This article was originally written for and featured in the Employment Law Journal.
Failing to follow the correct procedure for dismissing an employee can mean that the employment contract continues, with potentially costly consequences, warns Tom Custance
On 19 December 2012 the Supreme Court delivered its judgment in Société Générale, London Branch v Geys. The case highlights a number of important issues on the termination of employment contracts.
Société Générale (SocGen) employed Raphael Geys in 2005 as managing director of European fixed income sales in its financial institutions division. His contract contained performance-related bonus provisions and provided for a termination payment linked to previous years’ bonuses. On 29 November 2007, SocGen purported to terminate Mr Geys’ employment without cause and with immediate effect. It was not entitled to do this as his contract contained a three-month notice provision, making the purported termination a repudiatory breach of his contract.
On 18 December 2007, SocGen sought to exercise a PILON (payment in lieu of notice) clause by paying Mr Geys’ three-month notice pay into his bank account. However, it did not notify Mr Geys that it had done this until it wrote to him on 4 January 2008. This was significant because if Mr Geys’ contract terminated in 2008, rather than 2007, the termination payment under his contract would be almost €2m higher. SocGen therefore argued that his contract terminated either on 29 November or 18 December 2007. Mr Geys’ case was that his contract terminated on 6 January 2008 (the deemed date of receipt of SocGen’s letter dated 4 January 2008).
SocGen’s argument for a termination date of 29 November 2007 was that, where there is a wrongful dismissal or resignation that is ‘express and immediate’, the contract terminates automatically. It is not open to the innocent party to elect whether to accept the other party’s repudiatory breach (and thereby bring the contract to an end) or to affirm the contract and keep it in existence. The company’s argument for 18 December 2007 was that the payment into Mr Geys’ bank account of his notice pay on that date was sufficient to exercise the PILON clause: there was no additional requirement to notify him that the clause had been exercised.
The court’s decision
The Supreme Court rejected both of SocGen’s arguments by a majority of four to one. The argument that the contract terminated on 29 November 2007 raised a debate that the court described as having been ‘simmering’ for the last 60 years, namely whether employment contracts are in a different category from other contracts in the case of repudiatory terminations.
The court has now comprehensively ended this debate, holding that the standard contractual principle that the repudiated contract is not terminated unless and until the innocent party accepts the repudiation, applies in the employment context as with other contracts. Accordingly, in the event of a wrongful summary termination of an employee’s employment, the contract will continue to exist unless the to have accepted) the employer’s breach or the employer subsequently terminates the contract lawfully. In this case, Mr Geys did not accept the breach (and, indeed, wrote to SocGen expressly affirming the contract) and his employment therefore continued until it was lawfully terminated when SocGen gave him notice of the exercise of the PILON clause on 6 January 2008.
In reaching its conclusions, the court highlighted the unfair advantage to the employer if it is able wrongfully to terminate a contract on a date that suits it, for example shortly before the employee is due to receive a bonus or salary rise, or is about to complete another year’s service that would increase their pension entitlement. The fact that the employee can sue for damages if their contract is terminated unlawfully will not always provide an adequate remedy. This is because of the principle that the damages should only reflect the employer’s decision to repudiate the contract unlawfully, as distinct from a hypothetical lawful termination of the contract that benefits the employer. Applying this principle to Mr Geys’ case, SocGen could in fact have terminated his employment by a proper exercise of the PILON clause on 29 November 2007, so his entitlement to damages would have been nominal. This example reinforced the court’s view that the employer should not be allowed to profit from its wrongdoing and that therefore the employee is entitled to elect whether or not to accept the employer’s breach. In Mr Geys’ case, this meant that he was able to preserve his entitlement to a significantly higher termination payment.
Turning to the PILON clause issue, the court held that it is a necessary implied term that an employer should give the employee clear and unambiguous notice that it has exercised a PILON right and inform the employee when and how it intends to operate it. As the court commented, this is not an unreasonable requirement to place upon an employer. If notice is not needed, employees would be left having to check their bank accounts regularly to see if they have been dismissed, or if they learn of an unusual payment into their account, would have to guess what it is for. Also, in the absence of notice, employees could be unaware that their life and health insurance have been terminated (together with their employment) as a result of a PILON payment, with potentially serious consequences.
The court’s decision means that termination under a PILON clause will only be effective if the employer explicitly notifies the employee that it has exercised the clause and informs them when it has made or is to make the payment. If it gives the notice before it makes the payment, then the contract terminates on the date of the payment. If (as in Mr Geys’ case) the employer gives the notice after the payment, then the contract terminates when the notice is received (or deemed to be received). Unless the contract requires this, the notice does not have to be in writing, but in practice it clearly should be to avoid ambiguity and subsequent argument.
Implications for employers
The obvious lesson from this case for employers is to ensure that they properly implement contractual termination provisions and expressly and unambiguously inform employees of why, how and when their contract is being terminated. As the court pointed out, SocGen could easily have done things properly and avoided the problems it got itself into, with its two unsuccessful attempts to terminate Mr Geys’ employment before the end of 2007, It could thereby have saved itself a lot of money. Given that coordination between line managers, HR departments and external lawyers in decisions to terminate employees is not always as good as it could be, Mr Geys’ case provides a salutary example of the expensive consequences of getting that process wrong.
Employers and their advisers may need to review contracts and staff handbooks to identify and correct any inconsistencies or ambiguities relating to termination. Further, if employers do seek to terminate with immediate effect for cause (which was not the case with SocGen and Mr Geys), they need to be confident that they are within their rights to do so. Otherwise, if the employee successfully contests the termination, the contract will continue unless they accept or are deemed to have accepted the employer’s repudiatory breach. Accordingly, if the employer is in any doubt about its grounds for termination, it may be better advised to play safe and terminate on notice or exercise a PILON clause. This may mean that there will now be a move by employers to shorten the notice periods that they are required to give their employees.
An issue left unresolved by the Supreme Court’s decision on wrongful termination is the question of deemed acceptance by the employee of the employer’s repudiatory breach. An employee who is marched out the door is not realistically going to be returning to work and the courts will not compel the employer to reinstate them. So there may well be an argument about whether the employee’s actions after that point constitute a deemed acceptance of the employer’s breach. While the court’s judgment gives no specific guidance on this, it does criticise previous case law to the effect that acceptance of a wrongful repudiation should be easily inferred.
As the court commented, there is no point giving the innocent party the right to elect whether to accept the repudiation and then depriving that right of any real value by readily inferring that the employee has accepted the breach. Employees will no doubt rely heavily on this comment in future cases: watch this space.