The Supreme Court has held that a termination was not effective when the employee was notified that he was being dismissed with immediate effect or when PILON monies were paid into the employee's bank account. It was necessary for the employer specifically to notify the employee that it was making a payment in lieu of notice. The Supreme Court also held that a repudiatory breach of contract does not automatically terminate the contract - the contract is terminated only when the innocent party elects to accept the breach.

Geys v Société Générale, London Branch

Mr. Geys' employment contract provided that either party could give three months' written notice to terminate his employment. The contract also included a payment in lieu of notice ("PILON") clause which provided:

"[The Bank] reserves the right to terminate your employment at any time with immediate effect by making a payment to you in lieu of notice..."

The main dispute focused on the date when Mr. Geys contract terminated. If the termination was in 2008, rather than 2007, he would be entitled to a significantly larger termination payment, (by some GBP4.5 million). The key facts were:

  • On 29 November 2007 the Bank notified Mr. Geys in a meeting that they were terminating his employment with immediate effect. He was given a letter confirming this and then escorted from the building. He did not return.
  • On 18 December 2007 the Bank made a PILON into his bank account without advising him that the payment was to be made or what it constituted. However, Mr. Geys accepted that his "best guess" at the time was that the money was a PILON.
  • On 2 January 2008 Mr. Geys' solicitors advised the Bank that he had "decided to affirm his contract of employment".
  • On 4 January 2008, the Bank wrote to Mr. Geys stating that it had given notice to terminate his employment with immediate effect in November and that his pay in lieu of notice had been credited to his bank account in December.

The High Court held that Mr. Geys' contract was not terminated until Mr. Geys had received both the PILON and been notified that the PILON had been made, which had not been until the 4 January letter. On appeal, the Court of Appeal held that the termination was effective when the PILON monies were paid into the Mr. Geys' bank account and it was not necessary to notify him that it was making a payment in lieu of notice. Mr. Geys appealed.

Supreme Court's judgment

It was accepted by the Bank that it did not properly exercise the PILON clause when it told Mr. Geys that his employment was terminated with immediate effect on 29 November 2007 as no payment in lieu was made at that time. Therefore the Bank's dismissal on that date amounted to a breach of contract.

The first question for the Supreme Court was whether this automatically brought Mr. Geys' employment to an end (the "automatic theory") or whether it only brought his employment to an end if he accepted the repudiatory breach as bringing his contract to an end (the "elective theory"). The majority of the Supreme Court held that the elective theory applies to employment contracts. Therefore Mr. Geys' employment did not terminate on 29 November 2007. On the facts, he had not accepted the breach as bringing his contract to an end.

The question then was when did the Bank lawfully bring Mr. Geys' employment to an end under the terms of the PILON clause? The Bank argued that the Court of Appeal was correct to find that this happened on 18 December, when the payment was made to Mr. Geys. The PILON clause was clear that making the payment would terminate Mr. Geys' contract. However, the majority of the Supreme Court disagreed. They held that it was an implied term of Mr. Geys' contract that in order to operate the PILON clause Mr. Geys had to receive notification from the employer, in "clear and unambiguous terms", that such a payment had been made and that it was made in the exercise of the contractual right to terminate the employment with immediate effect.

The combined effect of these findings was that Mr. Geys' contract was not terminated until 6 January 2008, when he was deemed (under the contract of employment) to have received the notification sent on 4 January that the PILON had been made.

Comment

The decision has significant implications for employers when terminating employment under a PILON clause.

What does an employer need to do to terminate under a PILON clause?

This will depend on the wording of the clause. In this case the PILON clause allowed the employer to terminate "by making a payment in lieu" i.e. it was the act of making the payment that would bring the contract to an end. Other clauses are worded differently and may permit termination before the payment is actually made. However, whatever the contractual wording, the effect of the Geys judgment is that an employer must clearly notify the employee that it is exercising the PILON clause, and also be clear about when employment will terminate. This is an obligation which will be implied into all contracts, at least unless it is expressly excluded.

What is the effect of not operating the PILON properly?

If the employer notifies the employee that his employment is terminated but does not properly exercise the PILON clause, or where there is no PILON clause, then (in the absence of gross misconduct) the employer will have dismissed unlawfully and will be in breach of contract. This means that the employee has two options:

Accept the breach as bringing his employment to an end

The employee can accept the breach as bringing his contract to an end and will be entitled to damages for loss of salary and benefits during his notice period, (which may or may not be quite the same as his entitlement under the PILON clause). However, if he does so the employer will have terminated employment unlawfully and any post termination restrictions will be unenforceable. The Supreme Court noted that the rule that post termination restrictions fall away if the employee is dismissed unlawfully is "the subject of some debate". However, it is likely to need a decision of the Supreme Court to change the position.

Affirm the contract of employment

The employee can affirm his employment contract and his employment will continue. In those circumstances:

  • his employment will continue until it is lawfully brought to an end. The High Court decision in this case suggested that the unlawful attempt to terminate would be sufficient to start the notice period running, but that was not considered by the Supreme Court;
  • in the interim, it appears that the Supreme Court accepted that the employee will not be entitled to receive salary and wages, but the position in relation to benefits is less clear; and
  • previous case law suggests that the effective date of termination (for the purposes of working out whether the employee has sufficient service to bring a statutory unfair dismissal claim and how soon they must present a claim), would be the date when the employee is notified that his employment terminates, (notwithstanding that he has elected to affirm the contract).

What should employers do now?

Employers should review the wording of any PILON clauses in their existing contracts and understand what steps they need to take to terminate the contract. They should review their process for terminating under a PILON clause in the light of those requirements.

Employers should also consider whether they need to change the wording of their PILON clauses for future contracts. Many employers will find it impractical to make a payment to an employee on the date when their employment terminates, and clauses can be drafted to make clear that employment terminates when the employee is notified that a PILON is to be made, with the payment following within a specified period.