Know your rights if you get the sack

So you thought you were a big success … and then they sacked you?

Not an uncommon complaint these days unfortunately. As the economy improves, the skills essential to managing a business in recession are losing their cachet to those required to stimulate growth. Vocal demands for change can lead to a reshuffling of the management team and a flurry of dismissal letters.

Employees’ rights and obligations are usually set out in their contracts of employment which may incorporate by reference other documents such as a staff handbook. The absence of all this official paperwork doesn’t mean there’s no contractual relationship. Both employers and employees still have certain implied legal rights and obligations. The employer’s obligations include the duty to pay salary, provide a safe workplace, and to act reasonably.

The employee has corresponding duties which include honesty, competence and loyalty. But there are also additional rights guaranteed to him or her by statute. Most employees have the right to statutory sick pay. Women have varying maternity rights depending on length of service. And there is also protection against unlawful deductions from salary as well as racial and sexual discrimination.

The 1978 Employment Protection Act imposes on employers a duty to provide employees with a statement of employment particulars within two months of starting work. The statement must include details such as the rates of pay, the place of work, job title and holiday pay. However, the sanctions for failing to comply with this requirement are minimal.

In large part, the extent of financial protection afforded to employees on summary dismissal in breach of contract is dictated by the length of notice period to which they’re entitled. If an employee is served notice and is allowed to work it out, he or she has no further contractual claim against the employer once that notice period has expired.

Damages payable

The damages payable following summary dismissal in breach of contract is defined as a sum equal to the value of the net salary and the fringe benefits (such as pension contributions or the use of a car) which the employee would have received during the notice period. Importantly, the value of such benefits is calculated on the cost to the employee of replacing them not on the cost to the employer of providing them. Even if the employee does not have a written contract stipulating salary and other perks, he can still show by way of wage slips, pension statements, healthcare plans and other such documents the benefits to which he is entitled.

Statute imposes a minimum notice period for all employees. Up until they complete two-years’ service, employees are entitled to one week’s notice.

After that, they are entitled to a week for every completed year of employment up to a maximum of 12 weeks. Any employee who doesn’t have a stated notice period can argue that they are entitled to ‘reasonable notice’ which is determined by a range of factors including what is normal in the employee’s industry for someone of comparable status and seniority.

The Greenbury report on directors’ pay, which does give guidance on this, has pressed for a reduction in the notice period of senior executives in listed companies to a year or less. It acknowledges that contracts in excess of a year may be granted, but recommends that such contracts should be disclosed and explained to remuneration committees.

In the absence of an express notice period, for example, it’s still relatively easy for a senior executive of a listed company to argue that it is appropriate to calculate compensation by reference to a two-year period. So the compensation payable to such an executive, subject to his duty to mitigate his loss, can still be very substantial.

For middle management, it is not unreasonable in the absence of a written contract to argue that such employees are entitled to anything from between three and six months’ notice. By contrast, money brokers, traditionally highly paid while retained on short notice, may have difficulty justifying a period much in excess of one month.

Unfair dismissal

In addition to their contractual rights, all employees who have completed over two years’ continuous employment have an undisputed right not to be unfairly dismissed regardless of whether they have a written contract.

The two-year qualifying period was successfully challenged in the Court of Appeal and will now be considered further in the House of Lords. Claims in respect of unfair dismissal must be submitted to the Industrial Tribunal and awards are made up of two parts. First, there is the basic award which is subject to a maximum of z11,300 unlike compensation in claims for sex or race discrimination which is not subject to any cap.

Normally up to the first z30,000 of any termination payment can be paid to a departing employee free of tax. The excess will be taxed at the executive’s marginal rates. However, provided the form P45 has been issued, the employer is only under an obligation to deduct tax at the basic rate leaving the employee to make up the difference in his annual tax return. By this method the employee enjoys a temporary cashflow advantage.

Employees who are nearing retirement may have greater difficulty in persuading the Inland Revenue that the payment is a termination payment which can be paid free of tax. The Revenue is likely to argue it actually represents an unapproved pensions payment which should be subject to tax.

The issue of mitigation usually plays a crucial role in deciding the size of the payment that the employee ultimately receives. On summary dismissal in breach of contract, the employee has a duty to seek suitable alternative employment. Therefore, if an executive is sacked one day and finds an identical position with the same package on the following day, he will be deemed to have mitigated his loss in full. In these circumstances, he will have no further claim against his former employer.

Contractual claims can be submitted to the court up to six years after the date of dismissal. It can take up to two years before a hearing date is obtained to decide the matter. Claims submitted to the Industrial Tribunal, by contrast, are usually heard much quicker – within six months usually.

Statutory claims are heard in the Industrial Tribunal which will also hear contractual cases though its ability to award compensation is capped at z25,000.

Contractual and unfair dismissal claims must usually be submitted to the Tribunal within three months of the date of dismissal and late applications are usually time-barred. Unlike the courts, there is no legal aid available.

Senior executives who do not have a written contract do have some advantages.

It is usual for top employees’ contracts to contain post-termination restrictive covenants which aim to prevent them joining competitors, or soliciting clients or employees. In the absence of such provisions, should the employee decide to leave and give a competitor the benefit of his experience, there is very little his former employer can do to stop him. In such circumstances, an executive can seek to strengthen his position by agreeing to enter into fresh post-termination covenants in return for payment.

The leaving offer

There are a number of additional ways in which an executive can seek to improve the offer made to him or her in a way which involves the employer in little or no additional expense. Often benefits such as private healthcare cover are purchased by the employer on an annual basis. It is often possible for the employer to allow the cover to remain in place until the renewal date even though the employee has been dismissed.

Employers are normally quite prepared to sell the company car to the departing employee who should try and buy it at its written-down value.

They are often even more generous with possessions such as personal computers and fax machines which have a limited resale value.

References are important in the search for fresh employment. An employer is under no legal obligation to provide one so the employee should seek to agree the terms of a reference, and obtain an undertaking from the employer to deal with any oral enquiries in the same manner, as part of the termination package.

Obtaining the best deal possible is ultimately dependent on the objectives of each party and their relative bargaining positions. Termination negotiations can often be very stressful, and even the most ‘amicable’ settlements can involve a fraught exchange.

Employees, who are sometimes in a disturbed state, are not always best placed to assess the relative strengths and weaknesses of their position.

Sound legal advice and commercial guidance from an experienced employment lawyer should guarantee peace of mind and a satisfactory outcome leaving the employee financially and psychologically prepared to go on to the next opportunity.

Ian Hunter is an employment specialist with City law firm Bird & Bird.