How to terminate an employment contract

When you want to dismiss an employee and terminate their employment, you must give them the proper notice period. This should be outlined in their employment contract, which you should have given to them when you first hired them.

You may also have outlined your company's staff dismissal policy at the start of their employment if you gave them a Dismissal and Disciplinary Procedure when they joined the company.

But if a notice period hasn't been expressly agreed should dismissal occur, then you can terminate employment upon 'reasonable' notice. What is reasonable depends on factors such as the employee's seniority, age, length of service, remuneration, and what is usual in their profession or industry.

Whatever has been stated in their employment contract, the notice period mustn't be less than the statutory minimum notice period.

The statutory minimum notice period

  • Employee's length of service is less than 1 month - No notice period
  • Employee's length of service is 1 month to 2 years - 1 week
  • Employee's length of service is 2 to 3 years - 2 weeks
  • Plus an additional week for each year of continuous employment to a maximum of 12 weeks

If you terminate their employment without proper notice, then your employee does have a claim for wrongful dismissal (see below for further details).

If you've given them proper notice, they will have no claim for compensation. But they may still have a valid claim for unfair dismissal, even if the proper notice period is given.

Instant dismissal

When an employer terminates an employee's employment contract, they often want the employee to stop working immediately. They may want instant dismissal to take affect, as they may be worried that the staff member may not continue to work effectively or they may be disruptive in the workplace. If this is the situation in your case, it's usual for you to pay them a sum in lieu of notice or as compensation for failure to give notice.

Sometimes the employment contract will expressly state that you can terminate employment on payment of a sum in lieu of notice. In this instance, when the payment is made, tax and National Insurance deductions should be made in the usual way.

If there is nothing in the employment contract relating to making payments in lieu, the payment may be paid tax-free, up to a limit of £30,000 and without deduction of National Insurance contributions. It's not always entirely clear whether the payment is tax-free, so it's worth seeking advice on this point.

If a payment in lieu of notice is made, it's not only the employee's salary, but also all of their benefits, such as a company car, that must be included in the calculation. The exception to this would be if their employment contract stated that pay in lieu of notice didn't include benefits.

Wrongful dismissal

If you dismiss your employee without giving the proper notice period and without pay in lieu of notice, then they're entitled to claim damages for their notice pay and benefits; and this claim is known as 'wrongful dismissal'. The exception to this is if the employee is guilty of gross misconduct, in which case you would be justified in the dismissal taking immediate effect. What constitutes gross misconduct does depend upon the work environment. Examples of gross misconduct are theft, damage to your property, physical assault and gross insubordination, or the employee not being able to work as they're under the influence of alcohol or illegal drugs, or they have misused the email and internet.

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Published on: June 2, 2008

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