Wrongful Dismissal: Employers’ Guide

Wrongful dismissal is a specific type of claim where an employee is alleging their employer has breached contractual terms when terminating their employment.

In this guide, we consider the legal and practical implications of wrongful dismissal claims and the measures that can be taken to reduce the risk of tribunal proceedings.

 

What is wrongful dismissal?

Wrongful dismissal is a legal concept that describes the unlawful termination of employment by reason of a breach or breaches of the terms of the employment contract.

In the context of a wrongful dismissal claim, this could be based on a breach of either an implied or express term. One of the most common examples of wrongful dismissal is breach of the implied term to provide the employee with the minimum statutory notice period.

In contrast, breach of an express term could be where the employer has failed to provide the employee with the minimum contractual notice period as set out in their contract of employment. In cases where the employee’s contract makes provision for enhanced notice rights, they will be entitled to that period of notice, rather than the statutory minimum.

 

Examples of wrongful dismissal

Wrongful dismissal can occur in a number of different ways, including dismissing an employee on the spot, without letting that individual work out their full contractual notice period or, alternatively, dismissing an employee without paying them in lieu of notice.

When it comes to breach of the right to notice, much will depend on whether or not the contract makes provision for pay in lieu. However, in either scenario, unless the employee is found guilty of gross misconduct, where they may be summarily dismissed without notice or pay in lieu, the employer must honour the employee’s right to notice or notice pay.

Other common examples can include an employer unlawfully terminating a fixed-term contract prior to expiry of the term or failing to follow a contractual dismissal procedure.

 

Difference between wrongful and unfair dismissal

Wrongful dismissal is often confused with unfair dismissal, where understanding the difference can help employers to avoid costly mistakes when it comes to dismissing employees.

As a matter of law, there are a number of important differences between wrongful and unfair dismissal, where it is essential for employers to understand the key legal distinctions to avoid making costly mistakes when bringing an individual’s employment to an end.

First and foremost, wrongful dismissal is a contractual claim, in circumstances where the employer has breached either an implied or express term of the employee’s contract, while unfair dismissal is a statutory claim arising under the Employment Rights Act (ERA) 1996.

The ERA sets out 5 potentially fair reasons for dismissal, including conduct, capability, redundancy, statutory illegality and for some other substantial reason (SOSR), where SOSR is a catch-all provision where no other fair reason applies. However, even where an employer has a potentially fair reason to dismiss an employee, they must still act reasonably in treating that reason as sufficient to justify dismissal in all the circumstances ‘and’ follow a fair dismissal procedure. As such, a tribunal would look at what procedures have been followed and whether the decision fell within a band of reasonable responses.

If a tribunal found that the employer had either failed to dismiss for a fair reason, or failed to act reasonably or follow a fair procedure, the dismissal will be deemed unfair.

In contrast, a claim for wrongful dismissal is where the employer has breached the terms of the employee’s contract of employment during the dismissal process, where fairness is not an issue here. As such, the only relevant consideration in the context of a claim will be the employer’s contractual obligations. To have grounds for wrongful dismissal, an employee must prove that they have been dismissed in such a way that breached their contract of employment and that they suffered a loss as a result of that breach. This could be where, for example, the employer has failed to provide any or sufficient notice, or pay in lieu of notice, and the employee has suffered a financial loss in consequence.

 

What will an employee need to show to claim wrongful dismissal?

To claim wrongful dismissal, the employee would need to show a breach of contract by their employer when bringing employment to an end. In the context of dismissing an employee without allowing them to work their notice or paying them in lieu of notice, the employee would first need to prove their statutory or contractual right to notice.

The length of notice, or pay in lieu, that an employee is entitled to be given on dismissal will be determined by what is set out in their contract of employment, although where that contract is silent on the issue of notice, the employee will still be entitled to the statutory minimum. This means that if the notice period in the employee’s contract is different to statutory notice, the employee will be entitled to whichever is longer.

The statutory minimum period of notice that an employer must give an employee when terminating employment is one week’s notice if they have been employed between one month and 2 years, or one week’s notice for each year of service with the employer if they have been employed between 2 and 12 years, up to a 12-week maximum limit.

The only exception to the statutory minimum notice rule is where an employee is summarily dismissed for gross misconduct. In these circumstances, provided the employee has committed a serious act that justifies dismissal without notice or pay in lieu, such as theft or violence, there is no legal obligation to provide notice or notice pay.

It is also worth noting that where no contractual provision has been made for pay in lieu of notice, but the employer pays the employee instead of allowing them to work out their notice period, this could also form the basis of a claim for wrongful dismissal. However, the employee would need to show that loss has been suffered as a result of being denied the opportunity to work out their notice, such as commission or bonuses from a sales role. This is because the claim will fail if the payment in lieu of notice puts the employee in the same financial position as they would have been in had they been allowed to work their notice.

 

 

Can employees claim wrongful dismissal before 2 years’ service?

One of the other key differences between wrongful and unfair dismissal is the qualifying service requirement. When claiming unfair dismissal, an employee must usually have accrued 2 years’ continuous service with their employer to be eligible to claim, unless the reason for dismissal is automatically unfair. Cases of automatically unfair dismissal are where the reason for dismissal — as determined by the tribunal — is so inherently unfair that an employee is not required to meet any qualifying service requirement. This could include being dismissed for being a member of a trade union or on maternity leave.

In contrast, unlike ordinary unfair dismissal, an employee may be able to claim for wrongful dismissal from day one of employment. Much will depend on the terms of their contract but, for example, if the employee has a contractual right to notice from day one and the employee fails to provide them with notice or pay in lieu on termination, this will constitute an actionable breach, regardless of how long they have worked for the employer.

There is therefore no qualifying service requirement for wrongful dismissal, unless the employee is dismissed within the first month of employment without notice or pay in lieu in circumstances where they are only entitled to the statutory minimum period of notice.

 

How much is compensation for wrongful dismissal?

The compensation for a wrongful dismissal claim can vary, depending on the nature of the contractual breach upon which the claim is based. For example, where an employer has failed to pay the employee any pay in lieu of notice, any award of damages will depend on the employee’s contractual entitlement. Equally, where the employer has provided pay in lieu of notice in circumstances where, in the absence of a pay in lieu clause within the employee’s contract, the employee was entitled to work out their notice period, much will depend on what commission or bonuses they would have earned had they worked this.

However, in broad terms, the amount of damages awarded for wrongful dismissal will usually equate to the net value of the employee’s salary and any contractual benefits for the period of time that they would have worked, but for the employer’s breach of contract. This can cover the employee’s usual pay for that period, plus any bonuses and commissions, as well as the value of any pension entitlement, private health cover and car allowance.

On the whole, as compensation for wrongful dismissal is capped at the relevant notice period and/or the period of time it would have taken to complete a contractual procedure, any award of damages for breach of contract is unlikely to be significant. There is also a £25,000 limit to the amount of compensation that can be awarded by a tribunal for this type of claim, although an employee can instead pursue the matter before the civil courts (either the county or high court) if the value of their claim is worth more. This could be where, for example, a former employee was a high earner with a lengthy contractual notice period or where a fixed-term contract has been unlawfully terminated with a substantial period remaining. In the context of breach of a fixed-term contract, the employer will have to pay for the entirety of the remaining term of that contract, unless there is clear provision within the employment contract for notice, or early termination, to be given.

 

Can compensation be pursued for both wrongful and unfair dismissal?

Depending on the circumstances in which an individual’s employment was terminated, a former employee may bring a tandem claim for both wrongful and unfair dismissal, although the employee would not be entitled to receive double recovery for the same loss.

In the context of compensation for unfair dismissal, damages will be made up of both a basic and compensatory award. The basic award is a fixed sum calculated to a set formula, while a compensatory award is to compensate the employee for any loss of earnings arising out of losing their job.

Importantly, however, where an employee is bringing a claim in tandem, this would need to be lodged before the employment tribunal within a period of three months, minus one day, from the date of termination. The employee would also be limited to the £25,000 cap before the tribunal for damages for wrongful dismissal. If, on the other hand, the employee is solely seeking to claim damages for wrongful dismissal, they will not be subject to any compensation cap. They will also have the benefit of an extended 6-year limitation period for breach of contract if they decided to issue their claim in the civil courts.

 

In what ways can wrongful dismissal claims be avoided by employers?

When deciding to dismiss an employee, it is important for employers to understand their employee’s contractual rights before making any decisions. This means that the employer should always carefully check the employee’s contract of employment to clarify their right to notice, including whether contractual provision has been made for pay in lieu of notice. It is also important check any workplace policy around dismissal that may set out a specific contractual procedure that may need to be followed to avoid any allegations of breach.

Equally, in the context of a fixed-term contract, the employer must ensure there is a term of the contract that entitles them to dismiss in those particular circumstances.

By clarifying the employee’s rights and entitlements, this does not necessarily avoid the risk of tribunal or court proceedings, but it will help to minimise the possibility of a successful claim being made. It is also worth seeking expert advice prior to terminating employment, in this way helping to ensure that the dismissal is both lawful and fair, as well as exploring the possibility of a settlement agreement. For employees on a high salary and with lengthy contractual notice rights, a settlement agreement often represents an effective way of avoiding legal proceedings, where an exiting employee agrees to waive their right to make a claim for wrongful and unfair dismissal in return for some form of financial payment.

 

Need assistance?

For specialist advice in relation to wrongful dismissal, contact us.

 

Wrongful dismissal FAQs

What is classed as wrongful dismissal?

Wrongful dismissal is a legal concept describing the unlawful termination of employment by reason of a breach of the terms of the employment contract, for example, breach of the implied duty to provide the employee with the minimum statutory notice.

What is an example of a wrongful dismissal claim?

One of the most common examples of a wrongful dismissal claim is where an employer has dismissed the employee on the spot, but failed to provide them with any statutory or contractual pay in lieu of notice.

What is the payout for wrongful dismissal?

The payout for wrongful dismissal can vary, depending on the nature of the contractual breach. For example, where an employer has failed to pay the employee any pay in lieu of notice, this will depend on their contractual notice entitlement.

What is the test for wrongful dismissal?

The test for wrongful dismissal is whether or not the way in which the employer has brought employment to an end has breached the terms of the employee’s contract, such as terminating employment prior to expiry of a fixed term.

Last updated: 27 February 2024