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09 May 2013

Employers must give notice of payment in lieu of notice as well as payment itself

Employers contractually entitled to terminate an employee's contract by making a payment in lieu of notice (PILON), but fail to notify the employee they have done so, may find the employee can treat their employment as continuing. This is the case even if the contract of employment does not specifically require such a notice, the Supreme Court has ruled.

In Société Générale v. Geys, an employee was entitled to a significant payment on termination of his employment, which would be several million pounds more if termination occurred after 31 December 2007. His contract of employment required the employer to give him three months' notice of termination, but also provided (as employment contracts commonly do) that the employer could terminate his employment by making a payment in lieu of notice (PILON). The employment contract did not expressly say the employer had to give him notice if it made a PILON in order to terminate his employment.

On 29 November 2007 his employer gave him a letter purporting to terminate his employment with immediate effect, but without giving a reason. This was in breach of the requirement to give him three months' notice.

On 18 December 2007 the employer paid a sum into his bank account as a PILON but without giving him notice that it was exercising its right to terminate his contract by doing so. He did not become aware of this payment until early January 2008. When he realised, he immediately wrote to his employer saying he did not accept his employment had come to an end. His employer replied by letter on 4 January 2008, to the effect that it had terminated his contract and made a PILON.

The employee argued that even though his contract did not expressly say so, his employer was also required to give him notice if it made a PILON to terminate the contract, so he knew exactly where he stood. Making a PILON was not, on its own, effective to terminate his employment. On that basis, he argued that his employment was not terminated until 6 January – the date he was deemed, under the contract, to have received the employer's letter posted to him on 4 January.

The employer argued it was not necessary for it to give notice of the PILON as well as making the payment. The contract had therefore been terminated on 18 December at the latest, when it paid the PILON into his bank account.

Alternatively, it contended that if it should have given notice it was making the PILON, its failure to do so was a repudiatory breach of the contract. It said that, in the case of an employment contract, the effect of a repudiatory breach was that the contract was to be treated as terminating automatically in any event. The contract had therefore been terminated on 29 November 2007.

However, the usual effect of a repudiatory breach of a contract is that it does not automatically terminate the contract, but gives the other party the option either to terminate it or to treat it as continuing – to 'affirm' it.

The Supreme Court found for the employee. It ruled that there was an implied requirement to give 'an express and unambiguous' notice (whether in writing or orally), in addition to making the PILON, explaining that the PILON clause had been activated. Otherwise an employee might not only be unaware that his employment had terminated, but also that other benefits such as health and life insurance had ended too, which could have serious consequences. The employer's failure to give such a notice therefore amounted to a repudiatory breach of the contract.

The Court ruled that employment contracts were no different from other contracts in that a repudiatory breach did not automatically terminate an employment contract, but gave the employee an option whether to treat it as terminated, or to affirm it. The employee's letter in January refusing to accept his employment had ended was an affirmation of his contract. It did not therefore terminate before 31 December 2007.

Employment law partner Jo Davis outlines the following recommendations to employers:

• Employers should ensure an employment contract providing they can terminate it by making a PILON to an employee also contains provisions expressly saying they must give clear, unambiguous notice to the employee that they are making a PILON; why, and the date termination takes effect. It should also say how the notice is to be given (for example, whether it must be in writing or not). This could also affect staff handbooks, where these form part of the contract between an employer and employee.
• Employers should also be aware that a repudiatory breach of an employment contract does not automatically terminate it, but gives the employee an option whether to terminate it or affirm it. A termination amounting to a repudiatory breach of contract will not be an effective termination unless the employee agrees it is effective. If he or she does not, it will be treated as continuing.
• Employers should take specialist legal advice if there is any doubt about the grounds for terminating an employee's contract.

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