8 things SMEs need to know about wrongful dismissal

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Employment law can be a complex, confusing business and wrongful dismissal is an area where there are too many misconceptions, says Michaela Smeaton of DAS Law

What is wrongful dismissal?

Wrongful dismissal is a breach of contract claim from an employee against an employer. It allows a dismissed employee to bring a claim for the benefits which they would have received if they had been dismissed in line with the terms of their contract, in circumstances where this did not happen.

For example, if an employee was dismissed and given two months’ notice when their contract actually entitled them to three, they could bring a wrongful dismissal claim. They would then be able to claim losses for the unpaid wages, as well as benefits (car allowance, pension etc.), for the one-month shortfall in their notice. Another example could be where an employer has a contractual dismissal process but did not follow this process when dismissing an employee.

Is wrongful dismissal different to unfair dismissal?

A common misconception is that they are the same – they aren’t. Claims for unfair dismissal centre around whether you have a legally valid reason to dismiss your employee, and whether the procedure used to dismiss is fair, as opposed to wrongful dismissal, which is a breach of the contract.

An employee may be dismissed fairly (with a good reason) but could still successfully claim for wrongful dismissal. That means that as an employer you have carried out the dismissal in a manner inconsistent – different to – the terms of their contract.

What are the key differences?

In order to bring an unfair dismissal claim, the basic statutory position is that an employee must have worked for you for at least two years (“automatic” unfair dismissal is an exception but that’s a piece for another day). Whereas in contrast, an employee does not need any qualifying rights to bring a wrongful dismissal claim – they may not have even started working for you yet to successfully bring a claim.

And where an employee usually has three months from the “effective date of termination” to bring an unfair dismissal claim, they have six years in which to claim for wrongful dismissal. Plus, the employee does not have to pursue both claims to be successful – they can successfully bring one claim without the other.

Notice periods

Once a contract is issued, as an employer you are bound by the notice period stated, and a contract must be issued within two months of a new employee starting work. But the contract doesn’t actually need to be issued before they start, and some businesses might use this flexibility to assess whether their new starter will be a good fit within the business without being bound to the employee notice period. However, this can lead to uncertainty on both sides and we at DAS Law recommend providing a contract – or offer letter highlighting the key terms and conditions – prior to any new employee starting. This gives both parties a completely clear understanding of the expectations and obligations on them.

So, what can SME owners do to avoid claims for wrongful dismissal?

Follow procedures

Make sure that when you are considering dismissing an employee you review your disciplinary and dismissal procedures. Discuss the matter with your HR department and/or seek legal advice before taking action against an employee to ensure that what you’re planning on doing will be compliant and you won’t put yourself at risk.

Payment in Lieu of Notice (PILON)

Check their contract. If it contains a provision to make a payment to the employee “in lieu of notice”, you can immediately dismiss an employee, as long as you then make the correct payments to them. In future you may wish to consider including a PILON clause to allow you more flexibility. Please note however that if your employee has two years’ service, you still need to ensure you follow formal procedure to minimise the risk of them claiming unfair dismissal.

Gross misconduct

If you are seeking to dismiss the employee because they have committed an act of misconduct that would be so serious it would fundamentally breach the employment contract, they may be summarily dismissed. In these circumstances notice would not be required to be given and any claim for wrongful dismissal would be able to be defended. Review your disciplinary policy to check whether an employee’s act (or omission) would fall within the scope of the policy.

Get independent advice

In these circumstances it is essential that you seek out HR advice or legal advice if you are unsure of your position in relation to a potential wrongful dismissal or unfair dismissal claim. Not all SMEs will have this facility in-house but it’s something you should really consider obtaining, even if you think you have everything in order. If you don’t, it could turn out to be costly.

DAS Law is a Bristol-based multi-service law firm and is part of the DAS UK Group

Disclaimer: this information is for general guidance regarding rights and responsibilities and is not formal legal advice as no lawyer-client relationship has been created.