November 2012

LEGAL EASE: Rewarding the rogues

Cowboy banditWhile the UK's financial sector remains the heartbeat of the nation's economy, there is no question that the City is going to experience the twinges associated with the national belt-tightening that is already in full squeeze.

This is, of course, usually just a euphemism for laying people off. Given the rates of remuneration financial workers tend to enjoy, making us mere lawyers appear by comparison to be journeyman labourers, this then could be an expensive time. Employers will have to be careful.

It is neither normal nor wise to require a financial worker to serve out their notice. An employer, therefore, has two real options.

The simpler is to activate the payment in lieu clause in the contract of employment. The messier is summarily to dismiss on any pretext and let the lawyers deal with the fallout, with a generous exit payment if that pretext is not proved.

Experience used to suggest that the former option was preferable. That was because, if the employee was subsequently found to have been guilty of a sackable offence, the payment in lieu could be withheld, as in the well-established principle set out in Boston Deep Sea Fishing and Ice Co v Ansell (1888). The case decided that an employer may rely on an after-discovered act of gross misconduct in defence of a claim for wrongful dismissal.

Sadly, following the Court of Appeal’s decision in Cavenagh v William Evans (2012), it would be a very unwise employer who now opted to make payment in lieu.

The reason is simple. The Court of Appeal decided that the principle enshrined in Boston Deep Sea Fishing does not apply if the employment was terminated legitimately under a payment in lieu provision. It would only apply if he summarily fired him with no explanation, or on a trumped-up allegation.

As a consequence, if the employer has indicated that he will make the payment in lieu when he terminates the employment, then he is bound to pay up even if he goes on to discover that the employee has, for example, had his hand in the till.

It may be possible in future to get around this problem with a suitably worded clause in the contract of employment, though that needs to be tested. There is, of course, the practical hurdle that it will be necessary either to agree fresh contracts of employment or amend the existing ones.

In Cavenagh v William Evans, the dismissed employee was managing director of the company from which he had appropriated £10,000 (€12,277) for his personal pension fund by writing out two £5,000 cheques. He had a junior employee countersign on the false basis that he had been awarded the payment by the board.

The MD had concealed his wrongdoing and, therefore, his employer did not know that it could, and probably should, instantly have fired him.

The Court of Appeal decided that it was just for him to retain his right to his payment in lieu – about £60,000. If Evans had just kicked him out, the MD would never have received the money.

But in this case, his dishonesty seems to have been rewarded, while the employer is being punished for trying to do the decent thing.

If the Court of Appeal could side with an employee and director in such a clear case of wrongdoing, it is unlikely that any dishonest or incompetent financial employee needs to worry about receiving his payoff if his employer honestly terminates his employment under a payment in lieu provision. Even if they find out the next day what he was up to, they will still have to pay.

Dennis Cooper is a senior litigation consultant, and Varun Zaiwalla is a legal assistant at Zaiwalla & Co Solicitors

©2012 funds europe