Termination date: Employee must accept employers repudiation in order to terminate contract

15 January 2013

In the case of Societe Generale v Geys, the Supreme Court has overturned the Court of Appeal decision (which we reported on in May 2011) as to the date on which an employment contract terminates when the employer wrongly exercises a contractual right to terminate by giving a payment in lieu of notice (PILON).

The facts in this case were unusual. The employer was entitled, under the terms of the employment contract taken together with its Staff Handbook, to terminate the contract with immediate effect and make a PILON.
In fact, the employer handed the employee a letter which stated that his contract was terminated ‘with immediate effect’ on 29 November, made the PILON three weeks later on 18 December, and only sent the employee a letter confirming what it had done on 6 January.

Which date did the contract terminate on?

The Supreme Court says that, in this case, the employer was in breach of contract by not making the PILON on 29 November. This was a repudiatory breach of contract. Also, the employee was only formally notified on 6 January that the employer was purporting to exercise its contractual right to terminate the contract with immediate effect.

As the employee had reserved his rights in the meantime, he could choose to say that it was only on 6 January that he had accepted the repudiatory breach as terminating the contract.

This meant that his contract terminated on 6 January (and not earlier) and so he could claim a substantial year-end bonus.

Points to note –

• In most cases, where an employer has wrongfully dismissed an employee (ie in breach of a contract term), the employee will accept the dismissal as terminating the contract then and there and sue for damages. What the Supreme Court is saying is that the employee does however have a choice. If it is in their interests to keep the contract ‘alive’ (as in this case for the sake of a year-end bonus) they may do so. Otherwise the employer would be benefitting from its own breach of contract.

• In order to avoid such problems arising, employers should not only ensure that the contract/staff handbook includes the right to terminate a contract with immediate effect and make a PILON, but also that, when exercising the right, they make it clear to the employee at the time that they are so doing. Employers should check their termination procedures and also make sure that they are properly implemented.

• The question here was when, as a matter of contract law, the contract terminated. This is a different question from asking when was the ‘effective date of termination’ (EDT) under the Employment Rights Act. If an employee wants to claim unfair dismissal, the claim must be made within three months of the EDT. In this case, the EDT was 29 November, the date on which he was summarily dismissed. An employee must know the EDT of his contract but, as can be seen in this case, need not necessarily know the date on which his contract terminates for common law purposes and it may not necessarily be the same date.

 Other articles related to the UK Employment Law Update for Janaury 2013:

> Employee's duty of fidelity while on garden leave

> Redundancy dismissal while on maternity leave - is it fair?

> Victimisation: Was offensive comment a 'protected disclosure' or racist act?