Employment can come to an end for one of many different reasons. An employee may leave a job through choice by resigning, or they may be retiring, a fixed term contract may be ending or the employer may decide to dismiss the individual.
In this guide for employers, we discuss how employment may be terminated and how to manage the legal risks when an employee is exiting an organisation.
Termination due to resignation
If the employment contract is being terminated because of the employee’s decision to resign, they have to provide the required amount of notice, which should be stated in their contract terms.
Depending on the circumstances, you may consider options for the notice period not to be worked – for example, if you have concerns about the employee accessing commercially-sensitive information. You could explore garden leave or alternatives to working the notice period, such as taking unused annual leave.
Termination due to dismissal
If the termination of employment is your decision as the employer, you must ensure you are meeting your obligations or risk tribunal claims.
By law, to lawfully dismiss an employee with more than 2 years’ service, you must show that you have a valid reason that you can justify and that you acted reasonably in all the circumstances.
What is unfair dismissal?
When an employer breaches the terms of an employee’s contract, A dismissal is unlawful or unfair if the employer breaches the terms of the employment contract. In practice, this often relates to notice or notice pay, whereby the employer fails to give the employee their full, legal entitlement.
Employees with less than two years’ service cannot bring a claim for unfair dismissal, unless the reason for dismissal is considered automatically unfair, such as pregnancy.
What is the difference between wrongful and unfair dismissal?
While protection from unfair dismissal is a statutory right, wrongful dismissal is when an employer has breached the terms of an employee’s contract.
While unfair dismissal protection is generally for empoyees with more than 2 years of service, wrongful dismissal has no qualifying period. This means that even if an employee has only worked for the employer for one year, they may still bring a claim for wrongful termination.
Who has the authority to dismiss an employee?
An employee can only be dismissed from an organisation by someone with the authority to make that decision on behalf of the organisation. In most cases, this will be the person’s line manager or a member of senior management.
Letter of termination
An employee must be formally notified that they have been dismissed. This usually means giving them a letter of termination. The letter of termination should provide the ground(s) for dismissal, along with the date the contract will be terminated and details of the notice period. The employee should also be informed of their right to appeal the dismissal.
Fair reasons for dismissal
Under section 98 of the Employment Rights Act 1996 (the 1996 Act) there are various valid reasons for terminating employment. These include:
- Breach of a statutory restriction
- For some other substantial reason
Dismissal due to redundancy
There are many reasons why a business may need to reduce the number of employees. This can be because of a reduction in workload, a change in the type of work available, a change of location or where the business is closing down altogether.
Redundancy as a form of dismissal can be considered fair as long as there is a genuine reason for the redundancy, a lawful process has been followed and a fair selection criteria have been applied.
The specific redundancy procedure to follow will depend on how many workers you intend to make redundant.
Up to 19, and you are not legally required to follow a formal consultation, although it is generally advisable to do so to manage the risk of unfair dismissal claims.
If you are making more than 20 workers redundant, you have to follow strict consultation rules.
The redundancy process includes:
1. Stating the reasons for redundancy
Before initiating any redundancy procedure, the employers must be able to show they have explored all alternatives to making people redundant, such as redeployment.
2. Fair selection criteria
Employers have to ensure they are not treating people unfairly in selecting them for redundancy. It is best practice to devise a set of objective criteria to use to assess all at-risk employees, which could include:
- An employee’s skills, qualifications and/or aptitude
- An employee’s standard of work and/or performance
- An employee’s disciplinary and/or attendance records.
You cannot select an employee for redundancy in any way that would directly or indirectly discriminate against certain individuals or groups of individuals by reason of a protected characteristic. This could include criteria such as age, disability sex, race, religion or belief.
This means that you may need to discount factors such as maternity-related absences so as to avoid indirectly discriminating against women. You should also be careful about using the last-in-first-out method, as this can negatively impact on young workers who are likely to have a shorter service than older workers.
The consultation process differs depending on the number of employees facing redundancy.
Redundancy consultations are required for all employees being considered if there are between 1 and 19 employees at risk. However, it is advisable to hold consultations when more than 19 are at risk as it can protect you from unfair dismissal claims.
Where more than 20 employees are being made redundant, you have to formally consult with those at risk, and their representatives.
During the consultation, the employer is required to share details of the redundancies, including any selection criteria being applied. The employer should also make provisions for workers to provide feedback.
4. Making the redundancies
Workers selected for redundancy should be met with and informed of the decision, along with details of their entitlements to redundnacy pat and notice. Ths information should be confirmed and provided in writing.
Termination due to capability
You can lawfully dismiss an employee if they are incapable of doing their job to the required standard or they are capable but unwilling to do their job properly.
You can lawfully dismiss an employee if they are proven to not be capable of doing their job to the required standard, or they are capable but unwilling to do their job properly.
Capability dismissal should follow prior reasonable attempts by the employer to understand, manage and improve employee capability issues.
Performance reviews and discussions with employees should be ongoing. When performance is monitored and reviewed regularly, there are more opportunities for feedback and for identifying and resolving problems. It is not recommended to raise the subject of underperformance during the yearly appraisal meeting alone.
Performance should be evaluated in accordance with guidelines and benchmarks understood and agreed by both the employee and the employer. All staff members must be made aware of the performance standards expected of them.
Line managers and supervisors should receive training on how to conduct performance evaluations and appraisals skillfully and honestly.
When performance issues are identified, they should be discussed as soon as possible with the employee.
If there is no notable improvement following informal discussions, the next stage is to formally notify the employee that they are subject to a performance management procedure.
They should be invited to a meeting to discuss the problems and how they have fallen short of the necessary standards or targets by way of particular KPIs or metrics. The goal of the discussion should also be to determine whether there are any particular causes for the performance concerns, such as personal issues, and whether there are any steps you can do to support or address the causes, such as offering further training.
Throughout the capability management procedure, it will be crucial to have evidence to demonstrate how the employee is falling short of the standards required and as proof of performance management measures taken by the employer.
Termination due to misconduct
Misconduct issues could include things like persistent lateness or unauthorised absences from work, while performance issues could include an inability to keep up with important changes to their job or to get along with work colleagues.
Misconduct issues could include things like persistent lateness or unauthorised absences from work, while performance issues could include an inability to keep up with important changes to their job or to get along with work colleagues.
That said, unless any misconduct or performance issues are especially serious, you will need to give an employee the opportunity to change their behaviour or the chance to improve their performance prior to making any decision to dismiss. You may also need to provide suitable training.
In some cases, however, the misconduct may be so serious so as to justify summary dismissal. This is known as gross misconduct, where terminating employment without notice, or pay in lieu of notice, can be lawful, as long as you follow a fair process and there is clear evidence to support your finding.
Gross misconduct is an act so serious that it destroys the trust and confidence between the employee and employer, rendering the working relationship unviable.
Gross misconduct can include acts such as theft, fraud, use or threats of violence, breaches of health and safety, or serious insubordination in the workplace.
If, following a lawful disciplinary procedure, an employee is found to have comitted gross misconduct, it would usually be lawful for the employee to dismiss them with immediate effect. This is known as summary dismissal, where the employee is not entitled to any notice period or to be paid in lieu for their notice period. The company’s disciplinary policy or staff handbook should state what would be consoidered gross misconduct and potentially grounds for summary dismissal.
Employees with more than two years’ service remain entitled to a fair dismissal even where they are found to have committed gross misconduct. This means employers should avoid any ‘knee-jerk’ reaction to fire someone on the spot. You should still ensure the dismissal is fair to avoid claims for unfair dismissal.
Dismissal due to a breach of a statutory restriction
This reason is rarely used when terminating employment but can be necessary where continuing to employ someone would mean that you are breaking the law.
Section 98 (2) (d) of the Employment Rights Act states:
‘A reason falls within this subsection if it-
(d) is that the employee could not continue to work in the position which he held without contravention (either on his part or on that of his employer) of a duty or restriction imposed by or under an enactment.’
Examples of statutory restriction dismissals could include:
- If an HGV driver has lost their driving licence.
- If an employee’s immigration status prevents them from working, such as their work visa expiring, it would be illegal to carry on employing them.
- Someone working with children or vulnerable adults has been convicted of a crime that bars them from doing so.
- If someone fails to earn or maintain a qualification that is required for them to perform their job.
To dismiss an employee based on statutory illegality, you must demonstrate that continuing to employ the individual will breach the provision, rule, or law in question. You cannot rely on a genuine belief that the person has breached a statutory restriction; the employer has to check and confirm the reason for dismissal before terminating their employment.
In cases where the employee has lost their right to work, there are several considerations for employers. Employing illegal workers can result in fines of up to £20,000 per breach, but you must ensure you manage the matter correctly.
If you suspect or become aware of a change in an employee’s working status, you should arrange an initial discussion with them to discuss their situation. The employment contract should include provision for dismissal without notice if the employee is found to have lost the right to work, as this would constitute a breach of contract. The employer may decide to provide PILON if there is no such contractual provision. At this point, it will be crucial to provide the option to appeal, for instance, in the event that the person is later able to demonstrate that they still have legal status.
In any case of statutory illegality, it is crucial to follow a fair method when deciding to fire someone for this reason, which entails explaining the situation to the employee, giving them a chance to comment, and acting upon any concerns they may have.
The employer must also still follow the necessary dismissal process for the dismissal to be fair, which includes stating the ground(s) for dismissal and informing of their right to appeal.
Termination due to some other substantial reason (SOSR)
The concept of “some other substantial reason” is a statutory catch-all provision under the 1996 Act that allows an employer to fairly dismiss an employee in circumstances where no other potentially fair reasons apply.
That said, this phrase is not statutorily defined, so whether or not your reason for dismissal falls within its scope will depend on the facts of each case. It cannot be anything frivolous or insignificant, rather it must be something “substantial”.
A good example would be where your business has recently undergone a restructure or reallocation of work patterns, but this does not give rise to an actual redundancy situation because there is no reduction in the number of roles available or the work to be undertaken.
Another example could be in ‘fire and rehire’ cases. If an employee refuses to accept new terms being imposed by the employer, the only recourse may be to give them notice that their employment is ending and to make a fresh offer to rehire them under the new terms and conditions. In these cases, the employer must be able to demonstrate that you were making the adjustments for sound business reasons in order to prove this is a valid defence for dismissal. Given that this test is not especially difficult, it is likely that the employment tribunal will find that your dismissal was justified as long as you can prove that you were acting for business purposes rather than for some arbitrary cause.
SOSR dismissal could also be a possibility in circumstances where continuing to employ the member of staff puts the organisation and its reputation at risk.
Other reasons that could be regarded as substantial are a significant conflict of interest or where an employee does not agree to reasonable changes to their employment terms and conditions.
Dismissal due to illness
It is possible to fairly dismiss an employee by reason of a longstanding illness or prolonged absence through sickness where this has affected their ability to do their job or has made it impossible for them to do their job at all.
However, where a capability issue is linked to someone’s physical or mental health, dismissal should be used as a last resort after exploring ways in which you can help the employee to do their job. This could include arranging an occupational health assessment to determine what, if any, reasonable adjustments can be made to assist them, such as a phased return to work, amended duties, altered hours or workplace adaptations.
Dismissal because of a long-term disability may be unlawful discrimination, and terminating employment by reason of a disability could be classed as unfair. However, if an employee cannot do their job because there are no reasonable adjustments that can be made by you to remove any disadvantage suffered by them, it may be fair for you to dismiss them, even if they are disabled.
What is a fair procedure for termination of employment?
Where you are looking to establish a fair dismissal, you must not only show that you have a valid reason for the dismissal, but that you acted reasonably in all the circumstances. There is no legal definition of “reasonableness”, but the following factors may determine whether a dismissal was fair:
- Whether the reason you gave for the dismissal was the real one
- Whether you genuinely believed that the reason was fair
- Whether you carried out proper investigations where appropriate
- Whether you followed the relevant procedures
- Whether you have behaved consistently, for example, by not dismissing an employee for something that others have been allowed to do
- Whether you gave the employee plenty of warning about the possibility of dismissal
- Whether you told the employee why they were being considered for dismissal and listened to their views
- Whether you allowed the employee to be accompanied at any disciplinary or dismissal hearing(s)
- Whether you gave the employee the opportunity to appeal
As a matter of best practice, in cases of conduct or capability matters, you should always refer to the guidance set out under the ACAS Code of Practice on Disciplinary and Grievance Procedures. This involves a variety of steps that must be taken before making any decision to dismiss, including written warnings and suitable training, where appropriate.
Although any failure to follow the Code of Practice will not, in itself, make you liable to proceedings, nor does it automatically make any dismissal unfair, an employment tribunal can increase any award of damages made against you by up to 25% for any unreasonable failure to follow this guidance.
Even in circumstances where an employee is potentially guilty of gross misconduct, a full investigation and fair disciplinary procedure should still be followed, providing the employee with an opportunity to respond before terminating their employment without notice.
When terminating employment by reason of redundancy, this can only take place after the appropriate consultation process has been followed. This will allow you to respond to any representations made or objections raised by employees and/or their representatives, and to consider any reasonable alternatives to dismissal. Where you are making 20 or more employees redundant within any 90-day period you must also follow the collective consultation rules.
What notice should be given when terminating employment?
When terminating employment you must provide the employee with a minimum period of notice. Depending on the employee’s contract, this could either be statutory or contractual notice period.
Statutory notice period rules
The minimum statutory notice you can give is one week if the employee has worked for you continuously for one month or more but for less than 2 years, with one additional week for each complete year of employment up to a maximum of 12 weeks. For example, for 2 years continuous employment the notice period will be 2 weeks.
Contractual notice period
Some employers offer longer notice periods, which form part of the employment contract.
If the contract of employment provides for a longer period of notice that the statutory minimum, you must provide the employee with this period instead.
You cannot give an employee less than the statutory notice period they are entitled to, even if the employment contract seeks to do this.
Alternatively, where permitted within the contract, you can give the employee pay in lieu of notice (PILON). PILON refers to when an employer immediately terminates an employee’s employment and pays notice pay rather than requiring them to work their notice period.
In order to prevent the employee from having access to sensitive information, the company may decide to make a PILON and remove the employee from the workplace as soon as the decision to terminate the contract has been made. PILON may also be preferred by the employer if
continued employment could have a negative impact on the team as a whole as well as the business. PILON can also be used as a negotiated term of an exit within a settlement agreement.
The employee is due the payment in lieu as a debt under their employment contract.
A PILON clause must be present in an employee’s employment contract for a PILON to be valid. If a payment is provided in the absence of a provision, the employer violates the terms of the agreement by forbidding the employee from working their notice.
An employee is not entitled to PILON if they are summarily dismissed for gross misconduct.
PILON is calculated on the basis of the amount the employee would have earned ordinarily during the notice period. For example, if the notice period is one month, the employee would be owed the equivalent of one month’s pay.
Dismissing someone without notice
In circumstances where you fail to give an employee the correct notice, or pay in lieu of notice, this will amount to wrongful dismissal. This is essentially where you break the terms of an employee’s contract during the dismissal process by failing to provide them with what they are contractually or statutorily entitled to.
Ordinarily, you would need to provide an employee with their relevant notice period entitlement when dismissing them. The exception is if the employee is being dismissed for gross misconduct, in which case they lose their entitlement to a notice period and pay in lieu of notice. This is known as ‘summary dismissal’.
Employers should note, however, that summary dismissal is not necessarily the same as instant dismissal. Dismissing someone ‘on the spot’ potentially exposes the organisation to claims for unfair dismissal because even in the case of gross misconduct, employees (those with more than 2 years’ service) are still entitled to a fair dismissal which would usually involve a fair disciplinary and investigation procedure. The employee should also be made aware before the investigation that they could face dismissal as a possible outcome of the disciplinary procedure.
Terminating employment within the 2-year service period
Employees can only usually claim unfair dismissal if they have worked for you for a qualifying period of 2 years. In theory, this means that you can dismiss any employee without having a valid reason to do so in circumstances where they have accrued less than 2 years continuous service.
However, where you have written dismissal procedures in place that form part of the employee’s contract of employment, you must still adhere to these procedures otherwise risk being in breach of contract. It is also good practice to follow a fair procedure as set out in the ACAS Code of Practice, giving the employee an opportunity to state their case and appeal any decision.
In some cases dismissals will be classed as automatically unfair for which no qualifying service period is required. Terminating employment will be automatically unfair if the reason for dismissal is connected with an employee exercising any of their rights relating to:
- Pregnancy, including all reasons relating to maternity
- Family reasons, including parental, paternity and adoption leave, or taking time off for dependants
- Acting as an employee or trade union representative
- Joining or not joining a trade union
- Being a part-time or fixed-term employee
- Pay and working hours, including the Working Time Regulations 1998, annual leave and the National Minimum Wage
- Whistleblowing, ie; reporting wrongdoing at work
Terminating employment during a probationary period
It is normally open to an employer to terminate employment during a probationary period, unless the employee’s contract expressly states that this is prohibited. However, this type of contractual provision is rare as the probationary period is primarily designed to assess an individual’s capabilities before making them a permanent member of staff.
Provided that there is no such clause, you can lawfully bring the employment contract to an end, although you should still provide the employee with an opportunity to respond to any performance or conduct issues relating to their proposed dismissal. You will also still need to give the employee any statutory or contractual notice to which they are entitled.
This means that if an employee has worked for you for one month or more, you must give them at least one weeks’ notice. Only in cases where an employee has committed an act of gross misconduct can you dismiss them without any notice.
Best practice when dismissing an employee
As a minimum, employers are advised to ensure the following steps are followed when making someone redundant:
- Review your disciplinary procedure regularly to ensure it remains compliant with the latest ACAS guidance and case law requirements.
- Train your managers and anyone with authority on organisation’s disciplinary procedures, and best practice when terminating employment contracts.
- Keep contemporaneous and thorough notes.
- Maintain objectivity through the investigation – this could entail engaging a third party to conduct the investigation and gather evidence and speak to witnesses to ensure impartiality.
- Suspension is not a disciplinary measure – it should only be used where it would be beneficial to preserve the integrity of the investigation.
- Conduct the investigation and disciplinary meeting within a reasonable timeframe.
- If the decision is to dismiss the employee, ensure the ground(s) for dismissal are fair and there is no unlawful discrimination.
- Advise the employee of the decision, the reason(s) for dismissal and remind of their right to appeal – confirm this all in writing.
Dismissals and terminating employment contracts can be challenging for employers, and if not handled as required by law, you could face repercussions such as claims for unfair dismissal.
DavidsonMorris’ employment lawyers can help with all aspects of employment contracts, including terminations. We bring extensive experience in advising employers on employee exits in all circumstances, from redundancy to performance management, long term sickness absence and more. Working closely with our HR specialists, we offer a holistic advisory and support service for employers encompassing both the legal and people management elements of contract terminations. Speak to our experts today for advice.
Termination of employment FAQs
What are the fair reasons for dismissal?
Under the Employment Rights Act 1996 the fair reasons for dismissal include redundancy, capability or conduct, or where continued employment would contravene the law. There could also be some other substantial reason of a kind that justifies the dismissal.
How much notice do you have to give to terminate a contract?
To lawfully terminate a contract of employment you must provide the employee with a statutory or contractual period of notice, whichever is longer. The minimum statutory notice you can give is one week’s notice if the employee has worked for you continuously for between one month and 2 years.
What is unfair dismissal?
An unfair dismissal is one that falls outside one of the fair reasons for dismissal. These reasons include redundancy, capability or conduct, breach of a statutory restriction or some other substantial reason. To qualify for unfair dismissal an employee must usually have 2 years continuous employment, unless the reason for dismissal was automatically unfair.
Last updated: 26 January 2023