You will not have to give an employee pay in lieu of notice if you are dismissing him (or her), fairly, for gross misconduct. In other circumstances you will either have to let employees work out their notice or - if you want them to leave immediately, rather than hanging about disgruntled - pay them in lieu of it.
However, if you do want them to leave immediately, with pay in lieu of notice, then you should have an express provision in their contract of employment that entitles you to pay them off in that way. Without such a provision, if you dismiss employees with pay in lieu then, technically, you are breaching their contract, and this may prejudice you in enforcing any contractual obligations later (such as restrictive covenants that prevent them poaching customers or setting up in competition). Moreover, there is a risk that the courts will take a poor view of such a move, particularly if it appears to have been made with a view to cutting the period of employment short to the employee's particular detriment. The Scottish Court of Session (equivalent to the Court of Appeal) recently refused to accept that there was an implied term in an employee's contract, allowing the employers to dismiss him with pay in lieu, and thereby get out of paying him a bonus to which he would otherwise have been entitled.
Where you are not dismissing for gross misconduct, and you neither pay money in lieu of notice, nor allow the employee to work his notice out, he is likely, following termination, to have grounds for a claim for wrongful dismissal (see question one). This could result in an award of damages (ie financial compensation). Ex-employees would be expected to do all they could to limit their losses by seeking alternative comparable employment. In establishing the level of damages an Employment Tribunal would take into account (and if appropriate deduct) any money that they had earned from new employment during the notice period.
