The recent case of Societe General v Geys [2011] EWCA Civ 307 has highlighted the need for companies to check the existence of ‘pay in lieu of notice clauses’ (‘PILON’) in employment contracts and the effects they have on both the employer and employee on termination of a contract – the effects can be substantial.
Mr Geys was a Managing Director in the sales department of the bank’s Financial Institutions Division. He was employed for two years and six months until his summary dismissal. Under the contract the bank was required to pay a ‘termination payment’. On the Bank’s construction of the date of termination, the payment was said to be €8 million. However Mr Geys brought a contract claim (not in the Employment Tribunal) for breach of contract and wrongful dismissal whilst submitting he was owed €12 million.
The Court was asked to assess the PILON clause and whether it had been validly executed and whether notice had been served properly. The date of service would have a significant financial impact on Mr Geys. If, as he asserted, the PILON clause came into effect when he says it was, he would benefit by €4 million.
The Bank submits they terminated Mr Geys contract in November 2007, which would put them in repudiatory breach of contract. They further submitted that in response to this breach they made a payment in lieu of notice in accordance with the contract of employment. Mr Geys on the other hand submitted he did not accept the breach and was not validly served notice of termination until January 2008. The sticking point is that the PILON payment was made in December 2008, further to this point, Mr Geys stated he had penumbral knowledge of a payment being made into his bank account before the end of 2007.
The Court of Appeal also considered the statutory concept of the ‘effective date of termination’ (‘the EDT’) used in unfair dismissal claims and whether this had any effect on termination at common law. Lord Justice Rimer concluded the two are entirely separate and can co-exist – albeit with different dates.
Rimer LJ held that on proper construction of the PILON clause, there was no need to give express notice of termination and therefore Mr Geys’ (for the purposes of common law) ended when payment was made into his bank account. The Court held there had been a valid termination of the contract when the payment was made due to the clause which stated:
“The Bank reserves the right to terminate your employment at any time with immediate effect by making a payment to you in lieu of notice”
the Court of Appeal rejected the earlier decision of the Judge in the High Court who stated that notice was effective when validly served – not when payment was made. Applying the clause in the contract there was no need for notice and the High Court had essentially implied a notice requirement into the contract. Rimer LJ stated it is not for a Court to do so and no notice or PILON clause will be implied into a contract where it is not clearly expressed.
It appears the Court have taken a new line into when a contract is terminated at common law. It is not when notice was validly served; rather, it can be when a PILON payment was made into the bank account even though Mr Geys was not expressly told what the payment’s purpose was.
In general, PILON clauses have different tax consequences for an employee. If a PILON payment is made, it is subject to the usual income tax and national insurance deductions. Where there is no PILON clause and the employer is in repudiatory breach, payment will be made on the basis of damages for wrongful dismissal where the first £30,000 is tax free and national insurance deductions will not be applied.
Whilst the sums in this case may not be typical of the majority of contract terminations, it tends to highlight the effect clauses can have on the outcome of a claim of this nature. The Court has also decided that the date of termination in common law can be different from the EDT for unfair dismissal., in order to avoid confusion and possible claims being made, clear wording and requirements are needed in employment contracts, employers should therefore consider:
1. When they give notice to terminate – this should be clear and unequivocal;
2. When payment is made – preferably on or as close to the date the notice was served; and
3. Whether they have any contractual obligations to use reasonable endeavours to make payment in a tax efficient manner.
Whilst it is important for employers to remain flexible in terminating an employee’s contract especially where notice is served, in practice and for the sake of clarity all steps taken should be in writing and the employer should communicate with the employee fully.
Georgina Kyriacou is Partner and head of employment department at Colman Coyle
