Dismissals and the duty to mitigate loss

Hardy v Polk (Leeds) Ltd.

An employee dismissed without notice often finds a new job in what would have been the notice period. If the employer had made a payment in lieu of notice, the employee would receive two sets of wages for the notice period - the notice money and the wages from the new employee. The courts for a long time have supported this double recovery on the basis that it encouraged employers to actually pay the notice money at the outset and not wait to see if the employee found alternative work and thus saved the employer money. Employees who find alternative employment are said to be ‘mitigating’ their losses.

The principle that, in appropriate cases where an employee does find new employment during the notice period, he/she can be awarded compensation for loss of earnings for the full notice period without deduction, is referred to as the Norton Tool principle. This is because it was the decision of a case of that name in 1973. The full case name was Norton Tool Co Ltd v Tewson.

In a recent case called Hardy v Polk (Leeds) Ltd, however, the EAT did not follow the principle established in the case of Norton Tool. Instead, it held that an employee dismissed without notice who finds alternative work during the notice period must give credit for the earnings from the new employment.

This decision will be of significant benefit to employers facing claims in the Employment Tribunal. This means, in practice, that an employee who is found to have been unfairly dismissed but who secures another job and a comparable salary almost immediately, will only be able to recover the basic award in the Tribunal. The basic award is a fixed amount calculated by reference to the employee’s age, length of service and subject to a weekly pay cap of £270.

The reason for this decision is that the purpose of awarding compensation to an unfairly dismissed applicant is precisely to compensate for loss and not to penalise the employer for its conduct.

Employers should take advice when dismissing anyone as to whether they can reduce the amount to be paid out by relying on the employee’s duty to mitigate. It is possible to do so either simply by reducing the notice compensation by a factor to reflect the likely amount of money to be earned elsewhere or to make staged payments which stop or reduce when the employee finds a new job.

The new Combined Code on Corporate Governance which came into force in November 2003 contains important new provisions for compensating directors and restrictions upon rewarding failure. Under the Combined Code, Remuneration Committees should be encouraged to take a robust line on reducing compensation to reflect mitigation of loss by the director. This new decision will support decisions of this nature by such committees.

Hardy v Polk (Leeds) Ltd 2004 IRLR 420