The Court of Appeal’s decision in Cavenagh v William Evans Ltd [2012] EWCA Civ 697, clarifies that where an employee’s employment is terminated pursuant to a contractual provision for pay in lieu of notice (a PILON clause) an employer cannot depend on  Boston Deep Sea Fishing and Ice Co v Ansell [1888] 39 ChD 399, and that in such cases employers cannot rely on misconduct, however heinous, discovered after dismissal to withhold payment in lieu.

This is frustrating news for employers, as indeed it was for Mr Cavenagh’s own employers, who discovered that he had diverted £10,000 of company money into his pension after the termination of his employment under a PILON clause.

It must be correct that Boston Deep Sea Fishing cannot be applied where an employee is dismissed pursuant to an express payment in lieu clause. When notice is not paid in such a case, the employee’s claim is for a debt due under the contract and not for damages for wrongful dismissal. The Revenue has similarly adopted a different approach to payments in lieu of notice pursuant to express contractual clauses and to compensation for breach of contract when applying the £30,000 tax exemption. What is puzzling is why, in this case, William Evans Ltd did not simply include a counterclaim against its fraudulent former managing director.

So what should employers be doing now to prevent such a situation? At the risk of making payment in lieu clauses even more unwieldy than they sometimes already are, provision could be included to ensure that where gross misconduct is discovered after dismissal, the employer reserves the right to withhold notice monies or to seek their recovery. If a compromise agreement is to be entered into similar wording can be incorporated to protect against such a risk.

Certainly, this case should not be interpreted as a reason not to include PILON clauses. These are generally regarded as affording more benefit to the employer than not, particularly where there are valuable restrictive covenants that the employer may wish to rely on; without a PILON clause, the employer is likely to have trouble enforcing them. Even if Boston Deep Sea Fishing cannot be relied on to withhold a payment in lieu of notice when misconduct is discovered after dismissal, there are other means of recovering monies which have been unlawfully obtained. More problematic will be cases where the misconduct does not have a monetary value, for example, a physical assault or harassment.