PILON terminates contract

In the recent case of Societe Generale v Geys [2011] EWCA Civ 307, the Court of Appeal has overturned a High Court decision which we reported in May 2010. This regarded the date on which an employment contract terminates when the employer exercises a contractual right to terminate by giving a payment in lieu of notice (PILON).

The facts in this case were unusual. The employer was entitled, under the terms of the employment contract taken together with its Staff Handbook, to terminate the contract with immediate effect and make a PILON. In fact, the employer handed the employee a letter which stated that his contract was terminated 'with immediate effect' on 29 November, made the PILON three weeks later on 18 December, and only sent the employee a letter confirming what it had done on 6 January.

The Court of Appeal says that, in such a case, where the employee has already been told that his contract has been terminated with immediate effect, all that is required is the payment of the PILON, not that the employee should be formally notified that the employer is exercising its right so to terminate the contract. In this case that meant that the employee's contract terminated on 18 December not 6 January and so he could not claim a substantial year-end bonus.

Points to note –

  • The question here was when, as a matter of contract law, the contract terminated. This is a different question from asking when was the 'effective date of termination' (EDT) under the Employment Rights Act 1996. If an employee wants to claim unfair dismissal, the claim must be made within 3 months of the EDT. In this case, the EDT was 29 November, the date on which he was summarily dismissed. An employee must know the EDT of his contract but, as can be seen in this case, need not necessarily know the date on which his contract terminates for common law purposes and it may not necessarily be the same date.
  • In order to avoid such problems arising, employers should not only ensure that the contract/staff handbook includes the right to terminate a contract with immediate effect and make a PILON, but also that, when exercising the right, they make it clear to the employee at the time that they are so doing. Employers should check their termination procedures and also make sure that they are properly implemented.