Termination of employment contracts and PILON clauses – clarification of the method and date of termination

12 April 2010

In Geys v Societé Genérale, London Branch [2010], the High Court held that an employment contract will not be terminated under a PILON clause until the employer has unequivocally communicated its decision to terminate the contract in this way.

Facts
Raphael Geys was a senior employee of the Respondent bank. His contract provided that if his employment was terminated, without any fault on his part, he would receive a “termination payment” and, in return, he would sign a “termination agreement”.

On 29 November 2007 Mr Geys’ employment was terminated “with immediate effect” and he was escorted from the bank. On 18 December 2007 the bank made a payment of around £32,000 into Mr Geys’ bank account, without providing Mr Geys with any notice or details of this payment. He concluded that it was a payment in lieu of his notice.

On 2 January 2008 Mr Geys’ solicitors wrote to the bank stating that their client had “decided to affirm his contract of employment” and asked for clarification of the nature of the payment. On 4 January 2008 the bank replied confirming that they had given notice to terminate Mr Geys' employment on 29 November 2007 and that his pay in lieu of notice had been credited to his bank account on 18 December 2007. The bank calculated Mr Geys’ termination payment to be in the sum of €8 million whereas Mr Geys argued he was entitled to €12 million, the difference being due to a disagreement over the date when Mr Geys’ contract ended.

The main issue before the Court was therefore to consider the steps an employer needs to take in order to terminate an employee’s contract under a PILON clause as well as at what stage termination in fact occurs.

Decision
The Court decided that Mr Geys’ employment contract effectively terminated on 6 January 2008; this was the date that he received the letter from the bank dated 4 January 2008 confirming that he had been paid in lieu of notice.

The dismissal on 29 November 2007 amounted to a repudiatory breach of contract, as the bank did not have any justification for terminating Mr Geys’ employment. However, this breach did not automatically terminate the employment contract as Mr Geys had a choice to accept the repudiation or to treat the contract as still in force. For the bank to treat the contract as terminated Mr Geys was required to “clearly and unequivocally” convey his acceptance of the repudiation. However, Mr Geys chose to affirm his contract, which he did on 2 January 2008. The Court considered that it had been made “abundantly clear” to Mr Geys that he was not able to return to work and therefore he was “entitled to a period of time in which to consider his position.”

Further, the payment of money into Mr Geys account on 18 December 2007 did not terminate his contract. In order to effectively terminate Mr Geys’ employment the bank had to specifically inform him that it was exercising its contractual right to provide a payment in lieu of notice. This did not happen until the bank’s letter of 4 January 2008 was received by Mr Geys on 6 January.

Comment
This case provides useful clarification of some of the issues surrounding PILON clauses.

It confirms that PILON provisions have to be fulfilled in order to effectively terminate employment contracts early and it specifically highlights the importance of detailed and effectively drafted PILON clauses and termination letters. If the termination letter sent on 27 November 2007 had unequivocally confirmed that the bank was exercising its contractual right to make a payment in lieu of notice, the termination of Mr Geys’ employment would have been effective from the date he received the letter thereby saving the bank a significant amount of money. Advice should be taken to ensure that such documents are comprehensively drafted in order to avoid the sort of difficulties faced by the bank is this case.

This case also reaffirms the principle that postal notice of the intention to provide a payment in lieu of notice is only effective on the date the notice is received or deemed to be received by the employee. The date on which the employment contract is deemed to be terminated can be crucial not only to the amount of any termination payment due, as here, but also as to acquiring continuity of service.