PILON: Employer pays the price for termination confusion

PILON: Employer pays the price for termination confusion

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Author: Kevin McCavish

The Supreme Court recently handed down an important decision affecting the operation of pay in lieu of notice clauses.

The benefits of a PILON

A pay in lieu of notice clause (PILON) is commonly found in employment contacts. A PILON generally give an employer the option of terminating an individual's employment with immediate effect by making a payment in lieu rather than waiting for the employee to actually work their notice.

The advantages of this for the employer include getting the employee out of the business away from customers and confidential information more quickly while ensuring that the contact is terminated lawfully, so that any restrictive covenants remain enforceable (because there has been no breach of contract by the employer).

A well drafted PILON will also make it clear that any such payment will be based on basic salary only and not the value of other benefits or bonuses. This makes it a cheaper option for the employer than allowing the employee to continue in employment during the whole of the notice period when they would be earning salary and continuing to enjoy and accrue other benefits.

There may be other reasons why an employer wants to terminate employment immediately, for example to prevent an employee from accruing the right to claim unfair dismissal or qualifying for a bonus scheme.

The facts

In the case, Societe Generale, London Branch v Geys, Mr Geys had a PILON which stated:

"SG reserves the right to terminate your employment at any time with immediate effect by making a payment to you in lieu of notice (or if notice has already been given, the balance of your notice period) based on the value of your: Basic annual salary; and Flexible benefit allowance."

On 29 November 2007 the bank called Mr Geys to a meeting and handed him a letter which said his employment was being terminated with immediate effect and that termination documentation would be provided to him. He was then escorted from the building and did not return. On 7 December Mr Geys' lawyer wrote to the bank asking about the termination sums it was offering to pay and saying that he was reserving all his rights.

On 10 December the bank sent him a termination agreement and on 18 December paid his three months' contractual notice pay to his bank account. However, the bank did not inform Mr Geys that it had made the payment or explain how it had calculated the amount of £31,899.

Although the evidence was that Mry Geys had become aware of the payment around 2 January, he did not receive his payslip and P45 setting out the various elements of the payment until 7 or 8 January 2008. On 4 January 2008 the bank sent a letter stating for the first time that they were exercising their right to make a payment in lieu. Mr Geys received this letter on 6 January 2008.

The matter in dispute was this: on what date had Mr Geys' contract of employment actually terminated? The answer mattered: if termination was before the end of 2007 Mr Geys was entitled to a pay off under his contact of Euro 7 million, but if it was in January 2008 it would be over Euro 12 million.

The decision

The Supreme Court held that Mr Geys had not in fact been dismissed until 6 January 2008 when he had received the bank's letter of 4 January stating that his employment had been terminated by payment in lieu and confirming that this had been credited to his bank account on 18 December.

Another important issue in the case was whether it was necessary for Mr Geys to accept the bank's fundamental breach of contract i.e. its purported summary dismissal of him on 29 November in order to bring his employment to an end - the "elective theory", or whether this occurred automatically without the need for acceptance - the "automatic theory". The Court's reasoning is beyond the scope of this article but it confirmed that the elective theory applies to employment contracts.

New implied term

One of the judges, Lady Hale, held that there was an implied term in a contract of employment that an employee would be notified by their employer,

".in clear and unambiguous terms that the right to bring the contract to an end is being exercised and, and how and when it is intended to operate."

Lady Hale considered that it was not good enough simply for an employer to make a payment to the employee so that they are required to regularly check their bank account to discover whether they are still employed. What was required was also notification from the employer that payment has been made and that this was in exercise of the contractual right to terminate the employment with immediate effect in accordance with the PILON. She went on to say that a wise employer would give this notification in writing.

In considering this, it is worth remembering that the PILON in this case was drafted so that the making of the payment to the employee was the act which terminated the contract. It should also be noted that implied terms can be overridden by express terms.

Comment

The Supreme Court's judgment suggests that employers should make a payment in lieu before or at the same time as actually notifying the employee that their employment is being terminated.

However, this will not always be practical. In reality many employers with similarly worded PILONs have previously purported to operate them by telling the employee they will be paid in lieu of notice but perhaps not actually making the payment until the next payroll run (which could be weeks afterwards). This will no longer be a safe course of action for an employer seeking to bring a contract to end as quickly as possible as they will risk extending the life of the contract until the date that the payment is actually made and the employee is told it has been made.

In addition, the Supreme Court's judgment puts an additional burden on employers to make sure they get the notification to the employee correct.

As this case shows, the actual date of the termination can be vital and failing to terminate the contract when they thought they were doing so can be very expensive for employers!

It remains to be seen how these principles will translate to statutory concepts such as the qualifying period for bringing an unfair dismissal claim but further litigation in this area seems likely.

However, it should be remembered that the Supreme Court ruled on the particular wording of Mr Geys' PILON; the position may very well be different for a differently worded clause. Employers should consider amending any similar PILON in their employment contracts to provide for immediate termination on notification to the employee that the PILON is being exercised rather than simply on the payment of the relevant monies.