If you’ve ever studied law, and feel nostalgic about wading through Supreme Court cases with multiple judgements dealing with the fundamentals of contract law (as opposed to still having anxiety dreams that you are taking your finals without having read any of the cases), take a look at Geys v Société Générale [2012] UKSC 63, which lays to rest the old “automatic/elective” controversy in relation to employment contracts…..or does it?

If you don’t have an essay to write, you can , of course skip reading Lord Sumptions’ dissenting judgment (no disrespect intended, but let’s stick to the ratio decidendi here, as we are in academic mode) and focus on Lady Hale and Lord Wilson’s judgements which plump for the elective theory. But what does this mean, I hear you ask? The effect, and the reasoning behind it, are that when one party commits a fundamental breach of contract, that contract does not automatically come to an end, but continues until the other party “accepts” the breach – so for example, if an employer unilaterally cuts an employee’s pay – the contract continues until the employee walks out in response to that breach. Sounds familiar. But what about the situation in this particular case?

Mr Geys was a banker. He had a contract which expressly allowed his employer to terminate the contract by making a payment in lieu of notice (PILON, for short). In November, he was called in, told he was sacked, and frogmarched out of the building with the traditional black plastic bag of personal effects. In December he received a large sum of money into his bank account – purporting to be the PILON, but with no breakdown of how it was worked out. He asked for a breakdown, via his solicitors, which he got on 6 January. So when did his employment end? According to the automatic theory, that would have been back in November. According to the elective theory, it was only when his employer had complied with its obligation to pay the PILON. It was no academic debate: a later termination date meant he was entitled to a more money. A lot more money. The Supreme Court, or at least a majority of it, considered that it is unfair for the party at fault to be able to dictate the termination date – and thus potentially reduce the damages payable. Fair enough.

What the Supreme Court didn’t discuss, was how this judgment might affect the date from which time limits are calculated for unfair dismissal purposes. This is known as the “effective date of termination”,. It has been established since 1974 that for statutory purposes, where a contract is terminated by payment of a PILON this will be the date of dismissal –  not when notice would have expired, had it been given (see  Dedman v British Building & Engineering Appliances Ltd, Court of Appeal, [1974] ICR 53 where you can further indulge your nostalgia by reading a Lord Denning judgement, if you feel so inclined)

So we are left in the position that in a situation like the present (by no means an uncommon one) there could be two termination dates –one for calculating contractual damages (likely to be the more substantial for higher paid employees) and another for working out time limits to make an unfair dismissal claim.

One action point for employers who use PILONs to come out of this case comes from the finding by Lady Hale that a PILON won’t be effective to terminate employment until the employee knows it a payment has been paid, and how that payment has been worked out:

“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 a payment has been made and that it is made in the 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 it is meant to do.”

So, employers, where you are making a payment in lieu of notice, make sure you set out in writing how the payment is worked out no later than the point at which you want employment to end – otherwise you may find you have not, in fact, ended the contract.