A recent Employment Appeal Tribunal (EAT) decision provides useful guidance for employers on the process for dismissing senior executives for performance concerns and the application of the Polkey deduction principle, which allows a tribunal to reduce compensation where it finds that the employer would have dismissed the employee anyway, even if it had followed a fair process.
Polkey deductions
The Polkey deduction principle was first set out by the House of Lords. The legislation requires the tribunal to award an amount of compensation that is “just and equitable” based on the claimant’s losses. The House of Lords held that a tribunal could reduce compensation to reflect the chance that the employer would have dismissed the employee anyway, even if it had followed a fair process. In other words, the employer’s procedural errors that made the dismissal unfair made no difference to the outcome. The dismissal remains unfair, but the tribunal will assess compensation based on its assessment of whether a fair outcome would likely have been the same.
Background
In Zen Internet v Stobart, Zen Internet dismissed Mr Stobart from his role as CEO on capability grounds. The company did not follow any process and the employment tribunal (ET) found his dismissal to be procedurally unfair.
The ET concluded that the dismissal was nevertheless inevitable, as a fair process would still have resulted in the same outcome within around two months of the date Zen Internet gave Mr Stobart notice. This timeframe, in the ET’s view, would have allowed Zen Internet time to hold meetings, decide an outcome and offer an appeal. It therefore applied a Polkey deduction and limited the award of compensation to around two months’ pay. Zen Internet appealed against the findings that Mr Stobart’s dismissal was procedurally unfair and that a fair dismissal would have taken a further two months.
EAT’s decision
The EAT dismissed the challenge to the finding of procedural unfairness, in which Zen Internet argued that the ET had not adequately considered the possibility that following a process was futile, given Mr Stobart’s senior position as the CEO. The EAT dismissed this argument because it found the case was not one of the rare cases where Mr Stobart’s seniority meant that Zen Internet did not need to follow any procedure before it could dismiss him fairly for capability.
The EAT upheld the second ground of appeal, finding that the ET had incorrectly assessed the timing for applying the Polkey deduction. Rather than calculating how long a fair process would have taken from the date Zen Internet gave notice, the ET should have considered the period from when capability concerns first arose, which was more than three weeks before dismissal. This earlier starting point could have affected the length of time a fair process would reasonably have taken.
Key takeaways
The decision provides timely clarification on how tribunals should approach Polkey deductions in capability dismissals, particularly where concerns about performance have been developing for some time.
- Senior executives remain entitled to a fair process. The decision confirms that employers should not assume that they can bypass a capability or performance process because the individual occupies a senior role. Dismissal without following any process is very much the exception.
- Timing matters when applying Polkey. Tribunals should assess how long it would reasonably have taken the employer to carry out a fair process from when performance concerns first became serious, not just from the date of dismissal or giving notice.
- Early engagement helps manage risk. Addressing performance concerns promptly and keeping clear records not only supports fair decision-making but may also reduce potential compensation exposure if dismissal becomes necessary.
Overall, the case reinforces that well-managed capability processes remain central to defending decision-making and reducing the potential extent of compensation if there are flaws in the procedure.
