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Employers Beware when exercising PILON Clause!

In Geys v Société Générale [2012] UKSC 63, UK's Supreme Court held that employers, when exercising their rights under a Payment in Lieu of Notice Clause ("PILON Clause") must give clear and unambiguous notice to the employee that they are doing so. Simply making the payment will not suffice. It further held that the contractual principle that a party's repudiation terminates a contract only if and when the other party accepts the repudiation, applies equally to employment contracts as it does to other types of contract, so that in the event of a wrongful summary termination of an employee's employment, the contract continues to exist unless and until the employee accepts the employer's breach (or is deemed to have accepted the breach) or the employer subsequently lawfully terminates the contract.


Geys had been employed by Société Générale as a managing director of its European Fixed Income Sales, Financial Institutions Division. His employment contract provided that his employment could be terminated on the expiry of three months' written notice by him to Société Générale or by Société Générale to him. It also provided that if Société Générale were to terminate his employment in circumstances other than those specified in the contract (which did not apply here), then Société Générale would pay him a Termination Payment within 28 days of termination. There were further clauses in the employment contract, the effect of which were that if Gey's employment was terminated after 31 December 2006 but before 1 January 2008, he would be paid X amount and if such termination was after 31 December 2007 but before 1 January 2009, he would be paid Y amount. The difference between X and Y was substantial.

On 29 November 2007, Société Générale purported to terminate Gey's employment, by handing him a letter, stating that they had decided to terminate his employment with immediate effect and would arrange for him to be provided with the appropriate termination documentation. He was escorted from the building and did not return.

On 18 December 2007, Société Générale sought to exercise a PILON Clause in the Staff Handbook (which formed part of Gey's employment contract) by paying Geys three months' salary into his bank account. They did not, however, notify Geys that they had done this until they wrote to him on 4 January 2008. Société Générale argued that Gey's contract had been terminated on either 18 December 2007 (the date on which they had paid three months' salary into his bank account), or, alternatively on 29 November 2007 (when they had handed him a letter stating that they had decided to terminate his employment).

The date when Gey's employment was terminated would have a significant bearing on the amount of termination payment he would be entitled to under his employment contract.

In relation to a termination date of 18 December 2007, Société Générale argued that the payment into Gey's bank account of three months' pay on that day was sufficient to exercise the PILON Clause and there was no need to also notify him that the Clause had been exercised. In relation to a termination date of 29 November 2007, Société Générale argued that where an employee's contract is terminated wrongfully, it is not open to the employee to elect whether to accept the employer's repudiatory breach (and thereby bring the contract to an end) or to affirm the contract and keep it in existence, rather, the contract comes to an end on the date of the wrongful termination.

Geys argued that his contract was terminated on 6 January 2008, the deemed date of receipt according to the Staff Handbook of Société Générale's letter of 4 January 2008.

The issues before the Supreme Court and its ruling in relation to each are as follows:

Does the repudiation of an employment contract by the employer, which takes the form of an express and immediate dismissal, automatically terminate the contract (the "automatic theory") or does the normal contractual rule apply, namely that the repudiation only terminates the contract if and when the other party elects to accept the repudiation (the "elective theory")?

The elective theory is to be preferred to the automatic theory because, depending on the terms of the contract, sometimes it matters whether the contract is terminated forthwith, or instead, survives until some further terminating event. The date of termination fixes the end of some contractual obligations and, sometimes, the beginning of others. An increase in salary may depend on the survival of the contract to a particular date. The amount of a pension may be calculated with reference to the final salary paid throughout a completed year of service. An entitlement to holiday pay may similarly depend on the contract's survival to a particular date. In some cases, an award of damages will compensate the employee for such loss, but it will often fail to do so.

The overall effect of the automatic theory was to reward the wrongful repudiator of the contract with a date of termination which he has chosen, no doubt as being, in light of the contract terms, the most favorable to him and, correspondingly, most detrimental to the other, innocent party to it. Under the automatic theory, the decision as to whether the contract is at an end is made beyond the control of the innocent party, whereas under the elective theory, it is for the innocent party to judge whether it is in his interests to keep the contract alive.

The contractual principle that the innocent party can elect whether to accept the breach or affirm the contract applies equally to employment contracts as it does to other types of contracts. Accordingly, if an employment contract is wrongfully terminated, the employment contract continues until the employee accepts the employer's breach (or is deemed to have accepted it) or the employer subsequently lawfully terminates the contract. In the present case, Geys did not accept the breach and his employment therefore continued until it was lawfully terminated by Société Générale when he received notice of the exercise of the PILON clause, on 6 January 2008.

When was Gey's employment contract terminated?

It was an obviously necessary incident of the employment relationship that a party is notified in clear and unambiguous terms that the right to bring the contract to an end is being exercised and how and when it is intended to operate. Both employer and employee need to know where they stand. They both need to know the exact date upon which the employee ceases to be an employee. In a lucrative contract, such as this one, a good deal of money may depend on it. But even without that, there may be rights such as life and permanent health insurance which depend upon continuing to be in employment. It is necessary, therefore, that the employee not only receive his payment in lieu of notice, but that he receive notification from the employer in clear and unambiguous terms, that such payment has been made and that it is made in 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 he is meant to do.

Such clear and unambiguous notification was not given in this case. It was not until 6 January 2008, when Geys must be deemed to have received Société Générale's letter of 4 January 2008, that the contractual right to terminate under the PILON method provided for in the Staff Handbook was validly exercised and his employment with Société Générale came to an end.

Was there any conflict between the provision for termination on three months' notice in the employment contract and the provision in the Staff Handbook, which gave Société Générale the right to terminate the employment at any time with immediate effect by making a payment in lieu of notice?

No. The employment contract set out a way of terminating the contract, but did not say that it was the only way. It used the word "can", which suggested that it was a course of action that Société Générale might take if it wanted to. But Société Générale reserved the right, in the Handbook, to use the PILON method. That provision in the Handbook could be read as qualifying the provision set out in the contract.

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