Credit for Payment in Lieu of Notice

Posted on February 10, 2021

If you’ve been dismissed from your job it’s important to know when calculating your potential compensation whether you’ve received any money in lieu of notice?

One of our employment team recently had a query from a highly paid employee client regarding the extent to which pay in lieu of notice affects the compensatory cap which is (currently) £88,519 in a claim at the Tribunal.

We advised the client that where an employee has been dismissed with pay in lieu of notice, credit must be given for this sum when calculating the employee’s total loss of earnings from the date of termination of employment

(Addison –v- Babcock FATA ltd [1987] ICR 805):- “where an employee has been dismissed with pay in lieu of notice, credit must be given for this sum when calculating the employee’s total loss of earnings from the date of termination of employment”.

This means that under the above Court of Appeal case where an employee has received full payment in lieu of notice from the employer and subsequently seeks to recover compensation in respect of exactly the same notice period as part of an unfair dismissal compensatory award (with a statutory cap of either 12 months’ gross salary or £88,519) the employee has to give credit for the notice payment by offsetting it against such part of a compensatory award as covers the notional notice period.

As an example, if you had a gross annual salary of £200,000 and believe you were unfairly dismissed and you issued a claim to the Employment Tribunal and are successful in your claim, the Tribunal would then go onto consider what compensation to award you:

If for example your dismissal date was 15th January 2020 and your Tribunal hearing was listed for February 2021 and the Tribunal finds that you have adequately sought to mitigate your losses (adequately searched for alternative employment during the period from your dismissal to your hearing date) but have either not obtained alternative work or have secured a new role but at a lower salary, then the Tribunal could award a maximum compensatory award of (currently) £88,519.
If you had a notice period of say three months and you were paid in lieu by your employer, this would be taken into account when calculating the compensatory award and you would have to give credit for the notice period, meaning that you would give credit for payment in lieu of £-50,000. The award would be £200,000 minus £-50,000 = £150,000, but due to the statutory cap the claimant would still receive £88,519
If the employee earning £200,000 pa, was dismissed on notice, paid their three months salary in lieu of working it and obtained a new role at the same salary after six months, the employee may claim a compensatory award of 6 months’ pay, of £100,000. However under the rule in Addison –v- Babcock the employee would have to give credit for the three months’ notice pay, meaning the compensatory award would be £50,000.

If on the other hand the employee had been summarily dismissed on an allegation of gross misconduct, i.e. not paid their notice and still obtained a new role on the same salary after six months, then the employee may claim a compensatory award of 6 months’ pay, of £100,000 as there is no credit to be given as no notice was paid. In these circumstances the maximum compensatory award the Tribunal could award would be limited to the statutory cap, which until April 2021 is £88,519.

NB income tax is payable on any compensatory award over £30,000. The Tribunal would ‘gross up’ such an award and the Employment Appeals Tribunal has held that the correct approach in an unfair dismissal claim is to impose the statutory cap after the grossing up calculation has been done.

For advice on all aspect of employment law contact Susan Mayall on 0161 785 3500 or email at enquiries@pearsonlegal.co.uk

Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

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