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24th May 2013

Legal Issues – Payment in Lieu of Notice

We are often asked by employers when terminating an employee’s contract of employment about exercising a contractual right to make a payment in lieu of notice (PILON) rather than give the employee their full contractual notice to end their contract of employment. This typically occurs when an employee is summarily dismissed shortly before they reach the qualifying period for being able to bring a claim for unfair dismissal. Employers are inclined to exercise a PILON clause in those circumstances to prevent the employee reaching the requisite period of service to bring such a claim by not working their period of notice.

This issue has recently been considered by the Supreme Court in Société Générale v Geys. Mr Geys was employed as the Managing Director of the bank’s European Fixed Income Sales division. The bank, on three occasions, tried to terminate Mr Geys’ contract of employment. Mr Geys was given a letter in November 2007 telling him that his employment was terminated with immediate effect. The letter made no reference to the PILON clause. Shortly after that, in December 2007, the bank then transferred a payment in lieu of notice into Mr Geys’ bank account. Finally, in January 2008, the bank wrote to Mr Geys explaining that it had exercised its rights under his PILON clause and gave Mr Geys a breakdown of the money it had paid into his account.

Mr Geys argued that as a result of the delay in his PILON payment, his employment did not end until January 2008. The precise date of termination of his contract was significant because if it was before the end of 2007 Mr Geys’ bonus entitlement would have been considerably less than if his employment actually ended in January 2008. The bank argued that Mr Geys’ employment ended in November 2007. Even if the contract of employment did not automatically terminate when it tried to dismiss Mr Geys summarily, the bank argued that it had ended when it exercised its right to make a payment in lieu of notice. However, the bank did not notify Mr Geys it was doing this at the time.

The Supreme Court ruled that Mr Geys’ employment had not been effectively terminated until January 2008 and he was therefore entitled to his bonus payment. The contract could only be terminated under the PILON clause if the bank made both the payment (or informed of the date when payment is to be made) and gave Mr Geys notice in ‘clear and unambiguous terms’ that it was exercising its right to do so and this did not occur until January 2008.

If the notice is given before the payment is made, the contract will terminate on the date of the payment. If it is given after the payment (as in Mr Geys’ case), the contract terminates on the date of the notice.

The only certain way of ending a contract of employment is to either give the full contractual notice, or exercise a contractual right to make a payment in lieu of notice. In either case it is important to tell the employee exactly what is going on. Often the quickest and most effective way of doing so is at a face-to-face meeting, when the necessary paperwork is handed over to confirm the employer’s decision.

This case highlights the importance of including a PILON clause in employment contracts. Such clauses allow an employer to end an employee’s contract immediately without acting in breach of contract. However, employers need to ensure that they properly exercise the PILON clause by:
• Notifying the employee of the termination of his or her employment with immediate effect under the PILON clause;
• Making the PILON payment; and
• Notifying the employee that the PILON payment has been made or informing them of when it is to be made.

Before exercising a contractual right to dismiss an employee by making a PILON, employers should be aware that an employee will technically remain employed until the date when (a) the PILON has actually been made; and (b) the employee has received clear and unambiguous communication of the decision to exercise the contractual right to terminate the employee’s employment by making a PILON.

The main lesson from this case for employers is to ensure that contractual termination provisions are properly exercised and that employees are left in no doubt as to why, how and when their employment is being terminated.

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24th May 2013