Dismissal, garden leave and redundancies
Our guide to terminating employment
Each dismissal situation is unique and comes with a number of employment law risks. Our employment lawyers guide you through the process with pragmatic and clear advice.
Terminating employment can be a legally sensitive process, with minefields for even experienced HR professionals. Our team of specialist employment lawyers are always on hand to advise on process and risk, and to help you devise a strategy for handling the exit of one or more of your employees. Your strategy may include following a specific process to put you to put you in the strongest position to defend a Tribunal claim, or it may involve consideration of alternative options such as protected conversations or without prejudice negotiations. Either way, it is important to understand what a fair process involves, and the potential claims that could arise if you get it wrong.
In this guide, we summarise what you need to know about unfair dismissal claims and how to avoid them; provide guidance on garden leave and dealing with redundancies; and explain when you may need restrictive covenants and how to enforce them post-termination.
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Section 1: Unfair dismissal claims
When employment is terminated, there are various potential claims that the employee can bring:
- for breach of contract – the employee claiming monies due under their employment contract or related documentation
- for unfair dismissal – the employee claims compensation i.e. monies which the employee would have received if the employment had continued
- other statutory claims such as discrimination or whistleblowing.
This section of the guide deals with claims that an employee may bring for unfair dismissal before an Employment Tribunal.
Learn more about unfair dismissal:
The employee must be able to show that they:
- were an employee and not an agency worker or self-employed;
- ordinarily worked in the United Kingdom – note that this is a fact-sensitive question, and not always straightforward;
- have contacted ACAS for Early Conciliation within 3 months from the date of termination of employment; and
- were continuously employed for at least 2 years *by the time the employment ends*. This guide is focussed on claims of ordinary unfair dismissal. Although ordinary unfair dismissal claims require 2 years’ service, there are some unfair dismissal claims with no period of qualifying service, such as dismissals related to whistleblowing or pregnancy. Note that this is not an exhaustive list of those unfair dismissal claims that do not require 2 years’ service and if you are in any doubt, legal advice should be obtained before you dismiss.
It is for the employer to prove that the reason for the dismissal was fair. There are five permissible reasons for dismissal:
- the capability or qualifications of the employee for performing work of the kind they were employed to do (this can include ill health dismissals and dismissals for poor performance);
- the employee’s conduct;
- a legal restriction making continued employment impossible; or
- some other substantial reason justifying the dismissal of the employee from that position.
Once the reason has been established, the Tribunal must satisfy itself as to whether, in the circumstances (taking into account the size and the measure of resources of the employer), the employer acted reasonably or unreasonably in treating it as a sufficient reason for dismissing the employee.
The ACAS Code of Practice on Discipline and Grievances at Work has persuasive force in the Employment Tribunal – if the employer unreasonably fails to follow the Code, and the employee wins their case, the Tribunal may award an uplift in compensation of a maximum of 25%. Similarly if the employee has unreasonably failed to comply with their obligations under the Code, a reduction of up to 25% may be made from any award. Failure to follow the Code, however, does not render a dismissal automatically unfair.
Whilst the Tribunal can order reinstatement (when the employee gets their job back) or re-engagement (when the employee is entitled to another job with the employer), the most usual remedy is compensation which usually falls under two headings:-
- A basic award calculated in a similar way to a statutory redundancy payment. In redundancy dismissals, if a redundancy payment has been made, this cancels out the basic award.
- Compensation which takes into account the employee’s financial losses as a result of the dismissal including loss of future earnings. The employee must give credit for monies received after the termination.
This is where the employee claims that they were forced to resign by the employer. The employee must show that there was a fundamental breach of contract by the employer or a series of events with a ‘final straw’ which, added together, constitute a fundamental breach. If the employee wins, they will be entitled to the same remedies as set out above.
The award may be reduced on account of the employee’s conduct before notice of dismissal was given, even if this conduct was not known to the employer at the time they were dismissed. Tribunals can also reduce compensation on a “Polkey” basis. In circumstances where a Tribunal decides that an employee was unfairly dismissed because the employer failed to follow a fair process, compensation can be limited to reflect the chance that the employee would have been dismissed in any event, if the employer had followed a fair process.
Section 2: Dealing with redundancies
The term “redundancy” is often used as a catch-all phrase, to describe dismissals for a variety of different reasons. It is important to bear in mind that “redundancy” does in fact have a very specific legal meaning.
Broadly speaking, a dismissal for redundancy is where a business no longer requires a particular employee to carry out their specific role. This could be because the particular workplace is closing or it may be because the company is reorganising and as a result of that reorganisation, jobs will disappear. It may also be because there has been a reduction in the type of work that the employee is employed to do.
Dismissal on the grounds of redundancy is a fair reason for terminating employment, and when implemented reasonably, provides a defence to a claim for unfair dismissal. This is the case, even if the redundant employees consider that with a different corporate strategy, the redundancies could have been avoided. Employment Tribunals consider that it is management’s job to manage the business, and will not interfere in this process. The law does, however, recognise that whilst the reason for dismissal may be fair, the manner in which the dismissal is carried out may be unfair. It is therefore very important for employers to ensure that the correct procedure is adopted when considering and making redundancies.
Learn more about dealing with redundancies:
The law expects that where an employer has decided that there is a redundancy situation which will involve selecting some employees for redundancy and retaining others, there must be a consultation process before a decision is made and termination notices issued.
Before consultation starts, the employer must decide on the pool from which the selection is going to be made. For example, where there is an assembly line of ten packers and due to falling orders, only six packers are needed, the selection pool with whom the employer must consult will normally be the ten packers. However, careful consideration must be given to the pool in advance, and it may be appropriate to consult with employees in relation to the proposed pool.
The employer has to show that it has selected the employees for redundancy fairly. The purpose of the consultation is to:
- assist the employer in being able to decide the criteria on which to base its selection
- discuss ways to avoid the dismissals
- reduce the number of employees to be dismissed, or
- mitigate the consequences of the dismissals.
The employer is not bound to agree with matters raised by the employees during the consultation but must be able to show that such matters were considered to rebut any suggestion that the consultation process was a sham. The company also has to decide the criteria on which to base its selection (which must be reasonable). The actual selection criteria can vary from company to company but it is better if the criteria adopted can be objectively measured.
If consultation does not result in the proposed redundancies being avoided, the employer should then score the employees against the selection criteria, in order to decide who to provisionally select for redundancy. Often employers have in mind the employees that they would like to retain and those who they wish to make redundant. Cherry picking in this way without formal selection criteria would be unfair.
Failure to consult with employees means that the employee has a claim against the employer before an Employment Tribunal for unfair dismissal. If there is a finding of unfair dismissal, the employee can seek to claim compensation for loss of earnings up to the statutory maximum, although there are ways in which an employer can seek to persuade a Tribunal to reduce compensation as outlined above.
It is also incumbent upon the employer to search current vacancies to see if an offer of suitable alternative employment can be made. If any such offer is accepted by the employee, there is no redundancy and the employment is deemed to be continuous, even if a termination notice has already been served. The employee is entitled to a four week trial period in the new job commencing from the start of the new contract and if during such trial period either the employer or the employee gives notice to terminate, the employee will be treated as having been dismissed on the grounds of redundancy.
An employee who is made redundant is entitled to their notice period to be calculated either by reference to the contract of employment or by statute, whichever is the greater. Obviously, the employer may either request the employee to work out the notice or else leave earlier and pay salary in lieu. In addition, there is a statutory redundancy payment which must be paid by an employer calculated by reference to the age of the employee and the length of service. For example, an employee aged 35 with 6 years completed service is entitled to 6 weeks statutory redundancy pay. Please click here for the redundancy ready reckoner which provides an easy calculation of redundancy payments. The weekly statutory redundancy payment changes on 6 April each year.
Where a company is planning to make 100 or more employees redundant within a period of 90 days or less, the company must consult with “appropriate representatives” about those redundancies at least 90 days before the first of the dismissals is due to take effect. If planning 20 or more (but fewer than 100) redundancies within a 90 day period, the consultation must begin at least 30 days before the first of those dismissals take place.
The representatives may be either Trade Union appointed representatives or employee appointed. If there is no Trade Union representation, the employer must consult with employees who have been appointed or elected by the affected employees to represent their interests in the redundancy consultation process. In advance of the consultation deadline, the employer must set aside sufficient time to enable the affected employees to elect or select appropriate representatives and whilst the employer may specify the number of representatives to be elected/selected, it must not otherwise interfere with the process.
Both before and during the consultation process, the appropriate representatives must be permitted a reasonable amount of time off during their normal working hours to obtain the views of the affected employees and report back to them on progress.
The employer is still obliged to consult individually with the affected employees notwithstanding collective consultation.
Failure to collectively consult can result in an Employment Tribunal making a protective award, ordering the employer to pay each affected employees up to 90 days gross pay. So failing to comply with the statutory requirements of a collective consultation process can prove expensive.
An employer proposing to make collective redundancies must complete and file form HR1 at least 90 days before the first of those dismissals is due to take effect for 100 plus employees, or 30 days for up to 20 employees. Failure to do so is a criminal offence.
Section 3: Garden leave - what is it and when is it appropriate?
A garden leave provision is a term in a contract of employment where an employee is not required to attend work and is free to stay at home and look after the garden, hence the term “garden leave”.
A garden leave clause stipulates that the employee must not attend at the company premises for work nor contact customers/clients. The employee’s access to the company’s IT systems may also be restricted or cut off. Since the employee is still employed, they are bound by the other terms of the contract such as the duty of loyalty and confidentiality and receives pay and all other benefits.
An employer may wish to consider invoking the garden leave provision immediately on giving or receiving notice of termination of employment. A common concern is that the employee may be going to work for a competitor and the employer may not wish the employee to continue working at the company premises.
- The employee will no longer have access to sensitive information especially if all passwords are immediately changed.
- The employee will not be able to copy documents for use in future employment.
- The employee will not be allowed to contact customer / clients and if he / she does so, this will be a breach of contract.
- The employee’s salary during the notice of termination can be paid in the usual way with statutory deductions thereby assisting cash flow as opposed to paying a lump sum by way of salary in lieu of notice.
- The use of garden leave provisions must be exercised in a reasonable way. An aggrieved employee may ask the Courts to rule on whether the employer is acting reasonably in invoking garden leave or claim that the length of the garden leave period is excessive. The Courts have decided that employers should not be given protection beyond what is necessary and consideration is given to the need for employees to maintain skills by exercising them in the workplace. Thus, there are certain industries such as the IT industry where an individual may have great harm done to their career if they are excluded from the workplace for even a short period of time.
- The employee may well have already taken documents in anticipation of being excluded from the premises.
- In the modern age of communication, it is difficult to monitor whether an employee is in breach of the garden leave provisions. To all intents and purposes, an employee may be sitting in their garden but using a laptop to communicate with key personnel. It is also difficult to know whether other employees are contacting them either during working hours or socially outside.
Employers should therefore consider carefully in each individual case whether an employee should either work out the notice period, be put on garden leave or have the employment terminated immediately and pay salary in lieu. If a decision is taken to terminate the employment and pay in lieu of notice, the employer must have the right to do so under the contract, otherwise the termination will be in breach of contract and any post-termination restrictions would no longer be effective.
Section 4: Post-termination - stipulating and enforcing restrictive covenants
Post-termination restraints, or restrictive covenants, aim to protect companies by restricting the business activities of ex-employees. Such terms are enforceable only if they can be shown to do no more than is necessary to protect the legitimate business interests of the company. As a matter of public policy, the Courts are reluctant to prevent anyone from earning a livelihood, and so the burden falls heavily on the employer to demonstrate why the restrictions should be enforced.
- Non Compete – prevents ex-employees from engaging in activities which are in competition with the former employer
- Non Solicitation – prevents ex-employees from seeking orders and business from existing clients and possibly prospective clients. Such clauses can also be used to prevent ex-employees ‘poaching’ employees
- Non Dealing – prevents ex-employees from dealing with existing and possibly prospective clients if they contact him/her at the new employment
When advising whether restrictive covenants are enforceable, the Court will consider some or all of the following matters:
- the intention and circumstances of the parties at the time the covenants were entered into
- period of restraint – in general terms, the more senior the employee and the longer the period of service, the longer the period of restraint may be. Any time spent on garden leave should be taken into account.
- type of business – only clauses that seek to restrain former employees in the area in which they worked will be upheld, regardless of the activities of the company.
- geographical area – a reasonable geographical area would be determined by the employer’s activities, and the area in which the employee worked. However, with the growth of the global marketplace, geographical restrictions may be of less importance than they used to be.
If an employer suspects that a former employee is in breach of their covenants, any action that is to be taken needs to be initiated quickly. There are various options open to an employer including issuing court proceedings and these should be discussed with your solicitor at the earliest opportunity. Delay can make it more difficult to successfully enforce the restrictions.
This is an area of law which depends upon the circumstances of each individual case. The Court will examine the circumstances at the time the contract was made in order to determine the intention of the parties and the reasonableness of a restrictive covenant. Covenants drafted too widely will not be upheld by a court, and so careful consideration must always be given when drafting restrictions.
As a separate but related issue, it is important to remember that ex-employees may be bound by an express duty of confidentiality under their employment contract, as well as an implied duty of confidentiality. It is therefore possible that even if the post-termination restraints are unenforceable, a company can still take action against the ex-employee if there is a risk that they may use the employer’s confidential information. The argument normally revolves around whether the information is in fact confidential and therefore capable of protection. This depends upon the nature of the industry and how readily accessible such information is to the public domain. It is advisable in employment contracts to define what is considered to be confidential information to avoid uncertainty and confusion later on.