Member Article

Has employee dishonesty been sanctioned?

Dennis Cooper, Legal Consultant and Solicitor at Zaiwalla & Co, examines the case of Cavenagh v William Evans [2012] EWCA Civ 697. He asks: has dishonest by an employee been sanctioned by the Court of Appeal?

The recent decision by the Court of Appeal to come down on the side of the former director of a company who was made redundant after deliberately taking money from his employer, to which he knew he was not entitled, has set a precedent which could alter the relationship between employer and employee The Court ordered the company in question to pay contractual compensation to the employee for having to leave without serving his notice period.

The decision is significant as it means if an employer terminates a contract of employment for a reason other than misconduct, it will still have to compensate the employee even if it is later discovered that he or she committed gross misconduct during his employment.

William Evans, a shop which has traded in St James’s Street in Piccadilly since 1883, originally terminated Duncan Cavenagh’s employment in March 2010 for commercial reasons under an employment contract clause that allowed them to make a payment in lieu of his notice period (PILON). They were set to make that payment, but then discovered that he had previously told a junior employee to countersign a cheque for £10,000, which he paid into his personal pension without the knowledge of the board.

Upon discovering this, the company refused to make the payment in lieu and went to Court to seek repayment of the money he had taken. At trial, the judge found that Mr Cavenagh was guilty of gross misconduct. She applied the well know principle set out in Boston Deep Sea Fishing that an employer may defend itself against a claim for damages by a former employee by relying upon his after discovered gross misconduct amounting to repudiation and decided that he was not entitled to his payment in lieu of notice. She found that William Evans would have terminated summarily his employment if he had not hidden his gross misconduct.

The Court of Appeal allowed an appeal against that decision on the basis that a distinction must be made between the summary dismissal of an employee under a payment in lieu provision and summary dismissal for an unjustified reason. It has concluded that Boston Deep Sea Fishing only applies in the latter situation. Because William Evans did not dismiss Mr Cavenagh for gross misconduct in the first place, the Court of Appeal has ordered it to make the full payment in lieu to Mr Cavenagh.

Although the trial judge did not make a finding of dishonesty in Mr Cavenagh’s case, such a finding could not have made any difference to the Court of Appeal’s decision which raises the spectre of an embezzler being compensated by an employer who terminated his employment in ignorance of his criminal act. In the light of this judgment, an employer will be forced to make a payment in lieu even if it later turns out that the employee was stealing money from the company at the time.

A consequence of the decision could be therefore that an employer will decide that the safer course to follow when terminating the employment of an unsatisfactory employee, especially where the payment in lieu is substantial (as it was in this case), will be to dismiss the employee summarily without explanation. If he can then find no basis for alleging repudiatory breach he can subsequently agree a settlement. Messy, yes, but the risk to the employer is probably less as the likely principal measure of damages would be lost remuneration for the notice period i.e. the equivalent of the payment in lieu.

In the very long term it may be possible for employers to seek to redraft every single contract it has with an employee, so as to attempt to circumvent the Court of Appeal’s ruling. This cannot, however, address the obvious injustice large numbers may suffer for years to come. The fact is that dishonest employees could continue to enjoy the fruits of their deceit and receive the same rewards as their honest colleagues.

The defendant in the William Evans case was guilty of a double breach of duty, as he not only took money to which he was not entitled but also failed to carry out his obligation as a director to bring this to the attention of his employer. It seems odd, therefore, that the Court of Appeal considered that such double breach of duty did not vitiate any contractual obligation to make a payment to Mr Cavenagh induced by his deceit.

This case is due to continue as it is anticipated William Evans will be seeking to appeal to the Supreme Court.

This was posted in Bdaily's Members' News section by Dennis Cooper .