Overview

No specific legislation is devoted to wrongful dismissal. It stems from an older contractual concept known as ‘common law’. It should not be confused with unfair dismissal.

Wrongful dismissal occurs 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 a 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.

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.

(For more information, see our Unfair dismissal Q&As and our Terms and conditions of employment Q&As).

Contractual wrongful dismissal cases have been around since the 18th century. By contrast, the concept of ‘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.

The following scenario demonstrates the difference between the two concepts.

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 her 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 illustrates the differences in the two claims (see Autism Sussex Ltd v Angel, 2014). The claimant in the case was dismissed for falsifying her time sheets. She claimed unfair and wrongful dismissal.

On the unfair dismissal claim, the Employment Appeal Tribunal found that 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.

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.

Unfair dismissal claims generally require a qualifying period of either one year or two years’ continuous employment (unless the dismissal is automatically). A wrongful dismissal claim needs no qualifying period. For example, an employee who has only been employed for one day may be entitled to bring a claim for wrongful dismissal.

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 civil courts.

The concepts of compensation are also different. In wrongful dismissal claims, damages are based on putting the employee in the position they would have been in had they received their contractual notice period.

In unfair dismissal claims, there is a basic award based on a mathematical formula, and a compensatory award which usually includes loss extending beyond the end of the notice period. As a dismissal can be both wrongful and unfair, 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.

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 notice pay or pay in lieu of notice as they have broken the contract. With an unfair dismissal claim, the employer may still be liable to pay compensation depending on how it handled the dismissal (see 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 (see London Central Bus Company Ltd v Nana-Addai, 2011).

Dismissing an employee with no or inadequate notice will nearly always lead to the right to bring a wrongful dismissal claim (and probably an unfair dismissal claim as well) except 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 (such as 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. This may be accompanied by a non-exhaustive list of examples, to show when an employee will be dismissed without notice. Examples of gross misconduct may include fighting, being drunk on duty, harassing people or subjecting people to racial abuse.

The breaches which justify summary dismissal will usually go to the heart of the employment contract, even the employer discovers it a long time after the misconduct happened. A very common reason justifying summary dismissal is an employee action that 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.

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.

Before 1994 wrongful dismissal cases were dealt with exclusively by the courts. Since 1994, employment tribunals can hear any wrongful dismissal case, provided they do not award more than £25,000 in damages.

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 the 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.

Other factors to take into account when making this choice 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 – see our Tribunal claims, settlement and compromise Q&As). An employee who is late bringing a wrongful claim may choose the civil courts for that reason.

Recovery of legal costs by a successful party is far more likely in the civil courts, so an employee with a strong wrongful dismissal 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 choose to pursue the matter in a court rather than a tribunal. 

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.

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 a company car, private health insurance, contractual bonuses, commissions, and so on).

However, the amount payable may increase where the employee has been dismissed without proper notice and without 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, as well as during the contractual notice period.

In the vast majority of cases, claims for wrongful dismissal consist of net wages and benefits that the employee would have earned during the contractual notice period. However, case law suggests that in some very unusual cases it may be possible to claim further money beyond the notice period.

In one case, a consultant surgeon was dismissed for gross professional and personal misconduct amounting to a breach of contract. He 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 did 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 (see Edwards v Chesterfield Royal Hospital NHS Foundation Trust, 2010).

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.

Tax

Wrongful dismissal claims are often settled by employers making significant termination payments. Employers may need to take legal advice to ensure the tax payments are treated correctly.

Termination payments can be either:

  • Non-contractual (compensation for unfair dismissal and discrimination, for example)
  • Contractual (for holiday pay or salary, for example).

Compensatory and ex-gratia, non-contractual payments made for loss of office up to the first £30,000 are not taxable.

Since April 2018, all contractual payments (for example, for loss of a notice period) are not included in the £30,000 tax free allowance and are liable to income tax and NICs.

Employees may ask employers to agree to dress up a payment in lieu of notice as an ‘ex-gratia’ payment in an attempt to avoid the notice pay being subject to tax. It is incorrect to try and circumvent HMRC rules in this way.

For more on the tax treatment of settlement payments, see our Tribunal claims, settlement and compromise agreements Q&As.

Most damages for wrongful dismissal claims are not substantial. However 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 they were 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.

The basic principle is that loss of contractual bonus falling due in the notice period will be payable. Disputes frequently arise over whether bonus schemes are contractual or genuinely discretionary. 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.

An employer may withdraw a job offer before it is accepted (see our 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 and so on for the contractual notice period.

Problems may arise if there is a probationary clause in the contract. In one case, cScape Strategic Internet Services Ltd v Toon (2008), the employer agreed a contract of employment but changed its mind before the new employee was due to start work. 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
  • 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 for unfair dismissal, and there may be a statutory claim as well as a wrongful dismissal claim.

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 law, 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 (in other words, 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, perhaps for a fixed period, with the same organisation that dismissed them, 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 that 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.

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