June 20, 2013

It’s reasonably common for employment contracts to include a clause giving the employer the right to terminate immediately by making a payment in lieu of notice (or a PILON clause for short).  The main advantage is that it gives the employer the ability to terminate the contract immediately without being in breach of contract, meaning that the employee will remain bound by any post termination restrictions in the contract.   The drawback, however, is that a PILON clause will mean that any notice payment is subject to PAYE (if there is no PILON, it is usually possible for notice pay to benefit from the £30k tax free exemption). However, the decision in Société Générale, London Branch v Geys [2012] has highlighted the importance of ensuring that PILON clauses are drafted carefully.  Mr Geys’ contract included a fairly standard clause giving the employer the right “to terminate your employment at any time with immediate effect by making a payment to you in lieu of notice.”  Although he was told in a meeting that his employment was being terminated with immediate effect, the Supreme Court found that the wording of the PILON clause meant that he was able to postpone his dismissal until the date when he actually received his notice pay and was notified that the company was relying on the PILON clause (which was about 3 weeks later).  This was good news for Mr Geys –delaying his dismissal meant that he was eligible for a further bonus payment of EUR 4.5 million. So what does this mean for the rest of us?  The key points are:-

• If the employment contract doesn’t include a PILON clause, the employee may be able to argue that their dismissal is ineffective if they are paid in lieu of notice rather than given their full period of notice.  So if your contracts don’t currently contain a PILON clause, it might be a good idea to think about including one.
• But you need to be careful about how any PILON clause is drafted.  Wording which could be interpreted as meaning that the dismissal is only effective once the payment has been made should be avoided.  Instead, it would be preferable for the clause to make it clear that the dismissal will be effective even if the payment is made a later date.
• Finally, if you ever decide to  invoke a PILON clause in order to terminate immediately, it will be important to ensure that you strictly comply with the terms of the clause.  In particular, it is likely that you will need to make it absolutely clear to the employee that the company is exercising its right under the PILON clause to terminate with immediate effect.

For further information please contact Marcus Rowland (marcus.rowland@wiggin.co.uk / 0207 927 9677) or Seth Roe (seth.roe@wiggin.co.uk / 01242 631 262)