When an employee takes on a role it is not expected they will commit the whole of their working life to their new employer – at some point the employee may wish to explore an external career opportunity and try something new.
For this reason, an employer should understand how to respond to an employee’s resignation and have an awareness of the legal and commercial risks that a resignation may cause. Here we look at some of the common considerations for employers when it comes to dealing with a resignation.
Constructive dismissal
If an employee believes that their employer has committed a fundamental breach of their contract of employment (the “contract”) and they are resigning in consequence of this, it is vital for an employer to consider if there is a risk of the employee being able to bring a successful claim in the Employment Tribunal for constructive unfair dismissal.
Resignation letters should be considered carefully – if the employee raises concerns or claims something has happened at work, which has caused them to resign, the employer should always discuss the concerns with the employee without delay. It may be necessary to investigate via the employer’s grievance procedure.
Heat of the moment resignations
Sometimes an employee resigns in the heat of the moment following an argument in the workplace or a significant event. An employee can resign unilaterally from their position – contrary to widespread belief, an employer does not need to “accept” the resignation for it to be valid.
Similarly, an employee who has properly given notice of termination has no right to unilaterally withdraw it. However, it is established practice that an employee should be given the opportunity to withdraw the words of a resignation if they are spoken in the heat of the moment once they have calmed down, providing the employee acts promptly in retracting the resignation.
If you are dealing with a difficult employee and/ or a decision that appears to be taken in the heat of the moment, it may not be safe to rely on the resignation without further communication with the employee to confirm their position. In the absence of this confirmation, you may be effectively dismissing the employee, which brings with it the many legal risks associated with a dismissal.
Length of notice
A key consideration is how much notice an employee has to give of their resignation. The answer to this question is usually contained in the termination provisions of the employee’s contract.
In the absence of any express notice provision in the contract, the notice period required is that which would be implied into the contract based on the circumstances including the employee’s seniority/ their position in the business, with the safeguard being that the Employment Rights Act 1996 states that for an employee with at least one month’s continuous service, the minimum period of notice that an employee must give their employer is at least one week.
If the employer and the employee have agreed a shorter notice period than that set out in the contract, this will need to be confirmed in writing. However, bear in mind if you have agreed to pay a non-contractual termination payment to the employee, mutually agreeing to reduce the employee’s notice period is likely to affect the tax treatment of this non-contractual payment due to the Post Employment Notice Pay (PENP) rules – you should seek advice in this event.
Will notice be worked?
There are some occasions when keeping the employee in the business to perform a handover of their duties will be beneficial. However, there are other occasions when an employee, who is on their way out of the business, becomes disengaged and keeping them within the business is deemed to be counterproductive. In this scenario, you may wish to terminate the employee’s employment immediately and pay them in lieu of their notice period.
If you intend to do this, you should check the employee’s contract to see if it contains a payment in lieu of notice (PILON) provision. If you wish to terminate the contract immediately via making a PILON, the employee’s contract must contain a suitably worded PILON provision in order to avoid successful arguments being made about:
- the employer potentially converting the employee’s resignation on notice into an immediate dismissal; and
- the employer acting in breach of the contract.
Case law has determined that an employee’s resignation is not subsequently converted into a dismissal when an employer exercises its “contractual right” to make a PILON. However, while this position remains good law for now, it is likely to be tested in the courts following the Employment Appeal Tribunal case of Fentem v Outform EMEA Ltd [2022].
Without a contractual right to make a PILON, it is likely that the resignation will be converted into a dismissal, which brings with it all the legal risks surrounding a dismissal.
Making a PILON in breach of contract also may allow the employee to argue that the contract has been breached and that they are therefore no longer subject to its ongoing obligations, for example, any post-termination restrictive covenants (depending on the drafting of the covenants and the particular circumstances of the case), which may expose the employer to significant commercial risk.
A contractual PILON clause should specify how the employer will calculate the PILON payment, for example, is this limited to the basic salary that would have accrued during the notice period had the employee worked it, or alternatively, should the PILON include compensation for the loss of other benefits such as, by way of example, car allowances and pension contributions?
Employee refuses to work their notice
There are occasions where an employee resigns in amicable circumstances, but wishes to start their new employment as soon as possible and therefore is reluctant to work their full notice period. In these circumstances, it is often asked whether an employer can force the employee to work their notice.
An employer faced with this frustrating scenario would have to think hard about whether they really want to attempt to force a disengaged employee who wants to leave the business early, to work their notice period against their wishes. If an employer attempts to do this and the employee refuses, it is unlikely that any court would make an order for specific performance requiring the employee to work against their will.
However, in exceptional circumstances, the court may decide to grant an injunction to prevent the employee from starting their new employment if this is with a competitor. The court may also make an award of damages in favour of the employer if there is an identifiable and quantifiable economic loss caused by the employee’s unwillingness to work their notice in breach of their contract, for example, the excess cost of using agency staff to cover their absence. These remedies are however rare, hard to obtain and very costly so an employer would need to be sure this is something they wish to pursue before embarking on a legal process.
Accrued holiday
An employee is entitled to either:
- take their accrued annual leave (calculated up to and including their termination date) during their notice period; or
- if they are not working their notice because a PILON is being made (or if the company cannot accommodate annual leave during the notice period if this is being worked), to receive payment in lieu of any accrued but untaken annual leave.
You will need to check the contract to understand when the annual leave year runs and what the employee’s annual entitlement to leave is. You will then need to identify how much annual leave the employee has already taken in the relevant leave year in order to calculate whether they have any accrued but untaken entitlement remaining.
If there is an accrued entitlement that is going to be paid in lieu, this will need to be paid at the employee’s usual rate of pay, taking into consideration any regularly worked overtime and other regularly received payments, for example, commission in some circumstances. Advice should be taken if you are unsure how to calculate holiday pay generally as this is a complex area.
If the employee has taken in excess of their accrued entitlement, you may wish to deduct a payment representing each excess day from the employee’s final salary payment. The ability to do this needs to be included in the employee’s contract if an employer wants to rely on it and the proposed deductions should be clearly set out in the letter acknowledging the employee’s resignation.
Company property
Remember to ensure, when acknowledging an employee’s resignation, that you identify any items of property that an employee currently has in their possession (such as a laptop, mobile telephone, set of keys or company car) and spell out the arrangements that the employee must make for these items to be returned. Ideally, the property should be returned before the termination date.
If an employee fails to return an item of property, you should seek advice about recovering this. Do not make a deduction from an employee’s final salary payment to cover the cost of replacing such items unless the ability to make such a deduction is contained in the employee’s signed contract, or they have expressly agreed in another document (which is in writing and signed by the employee) that this deduction can be made, and legal advice has been sought about doing so. Without this agreement, you may face a claim in the Employment Tribunal for unlawful deduction of wages.
Confidentiality and post-termination restrictive covenants
Always remember to check an employee’s contract to see if it contains a confidentiality provision and/ or any post-termination restrictive covenants – it is useful to remind an employee of these obligations in writing in the letter acknowledging their resignation prior to their exit from the business. If you are unsure if any post-termination restrictive covenants are likely to be enforceable against an employee, please seek advice.
If the contract does not contain any post-termination restrictive covenants and you believe these are necessary in order to protect the business, you may be able to negotiate the employee’s agreement to these via entering into a separate covenant agreement. However, an employer attempting to do this when an employee has already resigned is on the backfoot as there is little incentive for an employee to sign up to new covenants at this stage.
Remember, if there are post-termination restrictive covenants in the contract, it is important that you do not breach the contract as in this scenario an employee may argue that they are no longer subject to the contract’s ongoing obligations.