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Compensation for constructive dismissal should be treated differently from direct dismissal

An employee who has been constructively dismissed is not entitled to be paid for their full contractual notice period if they have undertaken paid work for a new employer during that time. This was the finding confirmed by the Court of Appeal in the case of Stuart Peters Limited vs Bell.

In assessing the amount of compensation for an employee who has been unfairly dismissed, the general rule in section 123(1) of the Employment Rights Act 1996 states that compensation should be ‘such amount as the tribunal considers just and equitable in all the circumstances'.

However, Norton Tool vs Tewson (1972) created an exception to this general rule and held that an employee who has been summarily and unfairly dismissed should be entitled to be compensated fully in respect of their notice period even if they may have obtained alternative employment during that time. This principle is now commonly referred to as the Norton Tool principle and has led many employees to, arguably unfairly, gain double recovery of compensation.

Prior to the Stuart Peters case it was unclear whether the Norton Tool principle only applied to actual dismissals or whether it also applied to constructive dismissals (that is, where an employee resigns in direct response to the employer's conduct).

In Stuart Peters, the employment tribunal held that Mrs Bell had been constructively unfairly dismissed without being paid her six months' notice pay. Bell had managed to obtain alternative employment for three of the six months following her dismissal. The employment tribunal held that had she acted reasonably she would, by the end of the six months' notice period, have found suitable alternative employment and therefore it awarded her no compensation in respect of any compensation after the six months.

The issue that arose in this case was whether Bell's earnings from her alternative employment during her notice period should have been offset against her entitlement to compensation for her unfair dismissal. The tribunal followed the Norton Tool principle and refused to reduce the compensation award to take account of money earned by Bell elsewhere.

The employer then appealed against the decision to the Employment Appeal Tribunal (EAT) arguing that the Norton Tool principle applied only to direct dismissals and not to constructive dismissals. The EAT dismissed the employer's appeal and upheld the employment tribunal's decision, stating that there was no legitimate basis to distinguish between a termination by the employer and a constructive dismissal.

At the Court of Appeal stage of proceedings, however, the court has held that the Norton Tool principle does in fact only apply to direct dismissals and does not apply to constructive dismissals. In his reasoning, Lord Justice Elias explained that the Norton Tool principle establishes that good industrial practice requires an employer, who terminates without notice, to pay in lieu of notice at the termination date.  If the employee subsequently gets a new job during the notice period, they are not required to pay back the employer any part of the payment in lieu he or she receives. 

Lord Justice Elias explained, however, that the practice for constructive dismissal cases is quite different and it would not be appropriate for a payment in lieu of notice to be made where an employee resigns in response to an employer's alleged breach of contract as there would normally be a dispute as to whether a breach of contract had occurred and, furthermore, the very essence of a constructive dismissal is that the employer has not directly dismissed the employee.

The effect of this decision means that, in determining the compensation in unfair dismissal claims, there will be a difference between those who are constructively dismissed and those who have their employment terminated by the employer.

Interestingly, both parties focused their arguments on whether the Norton Tool principle applied to constructive unfair dismissal claims as opposed to the wider issue of whether Norton Tool is in fact good law as it fundamentally conflicts with section 123 of the Employment Rights Act 1996 which, as previously mentioned, states that compensation should be just and equitable. It is likely that this wider issue will be appealed to the House of Lords (now Supreme Court) at some point in the future, but in the interim, we are grateful to the Court of Appeal for its clarification.

Ashley Brown is an associate in the Employment Group of international law firm Morgan Lewis