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Constructive Dismissal: Notice Pay

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In the recent case of Stuart Peters Limited v Bell [2009], the Court of Appeal has held that, when calculating the amount of the compensatory award due to a constructively dismissed employee, tribunals must offset earnings from alternative employment during the notice period. In making its decision, the Court of Appeal has refused to extend the established principal developed in Norton Tool v Tewson [1972].

A constructive dismissal is where an employee resigns in a situation where they are entitled to terminate their employment as a result of their employer's conduct. In order to justify resignation in this manner the employer's conduct must be a repudiatory breach or a fundamental breach of the employee's contract of employment. The employee's resignation after such a breach is considered an acceptance by the employee of the employer's breach of contract.

The History

According to the principle established in Norton Tool it is good industrial practice for an employer who has unfairly dismissed an employee without notice, to compensate them fully in respect of their notice period without making any reduction for alternative earnings (the "Norton Tool Principle"). The Court of Appeal's recent decision means that the Norton Tool Principle only applies to actual, and not to constructive, dismissals.

The Norton Tool Principle is a very specific exception to the general rule established by the House of Lords in the case of Dunnachie v Kingston upon Hull City Council [2004]; that a dismissed employee can only recover the actual loss which they have suffered as a result of a dismissal at Employment Tribunal.

In Langley and Carter v Burlo [2007] the Court of Appeal approved the Norton Tool Principle, but held that it could not be extended to create a wider principle, and that it was appropriate to take into account other aspects of good employment practice when assessing the amount of compensation awarded.

The facts of Bell

In Bell Ms Bell was unfairly constructively dismissed by her employer, Stuart Peters Limited, without being paid her six months' contractual notice pay. Following the decision made in Langley and Carter v Burlo, the Employment Tribunal awarded Ms Bell her full six months notice pay without making any deductions for earnings which she had received during her notice period.

Stuart Peters Limited appealed the decision arguing that the Norton Tool Principle only applied to dismissals by the employer and not constructive dismissals. The Employment Appeal Tribunal agreed with the Employment Tribunal's initial decision. Stuart Peters Limited appealed the decision to the Court of Appeal.

The Court of Appeal agreed with Stuart Peters Limited. It explained that in practice, employer's treated the two forms of dismissal quite differently. Although in cases where an employer had dismissed an employee without notice, it was good industrial practice not to deduct monies from the compensation payment to reflect monies earned by the employee during the notice period, this was not the case in constructive dismissal cases. In constructive dismissal cases there was often a dispute about whether the employer's breach of contract was serious enough to entitle the employee to resign claiming that their employment contract had been terminated. The Court of Appeal therefore did not extend the Norton Tool Principle to cover cases of constructive dismissal.

The Effect

The Court of Appeal's decision must come as a relief to employers in the current more pressurised economic climate. The decision means that employees who choose to treat their contracts of employment as having been terminated through the actions of their employer will not benefit in the same way as their counterparts who have actually been dismissed by their employer. Any notice pay which constructively dismissed employees receive will be reduced by the amounts they earn through alternative employment during their notice period. They will not therefore be able to double up in the same way as their actually dismissed colleagues during this period.

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