Ian Mather and Nick Abbott assess the continuing fall-out from a banker’s bonus battle that reached our highest court at the end of last year

Supreme court tackles banker’s bonus case

The main issue in Société Générale v Geys was precisely when Mr Geys’ contract of employment had been terminated. If it had been brought to an end just before the end of the calendar year, he would have been entitled to a significantly lower final bonus. If, on the other hand, the contract had not been terminated until the New Year, his bonus would have been worth about €7 million more.

The bank made three attempts to terminate Mr Geys’ contract. First, it tried to terminate his contract summarily and arranged for him to be escorted out of the building. About three weeks later it transferred a payment in lieu of notice into his bank account. All this happened before Christmas. Finally, in the New Year, it wrote explaining that it had exercised its rights under the payment in lieu of notice clause in his contract of employment and giving Mr Geys a breakdown of the money it had paid into his account.

The Supreme Court ruled by a 4:1 majority that Mr Geys’ employment had not been effectively terminated until the New Year, overturning the decision of the Court of Appeal and restoring the decision of the trial judge.

“Innocent” party can affirm employment contract, despite fundamental breach

The first question the Supreme Court had to decide was whether employment contracts behave in the same way as commercial contracts when there is a fundamental breach. As a general rule, when faced with a fundamental breach of contract, the innocent party has a choice – or in legalese can make an “election”. The choice is either to affirm the contract or to treat it as discharged. In either case the innocent party can sue for damages, though if the contract is affirmed it may also be possible to hold the other party to the contract. The orthodox view has been that employment contracts behave in just the same way, and this is known as the “elective” theory.

However, particularly in recent years, it has become apparent that in many respects employment contracts are significantly different from commercial contracts. For example, for obvious reasons, a court will never order an employee to continue to work for a particular employer against their will, though in some cases it can prevent them from working for a competitor for a limited period. These differences encouraged the development of the “automatic” theory, which held that an employment contract comes to an end automatically when one party is in fundamental breach.

The Supreme Court decided that the elective theory was the correct one. That means that the innocent party can elect to keep the contract alive until a time of his or her choosing, even if the other party has made it clear that the employment relationship is at an end. In Mr Geys’ case, he took legal advice after he had been marched out of his office and wrote making it clear that he did not accept his employer’s repudiation of his contract. That way he managed to keep it alive until the bank finally managed to terminate it lawfully.

Employee must be notified if PILON clause exercised

The bank’s next argument was that even if the contract did not automatically terminate when it tried to dismiss Mr Geys summarily, it had most certainly ended when it exercised its right to make a payment in lieu of notice. The difficulty with this argument was that the bank did not actually tell Mr Geys it was doing this at the time, although it was clear that Mr Geys could have made a pretty shrewd guess at what was going on, once he had noticed a considerable increase in his bank balance.

On this issue the Supreme Court ruled that, in order to terminate the contract, the bank had to tell Mr Geys clearly and unambiguously that it was relying on the payment in lieu of notice clause. This it had failed to do until it wrote giving a breakdown of the payment early in the New Year.

Where does this leave us?

It follows that from an employer’s perspective, the only certain way of ending a contract of employment is either to give the full contractual notice, or exercise a contractual right to make a payment in lieu of notice. In either case it is important to tell the employee exactly what is going on. Often the quickest and most effective way of doing so is at a traditional face-to-face meeting, when the necessary paperwork (preferably including a cheque for the payment in lieu of notice) is handed over on the spot.

Equally, when faced with an employee who wishes to end the employment relationship immediately, it is now clear that an employer can elect to hold the employee to his or her contractual notice, though it will not be able to force the employee to work the notice period.

However there remain a number of unanswered questions. For example, what impact does this case on how the effective date of termination (EDT) is established for unfair dismissal purposes? This is important because the EDT marks the start of the three month period for bringing a claim in the employment tribunal. The drafting in the Employment Rights Act, as well as the case law on this topic, appears to assume that the automatic theory applies. In other words, as things stand, the time limit normally starts to run from the date the employer repudiates the contract, not the point at which the repudiation is accepted by the employee. If that remains the case, we may in theory have a situation where the time limit for claiming unfair dismissal expires before the employment contract has come to an end.

Another problem surrounds the way damages are calculated for breach of an employment contract. Traditionally, aside from a claim for unfair dismissal, an employee can never claim a greater amount than the pay he or she would have received during the contractual notice period. But how does this principle sit with a case where the employee elects to keep the contract alive for an extended period, but where there is no prospect of going back to work? The high court may soon have to grapple with just such a situation in the Sharon Shoesmith litigation. In 2011 Court of Appeal decided that the dismissal of Haringey’s former director of children’s services in 2008 had been unlawful and therefore ineffective to terminate her contract of employment. Later this year, nearly five years after her purported dismissal, her application for a declaration that she remains employed is due to be heard.