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Terminating An Employee’s Contract – The Expensive Way!

Terminating An Employee’s Contract – The Expensive Way!

Daniel Gunn

The Supreme Court has recently handed down its eagerly awaited decision in the case of Geys v Societe Generale, London Branch [2012] UKSC 63.  In this case, a majority of the Supreme Court overturned the Court of Appeal’s decision and upheld Mr Geys’ appeal. In doing so, the Supreme Court confirmed that where an employer repudiates an employment contract, the contract only comes to an end once the employee elects to accept that repudiation.

The facts

On 27 November 2007, Mr Geys, a senior banker, was informed by the Bank that his employment contract was being terminated with immediate effect.  Mr Geys’ contract allowed the Bank to make a payment in lieu of notice (“PILON”).  He subsequently received a payment directly into his bank account from the Bank on 18 December 2007 which was described on his payslip as “in lieu pay”. However, it was not until 4 January 2008 that the Bank wrote to Mr Geys confirming the amounts paid and that this payment was in lieu of his notice period.  Mr Geys was deemed to have received this letter on 6 January 2008.

Despite the above dates being merely weeks apart, the date of the termination of the contract was critical. Mr Geys stood to gain or lose approximately €4million, by way of a bonus payment, depending on whether his contract terminated in 2007 or 2008. As a consequence, the Bank argued that the date of termination was either November or December 2007, and therefore, Mr Geyes was not entitled to his bonus.  Mr Geys, on the other hand, argued that his date of termination was either 6 January 2008 or 29 February 2008, and accordingly, he was entitled to his bonus.

The decision

The Supreme Court held that where an employer repudiates an employment contract, the contract only ends if and when the employee elects to accept the repudiation as having this effect (the “Election Principle”).  The majority rejected the argument, accepted by the Court of Appeal, that the contract ended immediately and automatically upon repudiation by either party (the “Automatic Termination Principle”). Accordingly, the Court held that, as the contract had not automatically terminated upon repudiation and Mr Geys had not elected to accept the repudiation, his contract did not terminate until 6 January 2008 when the contractual right to terminate was correctly exercised.  Therefore, Mr Geys was entitled to his €4million bonus.

So what does this mean for employers and employees in practice?

It is clear that the judgment in this case has implications for both employers and employees. The following points should be considered when terminating an employment contract:-

  1. An employee must elect to accept a repudiatory breach of contract by the employer before the contract will terminate.  This means that an employer cannot, for the purposes of common law contractual claims, unilaterally bring an employee’s contract of employment to an end in breach of that contract.  Instead, the contract must be terminated in accordance with its own terms. This is particularly important in relation to senior employees, where employers may be tempted to terminate the contract prior to the employee becoming entitled to bonus payments.
  2. An employer must notify the employee in clear and unambiguous terms if they are exercising a PILON clause to terminate the employee’s contract of employment. The payment of a PILON directly into the employee’s bank account is not sufficient to correctly engage PILON provisions.  
  3. It would seem that Elective Principle could also operate in the employer’s favour.  If an employee breaches their contract, for example by resigning without giving the required notice, the employer may still accept the repudiation and treat the contract as being at an end.  However, following this decision, it appears that an employer can also elect to affirm the contract.  This could oblige the employee to observe their contractual notice requirements before any post termination restraints take effect, thereby potentially extending the period of restriction.
  4. This case also raises the possibility of arguing that the termination date for breach of contract claims may be different from the effective date of termination for the purpose of bringing a statutory claim of unfair dismissal.  This is because the Geys decision does not directly address the fact that the recent case of Gisda Cyf v Barratt [2010] UKSC 41 appears to apply the Automatic Termination Principle to claims of unfair dismissal.  It is difficult to see how these two Supreme Court decisions can be reconciled in light of the differing interpretations of when the contract of employment terminates.  On the basis of the Geys decision, where an employer looks to summarily dismiss and there is no PILON clause in the employee’s contract, an employee could elect to affirm the contract, rather than accept the repudiation with a view to attaining the necessary service to bring a claim of unfair dismissal.  More litigation on this is likely to follow.

The outcome of this case is legally complex and difficult to reconcile with previous decisions made in relation to the statutory right to claim unfair dismissal.  Nonetheless, it highlights the importance of ensuring an employment contract is terminated in accordance with the correct provisions, particularly when dealing with senior employees or employees nearing qualifying service for unfair dismissal claims.  It also demonstrates how important it is to ensure that where an employer intends to rely on a PILON clause, it clearly and unambiguously communicates this to the affected employee.  

Daniel Gunn