UK: Termination Of Employment - The Importance Of Getting It Right

A pay in lieu of notice clause (PILON) is a useful tool to end employment immediately without the need to serve notice. Used properly, it can be effective but, as Société Générale found this week, if mistakes are made it can be expensive. In Société Générale London Branch v Geys, the Supreme Court ruled that it was not sufficient to terminate the employment of one of its senior employees by merely paying the notice monies into the employee's bank account without informing him that it had been paid. Often an employer will want to select a termination date before a rise in pay, bonus or pension entitlement takes place – it will therefore be essential that the employer gets it right and effects a termination in a clear and unambiguous way.

What happened in this case?

In this case, Société Générale (the "Bank") attempted to take advantage of a PILON clause in Mr Geys' contract by calling him to a meeting on 29 November 2007 and handing him a letter stating his employment was terminated with immediate effect. Mr Geys was then escorted from the building and did not return.

The date on which his employment was terminated was significant since after 1 January 2008, he claimed he became entitled to a further €4.5 million termination payment on top of the €8 million calculated by the Bank.

In early December, the Bank sent him a severance agreement and a list of payments which the Bank proposed to pay and then duly made a payment on 18 December of £31,899 into his bank account. The Bank sent him a payslip immediately showing the payment but Mr Geys only saw it in early January 2008. On 4 January 2008 the HR Director sent Mr Geys a letter confirming his termination date (29 November 2007) and informing him the PILON was paid on 18 December.

Mr Geys brought a claim for breach of contract and disputed the amount of the termination payment owed to him. One of the Bank's arguments was that the contract terminated on 18 December, the date on which it transferred the PILON into Mr Geys' bank account. The Court of Appeal agreed with this argument and ruled that termination took effect on 18

December 2007. It is important to note that the Court of Appeal did not agree with the Bank's initial argument that the employment terminated on 29 November – when Mr Geys was handed a letter of termination and marched out of the building. The Court of Appeal said that it was bound by the common law principle that, for a contract of personal service, a repudiatory breach (such as that demonstrated by the Bank on 29 November) only terminates a contract if and when accepted by the innocent party. Since Mr Geys did not accept the breach, the Bank's actions on 29 November did not terminate his employment.

The Supreme Court disagreed with the Court of Appeal as regards the effect of the payment into Mr Geys' bank account. The Supreme Court held that the right to terminate under the PILON clause was not validly exercised until 6 January 2008, when Mr Geys received the HR Director's letter confirming the purpose of the payment into his bank account. The PILON clause did not dispense with the requirement for an employee to be notified of termination. The employment relationship requires clear and unambiguous notification that the right to end the contract is being exercised, and how and when it is intended to operate.

What this decision means to employers

When exercising the right to terminate immediately under a PILON clause, employers should remember that the letter terminating employment must be a clear and unambiguous notification that the right to end the contract under the PILON clause is being exercised. It should refer to the clause of the contract and state specifically how and when termination, by payment of the PILON, is intended to operate. This will be essential if the particular date of termination is critical to the employer's liability to make a payment e.g. for bonus or pension entitlement. The best way to secure termination in this situation is to hand the employee a cheque for the notice monies, or tell them the amount will be in their account that day. That way the employer will not be in breach of contract and the employment will end lawfully even if the employee objects.

In practice, if the date of dismissal is not critical, an employer in this situation may wish to withhold payment in lieu in order to secure the employee's agreement to a compromise agreement settling all contractual and statutory rights.

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.