Unfair dismissal and reinstatement: the employee must repay the payment in lieu of notice

With order no. 22187 of 28 June 2026, the Italian Supreme Court addressed the issue of whether payment in lieu of notice paid to an employee must be repaid where the dismissal is subsequently declared unlawful and the employee is reinstated. The Court held that the employer’s right to reimbursement arises only once the employment relationship has been re-established and may be set off even in enforcement proceedings, as a subsequent extinguishing event affecting the judicial title.

The facts of the case

The dispute arose from enforcement proceedings brought by an employer against an employee who, following dismissal challenge proceedings, had obtained an order of reinstatement together with an award of damages equal to twelve months’ salary. In enforcing the judgment, the employer paid the employee an amount lower than that resulting from the judicial title, deducting the sums previously paid as payment in lieu of notice.

Considering such deduction unlawful, the employee served a demand for payment seeking recovery of the outstanding difference. The employer challenged the enforcement proceedings, arguing that it held a reimbursement claim arising from the payment in lieu of notice, which had become incompatible with the employee’s reinstatement.

Both the Court of First Instance and the Court of Appeal dismissed the employer’s arguments. In particular, the Court of Appeal held that the claim concerning payment in lieu of notice should have been raised during the dismissal challenge proceedings and that, being based on a fact predating the judicial title, it could not subsequently be relied upon in enforcement proceedings.

The Supreme Court’s ruling

The Supreme Court upheld the employer’s appeal, finding that the grounds concerning the nature of the reimbursement claim and its eligibility for set-off were well founded.

The Court first noted that, pursuant to Article 2118 of the Italian Civil Code, entitlement to payment in lieu of notice presupposes the termination of the employment relationship and is therefore “logically and legally incompatible with the reinstatement of the employee, which entails the restoration of the employment relationship”. The Court therefore reiterated that, once a dismissal has been declared unlawful and reinstatement ordered, any sums paid as payment in lieu of notice become undue and give rise to a reimbursement claim in favour of the employer.

The Supreme Court further clarified that the employer’s right to recover such sums “arises only where the employment relationship has been legally restored as a result of the reinstatement order”. Accordingly, the basis of the reimbursement claim is not the original payment of the indemnity itself, but rather the subsequent judicial decision ordering reinstatement.

On these grounds, the Court found that the Court of Appeal had erred in treating the reimbursement claim as a fact predating the enforcement title. On the contrary, according to the Supreme Court, the reimbursement claim “constitutes an event arising after the judicial title establishing the restoration of the employment relationship and may therefore be relied upon as a subsequent extinguishing event”.

Referring to its settled case law, the Supreme Court also reiterated that set-off, as a ground for extinguishing an obligation, may be relied upon in enforcement proceedings where the opposing claim arose after the enforcement title came into existence. Consequently, the employer was not required to assert its reimbursement claim during the dismissal challenge proceedings, as such claim had not yet arisen at that stage.

For these reasons, the Supreme Court quashed the appealed judgment and remitted the case to the Court of Appeal of Perugia, sitting with a different panel, for a new examination in light of the principles established by the Court.