January 13, 2014

A note for employers: how to handle notice periods – Part 2

To recap, you can view Part 1 here. In this part 2, we focus on payments in lieu of notice - or as they are more commonly known, “PILONS”, drawing on some points from the case of Société Générale, London Branch v Geys (“Geys”).

PILONs can be tricky. As a quick reminder: some employment contracts contain a clause (the PILON) which enables an employer to terminate the employee’s role immediately and pay their notice pay as a lump sum.

However, if an employer makes a PILON and it doesn’t have the contractual right to do so, this will amount to a repudiatory breach of contract on the part of the employer. A repudiatory breach means that the employee has two options - accept the breach and end the contract, or ignore the breach and continue with the contract. If the employee accepts the breach and ends the contract, the employer can no longer rely on any terms of the employment contract. Getting it wrong can therefore have important implications potentially freeing employees from post-termination restrictions and leaving it open for them to claim breach of contract.

As a brief overview, Mr Geys was dismissed by Société Générale, who chose to terminate his employment by exercising the PILON in his contract. However, Société failed to exercise the PILON correctly in accordance with his contract. Here the arrangement with Mr Geys was that his termination date would be effective as soon as the PILON was paid to him and not on the date he was told that Société would be exercising the PILON (his contract allowed for the latter). This amounted to three weeks difference.

Geys also confirmed that a repudiatory breach does not automatically terminate the employment contract; rather the employment contract will only be brought to an end if the innocent party accepts the breach and communicates that he or she no longer wishes to continue with the contract. In this case the employee did not accept the breach – and as a consequence the employer could not rely on its restrictive covenants in the contract.

For employers, the decision in Geys still has many implications and still leaves many questions unresolved about PILONs. But, to minimise the risk of unforeseen consequences, employers should ensure they:

•   Check the terms of their contracts, including any contractual policies, to ensure that the mechanics for giving notice are observed.
•   Where an employer decides to exercise a contractual right to terminate an employee’s employment by making a PILON, they should make it clear that they are exercising the right to make a PILON in accordance with their contract.
•   If an employee ever challenges whether they have been given notice correctly, as Mr Geys did, it is important to see whether there is any merit in the employee’s argument, so we would encourage you to take legal advice.

If you would like any further assistance on the implications of Geys and PILONs, please contact a member of our Employment team.

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