Pay in Lieu of Notice: How Lucky Can You Get?

‘Mr Geys is a lucky man’, said Lord Sumption, opening his judgement in Societe Generale v Geys 2012 UKSC 63.

Societe Generale (SG) wanted to terminate Mr Gey’s contract immediately, to deprive him of £6m or so of bonus he would receive if his contract ran into 2008.

The contract provided that SG could dismiss immediately ‘by making a payment in lieu of notice’ (‘PILON’). So, on 29 November 2007, SG gave Geys a letter which said: ‘SG has decided to terminate your employment with immediate effect.’

No reason was given. Geys was taken to clear his desk and escorted from the building. His solicitors wrote to SG to reserve his rights and, later, to affirm his contract of employment.

The Supreme Court had to decide when Geys’ contract ended.  There were three possibilities:

  •  29 November
  • 18 December, when Mr Geys’ bank was credited with notice pay
  • 6 January, when SG told him in writing that he had been paid

SG made a mistake, a repudiatory breach of contract, by failing to make the payment in lieu of notice on 29 November. The PILON clause could only end the contract ‘by making a payment in lieu of notice’.

Is such breach sufficient itself to terminate the contract, on 29 November, or does it have to be ‘accepted’ by the employee before the contract ends? Is the ‘automatic theory’ or the ‘elective theory’ correct?

Lord Sumption argued for the ‘automatic theory’. He quoted Shaw LJ in Gunton v Richmond-upon Thames London Borough Council 1981 Ch 448:

 ’…there can be no logical justification for the proposition that a contract of service survives total repudiation by one side or the other.’

The contract, according to Lord Sumption, ended on 29 November.

The majority disagreed. The ‘elective theory’ was correct. As Geys elected to affirm the contract, the contract continued beyond SG’s repudiation until SG lawfully terminated the contract.

SG argued that this was on 18 December, when the payment in lieu was made. But Geys argued that the contract was not ended until he received, not only payment, but SG’s notification, on 6 January, that he had been paid.

Lady Hale held that payment in itself without notification is not sufficient. There is, she said, an implied term:

‘It is necessary … that the employee…receive notification from the employer, in clear and unambiguous terms, that such payment has been made and that it is made in the exercise of the contractual right to terminate the employment with immediate effect. He should not be required to check his bank account regularly in order to discover whether he is still employed. If he does learn of a payment, he should not be left to guess what it is for and what it is meant to do.’

So what does this case decide?

  • If an employer or an employee repudiates an employment contract, such repudiation is not effective to terminate the contract unless and until the innocent party accepts such repudiation or the contract is lawfully terminated
  • An employer making a payment in lieu of notice under a normal PILON clause does not terminate the contract until (a) payment is made and (b) the employee is notified of payment in accordance with Lady Hale’s implied term above.

Lord Sumption, dissenting, is right to warn that it is dangerous ‘to allow the law to part company with reality in this way.‘ The result is uncertainty.

First, there is a difference now between the common law date of termination and the statutory concept of the ‘effective date of termination’ (‘EDT’)(Section 97(1) of the Employment Rights act 1996), which sets time running for bringing an unfair dismissal claim, amongst other things. Rimer LJ, in the Court of Appeal, suggested that although the unaccepted repudiatory dismissal on 29 November did not terminate the employment contract, it would have been the EDT.

Secondly, imagine a dismissal for gross misconduct challenged by the employee. Months later, a tribunal decides that there was no gross misconduct. Under Geys, the dismissal was a nullity, the contract still subsists and there was no termination. There was no dismissal, still less an unfair dismissal. .

It may be that Geys was not just lucky; he will bring luck to many ex-employees!

 Geoffrey Bignell, Chairman of Just Employment Solicitors

Geoff Bignell, Solicitor, Just Employment Solicitors.

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