Employers need to ensure that when they are making a PILON they notify the employee that a PILON is being made to them in exercise of the employer's contractual right to terminate the employment with immediate effect.

Background

In recent years, there has been considerable debate over whether a repudiatory (or fundamental) breach of contract automatically ends an employment contract.

In December 2012m, the Supreme Court considered whether an employer's repudiatory breach had the effect of automatically terminating an employee's contract and, if it did not, what had to be done for the contract to be validly terminated.

Summary

The claimant, Raphael Geys, was employed as a managing director for fixed income sales at Société Générale. On 29 November 2007, Mr Geys was handed a letter that stated that the bank "has decided to terminate your employment with immediate effect". He was then escorted from the building.

On 18 December 2007, the bank made a payment directly into Mr Geys' bank account. The bank did not advise Mr Geys in advance that the payment was to be made or what it constituted. However, Mr Geys concluded that it was intended to be a payment in lieu of notice.

On 2 January 2008, Mr Geys' solicitors wrote to the bank's solicitors stating that Mr Geys had decided to affirm his contract of employment and reserved his position "in relation to the acceptance of these monies once we understand what they constitute". By seeking to affirm the contract Mr Geys was arguing that his employment was continuing.

On 4 January 2008, the bank wrote to Mr Geys stating that it had given notice to terminate his employment with immediate effect on 29 November 2007 and that his pay in lieu of notice had been credited to his bank account on 18 December 2007.

A dispute arose as to when Mr Geys employment contract had actually terminated. This was important as the date of termination affected the amount of termination payment (including bonus payments) that he was owed under his contract – a difference of more than $4.5 million.

Mr Geys argued that, having affirmed the contract on 2 January 2008, his contract ended on 29 February 2008 (three months after notice was given). The bank's case was that the contract terminated, if not on 29 November 2007, then on or shortly after 18 December when the bank made the payment in lieu of notice.

Decision

The Supreme Court decided that, due to the bank's failure to expressly inform Mr Geys that it was summarily terminating his employment pursuant to the pay in lieu of notice clause, his employment contract did not end on 29 November when he was told he was summarily dismissed or on 18 December when the payment was made into his bank account. His employment contract did not terminate until 6 January 2008, the day on which Mr Geys was deemed to have received the bank's letter of 4 January confirming that it had exercised its contractual right to summarily dismiss and pay in lieu of notice.

The majority of the Supreme Court found that the bank's actions on 29 November 2007 amounted to a repudiatory breach of Mr Geys' contract and Mr Geys had a choice whether to accept the repudiation or treat the contract as still in force. Therefore, the fact that the bank was exercising its contractual right to pay in lieu of notice had to be specifically communicated to Mr Geys to validly terminate the contract.

Implications

If a decision is taken to terminate an employee's employment summarily under a contractual pay in lieu of notice clause, it is important to ensure that this is expressly communicated to the employee at the time of dismissal. Make clear to the employee that the employer has a right to make a payment in lieu of notice, that the employer is exercising that right, and that the contract of employment will be terminated as a result.

It is advisable to have a termination letter from the employer to the employee:

  • stating that their employment has been terminated in accordance with the relevant clause of the contract and/or staff handbook;
  • specifying the date on which the termination takes effect; and
  • stating the fact that a PILON has been made (or when the employer anticipates it being made) and how (for example, by cheque, BACS, and so on).

A failure to provide such clarity means that the employee could remain employed throughout the remainder of the notice period.