It is widely understood that an employment contract, unless otherwise agreed, cannot be immediately terminated simply because an employer or employee has had a change of heart or perhaps a sudden desire to pack their life into a rucksack and travel the world. Notice periods (to protect both employers and employees) feature in almost all employment contracts and their minimum length is understandably governed by the Employment (Jersey) Law 2003 ('the Law').

But what happens when either party could give, say, three months' written notice to terminate the employment contract in the normal way, but the employer could elect to make a payment in lieu of notice ('a PILON') purporting to terminate the employment contract immediately? Is that termination effective?

A recent case in the Supreme Court of the United Kingdom says not unless the employee is explicitly notified that the PILON clause has been exercised and informed when the payment has been or is to be made. This is an important case and is likely to be persuasive authority in Jersey.

The facts

Mr Geys was employed by Société Générale ('SocGen') and, as above, was subject to a contract where either party could give three months' written notice to terminate the employment but SocGen could terminate the same with immediate effect by making a PILON. The salient chronology was as follows:

(i) On 29 November 2007, Mr Geys was handed a letter by SocGen stating that his employment was being terminated with immediate effect and he was (hopefully, gently) escorted from the building;

(ii) on 18 December 2007, Mr Geys received a payment directly into his bank account from SocGen which was labelled "in lieu pay";

(iii) on 2 January 2008, Mr Geys, having not seen the payment from SocGen, wrote to them saying he was not accepting their breach of contract (purporting to terminate his employment without notice on 29 November 2007) and that he wished to affirm his contract;

(iv) on 4 January 2008, SocGen wrote to Mr Geys stating that it had given notice to terminate the contract with immediate effect and made a PILON on 18 December 2007; and

(v) on 6 January 2008, Mr Geys receives SocGen's letter of 4 January 2008. A dispute arose as to when Mr Geys' contract terminated. SocGen argued that the contract terminated either on 29 November, or at the very least, 18 December 2007 when it made the PILON. Mr Geys, on the other hand, argued that his date of termination was either 6 January or 29 February 2008 (expiry of the three months' notice period).

But why the big fuss and why did this matter go all the way to the Supreme Court? A significant amount of money. Mr Geys (described by Lord Sumption as "a lucky man") was claiming that he was entitled to a further â,¬4.5 million termination payment on top of the â,¬8 million calculated by SocGen as his employment was terminated after 1 January 2008. Clearly SocGen wished to establish that his employment terminated in 2007.

Decision

The Supreme Court (disagreeing with SocGen) held that Mr Geys' employment terminated on 6 January 2008 when he received the notification of the PILON and accepted that his employment had come to an end. Mr Geys had refused to accept termination of his employment before this date and the PILON did not dispense with the requirement for an employee to be notified of termination pursuant to that clause.

Although the Supreme Court's decision spans some 65 pages, in summary, the importance of this decision lies in its favouring of the "Election Principle" (whereby a contract only ends when the other party elects to accept the termination) over the "Automatic Termination Principle" (whereby a contract ends immediately and automatically upon repudiation by either party). The Supreme Court held that it would be manifestly unjust to allow a wrongdoer to terminate a contract by repudiatory breach if the innocent party wished to affirm it. Mr Geys was therefore entitled to decide whether to accept the breach by SocGen on 29 November 2007 (for dismissing him without notice) or affirm the contract.

The Supreme Court held that there was an implied term that the PILON was only effective if Mr Geys received the PILON and notification from SocGen, in clear and unambiguous terms, that the payment had been made and notification that it was made in exercise of the contractual right to terminate with immediate effect.

What this means

When exercising the right to terminate immediately under a PILON clause, employers must remember that the content of the letter terminating the employment is critical (as is the date the PILON is made). At the very least, the letter should refer to the relevant clause of the contract and specifically how and when termination, by PILON, is intended to operate.

It is also recommended that:

1. Employers review any contractual PILON clause in their contracts and/or handbooks to ensure that the effective contractual date of termination is clearly defined.

2. Legal advice be taken when drafting termination letters in conjunction with a PILON.

3. Employers elect to hand the employee a PILON cheque personally or expressly inform them when the PILON has been paid into their account to avoid potential uncertainty in relation to 1.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.