Logo L&E Global
United Kingdom | Clyde & Co

07. Termination of Employment Contracts

Employment Law Overview United Kingdom
Cross-Border Remote Work FAQs United Kingdom
Employees vs Independent Contractors United Kingdom
Opening a Business in the United Kingdom
United Kingdom

07. Termination of Employment Contracts

Grounds for Termination

There are several ways in which a contract may be terminated. These include: Notice being given by either the employer or the employee;  Mutual agreement; Expiry of a fixed-term contract. A fixed-term contract automatically terminates at the end of the fixed-term without the need for notice; Dismissal by the employer; Termination by the employee based on a serious breach of contract by the employer (that is, constructive dismissal).

Collective Dismissals

A redundancy situation arises where the business, workplace or job disappears, or fewer employees are needed.  For a fair redundancy, the employer must show:

  • the reason for the dismissal is redundancy;
  • it is reasonable to dismiss the employee for redundancy; and
  • a fair procedure was followed.

There must be fair selection of employees for redundancy and genuine consultation with the affected employees. Although redundancy is a fair reason for dismissal, a redundant employee is still entitled to a statutory redundancy payment. Employees with over two years’ service have the right to a statutory redundancy payment currently capped at GBP 19,290.

If an employer proposes to dismiss as redundant a total of 20+ employees across any site in the UK within a 90-day period, it must also follow a collective consultation procedure involving a minimum consultation period of 30/45 days, depending on the number of redundant employees, in addition to any individual redundancy procedure. Employers that breach these collective obligations may be liable for protective awards of up to 90 days’ pay for each affected employee.

Individual Dismissals

An employee who has been continuously employed for two years or more has a statutory right not to be unfairly dismissed.

Provided there is no discrimination, employers will not be liable for dismissals where:

  • they follow a fair procedure;
  • the reason for dismissal is one of the designated fair reasons set out in the legislation.

These fair reasons are:

  • capability or qualifications;
  • conduct;
  • redundancy;
  • contravention of a duty or restriction imposed by or under an enactment; or
  • some other substantial reason of a kind such as to justify the dismissal of an employee holding the position which the employee held e.g. personality clash, a reorganisation.

Certain dismissals are automatically unfair and there is no requirement for any qualifying service (for example, dismissals relating to the employee’s pregnancy, certain health and safety matters, trade union membership and trade union activities).

It is unlawful to dismiss employees, or to subject employees or workers to a detriment, if they disclose information with a reasonable belief in its truth, about certain types of wrongdoing by the employer. The awards in whistleblowing claims are uncapped and are assessed on a similar basis to discrimination claims. It is not uncommon for employees to raise whistleblowing claims as part of the tactics of bringing a tribunal claim.

Is Severance Pay Required?

Except for redundancy dismissals (where an eligible employee will be entitled to a statutory redundancy payment) there is no statutory entitlement to a severance payment as such. An employee is entitled to notice, and it is common for employees to be paid a sum in lieu of notice, usually equal to the value of pay over the notice period.

Separation Agreements

Is a Settlement Agreement required or considered best practice?

A settlement agreement (separation agreement) is an agreement made between an employer and an employee to settle a dispute and/or to waive any claims that could be brought by the employee against the employer. The employee will receive consideration in return, generally in the form of a termination payment.

Although there is no statutory requirement for parties to settle their dispute by way of a settlement agreement, it is advisable for employers to make an offer of a payment, which is more than the employee’s statutory and contractual entitlement on termination, conditional on the employee waiving all claims they have against the employer. Employees can only waive unfair dismissal and other statutory claims if the waiver is contained in a settlement agreement or ACAS agreement (ACAS being the body that provides advice, training, conciliation and other services for employers and employees to help prevent or resolve workplace problems). A settlement agreement should not prevent the employee from blowing the whistle (making a protected disclosure) or otherwise speaking up where they have the right to do so, for example by informing the police or a regulatory authority that a crime has taken place.

ACAS agreements are generally only used when settlement is reached after the employee has brought a claim in the employment tribunal.

What are the standard provisions of a Settlement Agreement?

To be effective in settling statutory claims, the settlement agreement should include:

  • a brief description of the circumstances leading up to the settlement agreement;
  • list the specific claims being waived;
  • a statement that the employee has taken legal advice on the terms and effect of the agreement from an independent legal adviser, who must be identified.

Additional provisions which generally appear in settlement agreements include a term:

  • requiring the employee to maintain confidentiality of the terms of settlement;
  • prohibiting the employee from making derogatory comments about the employer;
  • imposing restrictions on the activities the employee can pursue after termination of their employment;
  • requiring the employer to provide a reference.

Does the age of the employee make a difference?

Save that employers should avoid directly or indirectly discriminating against an employee on grounds of age; and an employee’s redundancy payment is dependent on their age as well as length of service, the age of the employee does not make any difference.

Are there additional provisions to consider?

Employers must take care when raising the issue of a settlement agreement. An offer of a settlement agreement will not be treated as being “without prejudice” unless:

  • there was a pre-existing dispute between the parties, or
  • it was introduced as part of a “protected conversation”.

Protected conversations are not protected from disclosure in automatically unfair dismissal or discrimination claims, or where the employer had acted improperly.

There have been changes to the treatment of tax and NICs on termination payments over recent years.  All payments made in lieu of notice on termination of employment, regardless of whether there is a contractual entitlement, are subject to income tax and NICs.

Since April 2020, employers are liable to pay employer’s NICs on termination payments over GBP 30,000.

Remedies for Employee Seeking to Challenge Wrongful Termination

In a successful claim, the employee will generally be entitled to compensation equal to the net value of the salary and benefits, which they would have received if they received their full notice period.  However, the employee is under a duty to mitigate their loss i.e. to take reasonable steps to seek alternative employment.

If the employer terminates an employee’s employment against their will, the employee will generally have no choice but to accept the dismissal. The employment contract will end, and the employees will have to consider their options in terms of any claims they may have against their employer, for either breach of contract (such as failure to give proper notice or failure to make payments under the contract of employment) or breach of some other statutory right, such as unfair dismissal or discrimination. Commonly, an employee might threaten a tribunal claim and secure a settlement with the employer through legal advisors, particularly if the employer is keen to avoid the publicity of an employment tribunal claim or if the employer is concerned that there is a good chance they will lose at tribunal. An employee who has been unfairly dismissed may ask for reinstatement but it is very rare for a tribunal to make a reinstatement order; and even where one is made, the employer can opt to pay compensation instead.

An unfair dismissal award, which is currently capped at a maximum of GBP 124,997, is made up of:

  • a basic award (calculated according to the employee’s age, length of service and pay) – currently capped at GBP 19,290; and
  • a compensatory award (a “just and equitable” amount) – currently capped at the lower of one year’s gross pay (excluding pension contributions, benefits in kind and discretionary bonuses) and the overall cap of GBP 105,707.

The length of time a claim takes from start to finish depends on the complexity of the case and the particular region the claim is brought in. However, it is not uncommon for a case to take, from claim until hearing, anything between 3 months and one year.

Whistleblower Laws

The dismissal of an employee will be automatically unfair if the reason or principal reason for their dismissal is that they have made a “protected disclosure”. It is unlawful to dismiss employees, or to subject employees or workers to a detriment, if they disclose information with a reasonable belief in its truth, about certain types of wrongdoing by the employer. A qualifying disclosure arises where a worker discloses information which in their reasonable belief shows a certain type of wrongdoing has and/or will take place within the workplace. Such wrongdoing includes, but is not limited to:

  • committing a criminal offence;
  • breaching a legal obligation; and
  • endangering healthy and safety.

The worker must also have a reasonable belief that the disclosure is in the public interest. There is no requirement for good faith. A qualifying disclosure is “protected” if it is made directly to the employer, a “responsible” third party or a “prescribed” person such as a regulator. Workers should be encouraged to raise concerns internally in the first instance. A whistleblowing policy should be put in place to encourage this. As with discrimination claims: there is no qualifying period of employment necessary to bring a “whistleblowing” claim nor is there a cap on the level of compensation that may be awarded. It is not uncommon for employees to raise whistleblowing claims as part of the tactics of bringing a tribunal claim.

Any questions

Ask our member firm Clyde & Co in United Kingdom