( Download PDF)

WRONGFUL DISMISSAL (1)

Update: 30 June 2008.

The law:
Limitation Act 1980, s.5;
Employment Tribunals Extension of Jurisdiction (England & Wales) Order 1994, SI 1994/1623;
Employment Rights Act 1996, s.86(1); s.87(3); ss.88-91; s.95; s.97(2); s.123(4); s.136;
Income Tax (Earnings and Pensions) Act 2003, s.62; s.401; s.404.
___________________________________________________________________________

Definition:
a wrongful dismissal is a breach of contract that occurs when an employer dismisses the employee without good cause and without justification and/or:

(i) with less notice than he or she was contractually entitled under the contract of
employment or without the contractual right to make a payment in lieu of notice and/or -

(ii) without paying her or him the required contractual amount of financial compensation to
which he or she is entitled in order to compensate her or him for being given less
contractual notice than that which he or she was entitled to be given by the terms and
conditions of the employment contract. 'Less contractual notice' means either insufficient
notice or no notice at all. And 'the required contractual amount of financial compensation'
means either insufficient compensation or no compensation at all.

For the purposes of mitigation, there is a difference between (1) a wrongful dismissal and (2) a breach of contract arising from a dismissal:

(1) a wrongful dismissal takes place when an employer dismisses an employee: (i) without good cause and without justification and/or; (ii) with insufficient notice or without the contractual right to make a payment in lieu of notice and/or; (iii) without paying the employee the contractual amount of compensation for the remaining period of the employment contract in which case, if the employee makes a claim for damages, the employee has a duty to mitigate her or his loss: Brace v Calder (1895) 2 QB 253, CA. The employee is only entitled to a sum in damages equivalent to net pay because that would be the extent of her or his actual loss yet income tax and national insurance contributions do not have to be deducted on a payment of damages or compensation of up to £30,000: s.401, s.404, Income Tax (Earnings and Pensions) Act 2003).

Yuan v Birkbeck College (2006) EAT, 20.01.06 (Case No. 0661/05), is a practical example of a wrongful dismissal that may not appear to be obvious:
(a) although the employer had the contractual power to dismiss for cause and to make a
payment in lieu of notice (so apparently there was no wrongful dismissal);
(b) the employer dismissed for the reason of allegedly unacceptable conduct, a reason for
dismissal that was not permitted or justified in the circumstances by the contract, therefore
the dismissal was without good cause and without justification;
(c) and the employer dismissed by giving less notice than that stated in the contract (being
one month's notice instead of three months and was, therefore, in breach of contract);
(d) thus the claimant had a claim for breach of contract;
(e) that claim being for damages;
(f) so that the claimant had a duty to mitigate.

(2) in contrast, a common law breach of contract arising from a dismissal takes place where the employer dismisses the employee: (i) without good cause and without justification and/or; (ii) where the employer does have the contractual authority to dismiss with notice or to make a payment in lieu of notice; (iii) but fails to pay the employee for the notice period and/or for any other contractual benefits owing to the employee or pays the employee a lesser amount in which case the claim is a claim for liquidated damages that is a debt: Abrahams v Performing Right Society (1995) IRLR 486, CA. There is no duty upon the employee to mitigate her or his loss but, because the employer has the contractual right to make a payment, the payment is an emolument from employment so that tax and national insurance contributions must be deducted: EMI Group Electronics Ltd v Coldicott (2000) IRLR 630, CA). See too: Delaney v Staples (1992) 1 AC 687 per Lord Browne-Wilkinson.

(2) Another example of a breach of contract arising from a dismissal occurred in Sarker v South Tees Acute Hospitals NHS Trust (1997) IRLR 328, EAT. When an employer makes an offer of employment to a job applicant and the job applicant accepts the offer, a contract of employment comes into being between the two parties. However, if the employer has a change of mind about employing the employee before the employee starts work and terminates the contract of employment, the employee is entitled to damages for breach of contract, the level of damages being the contractual notice period: Sarker v South Tees Acute Hospitals NHS Trust (1997) IRLR 328, EAT. In Sarker (1997), the employer made the job offer to the claimant in July that the claimant accepted and agreed to start work in October. But in September, before the employee was due to take up the post, the employer terminated the contract. As a result, the claimant made a claim for her contractual notice under the provisions of the Employment Tribunals Extension of Jurisdiction Order 1994. The EAT held that as her contract had been terminated, she was entitled to payment for the period of her contractual notice. (Note that if an employer terminates a contract of employment that it has agreed with the employee before the employee starts work because, say, the employer finds out that the employee is pregnant/has young children/has engaged in trade union activities or for any other automatically unfair reason, he or she will be able to make a claim for statutory unfair dismissal instead of for a mere common law breach of contract).

Assessing damages payable for breach of contract for the notice period: cScape Strategic Internet Services Ltd v Toon (2008) EAT, 13.05.08 (Case No.0087/08.) was another case in which an employer agreed a contract of employment with an employee but, before the employee was due to start work with the employer, the employer informed the employee that it was unable to honour the contract therefore, as recompense, it would pay the employee one week's pay for the contractual notice period. Dissatisfied, the employee made a claim to an employment tribunal for one month's contractual notice pay and was awarded that sum by the tribunal that disregarded clause 5.1 of the contract of employment that stated that during the first three months' of employment, the employer had the right to dismiss the employee on one week's notice. Instead, the tribunal relied on clause 13.1 of the contract of employment that stated that the employer had the contractual power to dismiss the employee with one month's notice during the first five years. The tribunal reasoned that because the employee had not actual commenced working for the employer (although the employee had actually been engaged by the employer under a contract of employment), the contract had not been terminated during the first three months of employment, therefore the alternative contractual clause 13.1 applied thereby entitling the employee to one month's pay for the contractual notice period. However, the Employment Appeal Tribunal ruled that the employment tribunal had erred. Mr Justice Wilkie, sitting alone, held that the employer had committed an anticipatory breach of contract. Further, by doing so, the employer had '… expressed a firm intention in advance of performance of the contract that it would not perform the contract by engaging the employee…' (to start work on the contractual date.) He added: 'It (the employer) was announcing its intended breach before the point at which the time for performance arose. (The employee) was in a position to accept the anticipatory breach and to claim damages.' Giving the ratio decidendi of his judgment, His Honour Judge Wilkie concluded by saying: 'In assessing the amount of damages it is trite law that the Court must assume that the party in breach would have performed the contract in the way most advantageous to it. Under this contract, it was open to the employer by virtue of clause 5.1 to have given one week's notice of termination of the contract on the first day of its coming into effect. Therefore the Court must assume that the (employer) would have performed the contract in that way, thereby limiting the damages for breach of contract to payment for one week's notice which it would have been obliged to give under clause 5.1. Accordingly, the (employer) has already paid (the former employee) in full in relation to the damages for breach of contract.'

There is also a difference between (1) an unlawful dismissal and (2) an unfair dismissal:

(1) an unlawful dismissal is a common law breach of contract arising from a dismissal or a wrongful dismissal that may result in a claim for either a debt or damages both of which are an unpaid amount of money in respect of the notice period and other contractual benefits. This could occur in two ways:

(a) if the contract states that the employer has the power to: (i) terminate the contract with notice and/or (ii) make a payment in lieu of notice and the employer does so lawfully, there is no wrongful dismissal merely a breach of contract arising from the dismissal that is a claim in debt if the employer owes the employee a payment for the notice period and other contractual benefits which means that the employee is not under a duty to mitigate against her or his loss by finding alternative suitable employment because the claim is for liquidated damages: Abrahams v Performing Right Society (1995) IRLR 486, CA;

(b) however, if the contract does not state that the employer has the power to terminate the contract with notice and/or to make a payment in lieu but the employer nonetheless dismisses the employee or dismisses unlawfully in breach of contract then this constitutes wrongful dismissal and, if the employee makes a claim for a payment in lieu of notice and other contractual benefits, the employee is under a duty to take reasonable steps to mitigate her or his losses by seeking other suitable employment: Brace v Calder (1895) 2 QB 253, CA -

in contrast -

(2) an unfair dismissal is a statutory breach of contract dismissal that may result in a claim to an employment tribunal whereupon the tribunal, instead of asking whether a breach of contract has taken place (other than constructive dismissal), will determine the question of whether the dismissal was fair or unfair (i.e. reasonable) by asking: When dismissing the employee, did the employer act within the range of reasonable responses of a reasonable employer? - Iceland Frozen Foods Ltd v Jones (1983) IRLR 439, EAT. If the answer is 'No, the employer did not act reasonably,' the employment tribunal may make an award of compensation to the employee for her or his losses which occur as a result of the unfair dismissal. Since 1st October 2004, a tribunal will also ask whether the employer and employee completed either of the statutory disciplinary, dismissal and grievance procedures if it was their duty to do so prior to, during and after the express dismissal or constructive dismissal took place. See: Statutory Dismissal, Disciplinary and Grievance Procedures

Note: a breach of contract is not restricted to wrongful dismissal. A breach of contract can occur when a breach of the employment contract falls short of an actual or express dismissal. Such a breach may occur if the employer attempts to unilaterally vary the terms and conditions of the contract to the employee's detriment and without the employee's agreement. If an employer has no contractual power to do so, the employer can only impose a contractual variation if it is reasonable to do so. If the employer acts unreasonably in this way the employee might choose not to terminate the contract of employment but may, instead, bring a contractual or statutory action for the breach. For example, a breach could be a demotion, an unlawful deduction from wages or a suspension. Another course of action for the employee would be to insist that the employer performs the contract: Dietman v London Borough of Brent (1987) IRLR 259, CA. Alternatively, the employee may consider that the employer's conduct amounts to a fundamental breach and, if so, that he or she can exercise the statutory and/or common law option of terminating the contract of employment and regard herself or himself as having been constructively dismissed, whether wrongfully or unfairly or both.

NEXT >>

Click here to email John M. Wright