Tribunal claims, settlement and compromise Q&As).
Employees may ask employers to agree to dress up a payment in lieu of notice as an ‘ex-gratia’ payment. This may be an attempt to avoid the notice pay being subject to tax. It is incorrect to try and circumvent HMRC rules in this way. Employers may need to take legal advice to ensure the tax payments are treated correctly.
As part of a settlement agreement the employer will often pay a contribution towards the employee’s legal costs. Special rules also apply to the tax treatment of these payments.
How substantial are damages awards and are bonuses included?
Most damages for wrongful dismissal claims are not substantial at all. However, the press does from time to time highlight substantial awards. In a small minority of cases, the damages can be for large sums either because the employee had an extremely long contractual notice period, or because the employee was a high earner, often with a significant bonus package.
Damages for wrongful dismissal will be assessed by reference to loss suffered during the period of notice which the employer should have given. If a large bonus fell due during the notice period that will be reflected in the award. The cases in which wrongful dismissal claims are highly contentious usually involve senior employees with valuable remuneration packages who are dismissed without being given full contractual notice.
Attempting to design a bonus scheme under which the employer does not have to pay pro rata bonuses during a notice period can be very difficult and careful legal advice should always be taken. The basic principle is that loss of contractual bonus falling due in the notice period will be payable. Disputes frequently arise concerning whether bonus schemes are contractual or genuinely discretionary.
How are damages calculated to compensate an employee if the employer tries to go back on an offer of a new contract of employment?
An employer may withdraw a job offer before it is accepted (Recruitment and selection Q&As).
However, once an offer of employment is accepted a contract of employment comes into being. This may be a verbal contract if nothing has yet been written down. If the employer changes its mind before the employee starts work, the employee is entitled to damages for breach of contract. This may be what is known as an ‘anticipatory breach of contract.’ The level of damages will be the wages etc for the contractual notice period.
Problems may arise if there is a probationary clause in the contract. In cScape Strategic Internet Services Ltd v Toon (2008) the employer agreed a contract of employment but, before the new employee was due to start work, the employer changed its mind. The contract provided that the employer had the right to dismiss the employee during the first:
- three months of employment, on one week’s notice, and
- five years, on one month’s notice.
The employer paid the new employee one week’s pay for the contractual notice period. The employee claimed one month’s contractual notice pay as wrongful dismissal damages. The Employment Appeal Tribunal ruled that the damages for breach of contract were limited to payment for one week’s notice, because it was open to the employer to give one week’s notice of termination of the contract on the first day of its coming into effect.
Accordingly, the employer had already paid in full for the damages for breach of contract.
If an employer terminates a contract of employment before the employee starts work for certain specified reasons, for example because of pregnancy or for any other automatically unfair reason, this will circumvent the usual rules requiring a qualifying period of continuous employment* and there may be a statutory claim for unfair dismissal as well as wrongful dismissal.
Are damages affected if the employee has another job to go to?
Yes. The sums payable by the employer will usually be reduced if the employee has another job. As the basis of a wrongful dismissal claim is in contract, an employee has a duty to mitigate their loss. In practice this means that an employee must try to find another reasonable job at the same or similar level of remuneration. This principle of mitigation means that an employee who has been wrongfully dismissed will have a deduction from any damages if they:
- fail to apply for another job (do not try to mitigate the loss), or
- get another job with the same or better remuneration package (in which case there is no loss).
The employee ‘loses’ compensation in both cases. The only circumstance in which the employee will recover full wrongful dismissal compensation is where they try to find alternative employment and fail. Damages may also be more substantial if, through no fault of their own, the employee does obtain other work but at a much lower level of pay.
The employer has to show that the employee has failed to comply with the duty to mitigate. The employee does not need to show that they acted reasonably.
- If there has been a failure to mitigate, a reduction to compensation must be assessed by looking at what the employee should have done to get another job to mitigate their loss, and when they would have achieved an alternative income. Then a tribunal would reduce the compensation by the amount of income which would have been earned.
- Employers defending tribunal claims must address issues of mitigation and produce evidence of the steps an employee should have taken, such as job advertisements and expert evidence about employability in the sector. The employer should also seek full disclosure from the employee of their efforts to mitigate.
- The views and wishes of the employee should be taken into account. Just because there is a better paid job which it would have been reasonable for the employee to have taken does not always mean the employee has not mitigated. There may be other circumstances making it reasonable not to take the alternative position.
- The Employment Appeal Tribunal has confirmed that the principles of mitigation apply to the loss up to the date of the tribunal hearing and any future, continuing loss; an arbitrary percentage reduction is not an appropriate way of assessing mitigation.
- If an employee gets a new job shortly after dismissal at the same or improved pay, but then loses that new job, compensation for loss of earnings does not just stop at the point the second job started. Compensation will include further losses for the period after the second job ended as well.
- If a wrongfully dismissed employee is re-offered work with the same employer who dismissed them, perhaps for a fixed period, the employer can argue that the employee failed to fulfil their duty to mitigate their loss by rejecting the offer. Although the employee may not feel able to work for an employer who wrongfully dismissed them, it is a relevant factor to take into account.
- An employment tribunal can decide that an employee was likely to have been appointed to an alternative job advertised by the same employer if they had applied for it. The tribunal will consider the surrounding evidence of an employee’s skills and experience and their track record to decide if the employee has failed to mitigate their loss by not applying for the alternative position.
- An employee can mitigate their loss by taking up self-employment, but any award of compensation may be limited if there is other higher paid work available which the employee chose not to pursue.
Unusually for employment law, the core principles relating to wrongful dismissal are relatively settled as it is a contractual concept. However, some significant future developments are expected in two main areas which will affect tribunal claims generally and will have a knock-on effect on wrongful dismissal claims.
The introduction of tribunal fees in 2013 was followed by the introduction of Acas early conciliation from 6 April 2014, which has reduced the number of tribunal applications substantially (Tribunal claims, settlement and compromise Q&As).
A possible future jurisdictional change could arise from the recommendation of the courts that the £25,000 limit on wrongful claims in the tribunal is ripe for review.
Wrongful dismissal claims are often settled by employers making significant termination payments. Imminent tax changes will affect how managers negotiate these payments. The changes come into effect in April 2018.The current income tax exemption for compensation payments will remain at £30,000. Termination payments can be either:
- Non-contractual, covering compensation for things like unfair dismissal and discrimination compensation. These payments fall within the tax exemption.
- Contractual, covering things such as holiday pay or salary which fall due under the contract and are taxable.
There have been many legal difficulties about payments made to employees who have been dismissed regarding payment for their notice periods. Some employees were taxed, and some qualified for the £30,000 exemption depending on how their notice period was drafted in the contract.
From April 2018 the rules are being changed to make it clear that all payments for loss of a notice period cannot be included in the £30,000 tax free allowance. The effect of this is that income tax and NICs will be payable on all payments made for notice periods from April 2018 onwards. This will be the case even if the employee has a contractual right to a PILON payment.
Also, as the legal principles governing wrongful dismissal concern well-established principles of contract law, any significant changes will probably come from decided cases.