Truth behind ‘dismissal with immediate effect’

Employers must word contracts carefully to allow them to sack staff instantly for failing to meet set standards

What is the meaning of the words “dismiss with immediate effect”? Can an employer dismiss an employee without paying notice, if these words appear in their contract of employment?

The concept of dismissal with immediate effect appears in many contracts, particularly the contracts of directors and other senior staff. It is thought by many to allow a right to terminate the contract summarily – that is, without notice or payment in lieu of notice, where the employer would not otherwise be permitted to do so.

Where, for instance, a highly-paid director on a long notice period has been brought in to achieve a particular goal for a business, the business may be reluctant to pay him notice if he fails to achieve his targets.

A probationary period is one way round this, giving the employer the right to dismiss on short, or no, notice during, say, the first six months of the contract.

Outside any probationary period, however, it will be necessary to provide specific contractual provision to allow termination without notice in cases of poor performance. Otherwise the dismissal will be in breach of contract and more than likely unfair, giving rise to a claim for damages by the poor-performing director.

The Court of Appeal has recently interpreted the meaning of this expression in the case of Skilton v T&K Home Improvements, New Law Digest, 10 April 2000.

Skilton was the sales and marketing director of a double-glazing company, T&K Home Improvements. His contract allowed T&K to terminate his employment by giving him three months’ notice or by paying him in lieu of notice.

T&K could also terminate summarily in cases including gross misconduct and gross incompetence. In these cases, the contract said, Skilton would not receive prior notice or pay in lieu (and would not be entitled to compensation or damages).

The contract also stated, “If over any quarter you fail to achieve your performance target as outlined below you may be dismissed with immediate effect.”

When Skilton failed to meet his required sales levels, he was dismissed by T&K without notice or payment in lieu, relying on its right to dismiss with immediate effect.

Skilton brought a claim for wrongful dismissal in the employment tribunal, claiming that he should have been given three months’ notice, or received a payment in lieu.

He argued that T&K could only dismiss him summarily under the gross misconduct and gross incompetence clause. As Skilton fell into neither of these categories he should have been given notice.

The Court of Appeal agreed with Skilton and awarded him pay in lieu of the three months’ notice he should have received. The Court stated that words “with immediate effect” could not be read as depriving Skilton of his right under the contract to notice or payment in lieu. The right to dismiss with immediate effect only allowed T&K to insist on Skilton leaving the premises immediately. It did not take away his right to be paid in lieu of notice. The clause was in effect a form of garden leave clause.

With hindsight, T&K should have included failure to reach sales targets as one of the instances in which it could dismiss summarily. This would have avoided the ambiguity which clearly existed in this contract.

The case is a lesson that clear drafting of contracts is crucial. The contract should avoid using the words dismissal “with immediate effect” without clarifying that this means dismissal without notice or payment in lieu.

Alastair Brunker is a solicitor specialising in employment law with Shell International

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