How to be a terminator, not hoisted by your own pilon

The UK Supreme Court has given a very important decision on what should be a straightforward matter – how to terminate an employment contract. The ratio of the case is very simple – employment will continue until the employee receives unequivocal notice that the employer is terminating the contract by making a payment in lieu of notice.

This case is of key relevance where electing to terminate an employee without full notice in order to avoid contractual rights such as bonuses or share options accruing during the notice period; it is not relevant to assessing the “effective date of termination” for the purposes of unfair dismissal legislation.

Facts

In the case of Geys v Société Generale[1], Mr Geys was told on 29 November 2007 that his employment would end “with immediate effect” and was handed a letter that confirmed this; but, the letter made no mention of any payment in lieu of notice (PILON) as required under his contract. It was not until 10 December that Mr Geys received a letter about his pilon, the amount of which Mr Geys disputed.

On 18 December – stay with this it’s good and could be you – a sum of money was paid into Mr Geys’s bank account, but with no explanation as to what the sum was for or how it was calculated. On 2 January 2008, Mr Geys, through his solicitors, asked about the payment made on 18 December and stated that by purporting to terminate the contract on 28 November 2007, in the absence of cause, and without a payment in lieu, the bank were in fundamental or repudiatory breach of contract, but that he was not accepting the breach, rather that he was affirming his contract and therefore remained employed.

It was only on 4 January 2008 that the bank set out in a letter to Mr Geys what its position was, namely that it had given Mr Geys notice terminating his employment with immediate effect on 29 November 2007 and thereafter had paid him his entitlement to pay in lieu of notice on 18 December. Mr Geys received this letter on 6 January 2006.

The sting

The bank threw money at this issue because, if Mr Geys was employed after 31 December 2007, he would be entitled to bonus payments worth €4.5 million; if his employment had been terminated on or before 31 December 2007, he would not be entitled to this money.

The bank argued that Mr Geys’s employment either ended on 29 November when he was told it was coming to an end, or, if later, on 18 December when the sum of money was paid into his bank account.

Back to law school

Can a repudiatory breach automatically terminate a contract?

No, a repudiatory breach has to be accepted as such by the innocent party to the contract in order to achieve an effective termination for common law purposes.

Can employment terminate on different dates for different purposes?

Yes, under common law, following a repudiatory breach the contract will continue until the innocent party accepts the breach and so brings the contract to an end.

Under statute (Section 97 Employment Rights Act), for unfair dismissal purposes, the “effective date of termination” can be immediate, being the date on which the employer has said the contract ends and no longer has any intention to continue to pay the employee.

Accordingly, in the case of Mr Geys, under common law his employment ended when he accepted the bank’s repudiatory breach on 6 January 2008, but for unfair dismissal purposes (calculating the 3 month time limit within which to bring a claim), the effective date of termination was 29 November 2007.

The bank’s “schoolboy error” cost them €4.5 million plus costs!

What to do now

Have clear termination/notice provisions in your contracts.

If you have a PILON clause ensure that it is clear how the PILON will be operated (e.g. whether it will be basic salary only or full notice) and that, when giving notice and terminating immediately by making a payment in lieu of notice, you refer to (preferably set out) the PILON clause and say when the payment will be made.

Be wary of exercising the option to unilaterally terminate in breach as this will only be an effective termination once the employee has elected to accept the breach as terminating the contract.

Richard Isham