Termination by Payment in Lieu of Notice: When Does the Contract Terminate?

The Supreme Court has ruled that an employee’s contract continued until the date when he received unequivocal notice from his employer that it was exercising its contractual right to terminate by making a payment in lieu of notice.  Making the payment in lieu was not sufficient, by itself, to bring the contract to an end.

In Geys v Societe Generale, the Supreme Court had to consider when an employee’s contract of employment terminated.  G was told on 29 November 2007 that his employment was being terminated with immediate effect.  On 18 December 2007, his employer paid a payment in lieu of notice into his bank account but did not notify him that the payment had been made or what it represented.  On 4 January 2008, his employer notified him that it had made a payment in lieu of notice in exercise of its contractual right to terminate his employment with immediate effect. 

The Supreme Court had to consider whether his employment terminated:

• When the employer told G that it had decided to terminate his employment with immediate effect (29 November 2007); or
• When the employer made a payment in lieu of notice (in accordance with a contractual PILON provision) into his bank account (18 December 2007); or
• When the employer informed G that it had terminated his employment by making a payment in lieu of notice and had made the payment (4 January 2008). 

The termination date was important as if it was in 2008, G became entitled to an additional 4.5 million euros by way of bonus.

The Supreme Court rejected the employer’s argument that the employment terminated automatically upon its repudiatory breach on 29 November 2007, when it told G it was terminating his employment with immediate effect.  The Court agreed with the earlier decision of the Court of Appeal in Gunton v Richmond-upon-Thames LBC and held that the innocent party (in this case G) has the right to elect whether to accept the breach or to affirm the contract.  The contract will therefore only come to an end if and when the employee elects to accept the breach. 

On the question of whether making the payment in lieu of notice into the employee’s bank account had terminated the contract, the Supreme Court overturned the Court of Appeal decision and held that it had not.  It decided that G’s contract only terminated once the PILON had been made and he had received notification in clear and unambiguous terms that such a payment had been made in exercise of the contractual right to terminate with immediate effect.  This meant that his employment terminated on 6 January 2008, the date when he was deemed to have received the employer’s letter of 4 January 2008.  G was therefore entitled to the additional 4.5 million euros.

Employers relying on PILON provisions to terminate employment should therefore make sure that they tell employees that they are exercising that right and make the payment immediately.  Had the employee in this case been told on 29 November that his employment was being terminated pursuant to the PILON provision and been handed a cheque, his employment would have terminated immediately and the employer would not have been obliged to pay his bonus.

The Court's decision that an employer's termination in repudiatory breach of contract does not automatically bring the contact to an end resolves an issue that has been in doubt for many years.  It means that an employee can insist on keeping the contract alive where an employer purports to terminate in breach of contract, leaving the employer with no option but to terminate lawfully by giving contractual notice or making a payment in lieu where it has a contractual right to do so.  The inclusion of PILON provisions in contracts is therefore more important than ever.