Immediate termination: How loose threads can unravel

March 11, 2013

A recent Supreme Court decision will have a significant impact on how employers terminate employees’ contracts.  Fashion Focus explores how some contracts, which are often fairly basic in the fashion industry, could be problematic for employers, but provide an opportunity for employees.

Until Geys took Societe Generale all the way to the Supreme Court, it was assumed in many quarters that one of an employer’s options when terminating a contract of employment was to do so in breach of contract. The employer would then negotiate a compensation payment with the employee from a position of economic strength. Yes, restrictive covenants, such as whether an employee could go and work for a competitor, fell away on the employer’s breach, but these could always be reinstated as part of the negotiation.

That option is now much riskier.  An employee may decide that there is an advantage in affirming the contract, which the decision in Geys says he is entitled to do where his employer dismisses in breach of contract.  For example, if a later termination date might result in entitlement to a bonus, share options or the like arising, keeping the contract alive may prove very rewarding for an employee (as it was for Mr Geys).

What should an employee look for?
An employer can give notice and have the employee work out his notice, or perhaps put him on garden leave (but usually only if that right exists in the contract). There is no breach there. However, if the contract does not contain a payment in lieu of notice (PILON) clause, any immediate termination by the employer without cause will be a breach of contract. Affirmation may then be possible, and productive, for the employee. The employee should however be careful that he does not act in such a way that he is treated as having accepted the employer’s breach (although not turning up for work after dismissal is unlikely to amount to acceptance).

For the employer, the only way to terminate the contract immediately without cause is to ensure there is a PILON clause in the contract. The employer should follow this to the letter, making payment in accordance with the clause and ensuring that the employee is informed in clear and unambiguous terms that their employment is being terminated in exercise of this contractual right.

Anything less could be problematic for the employer, and lucrative for the employee.


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