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When is a PILON clause correctly exercised?

Case briefing: Cole v Consolidated Minerals Limited

This case involved examination of Mrs Cole’s (the “Applicant”) effective date of termination (“EDT”) which was important in terms of calculating the level of statutory redundancy payment due to her and the amount of any compensation that may be due in the event of a finding that she was unfairly dismissed.

The Applicant’s contract of employment provided for her to receive one months’ notice on termination, and included a discretionary payment in lieu of notice (“PILON”) clause for her notice period.

The Applicant claimed that her notice period should have been included in the calculation of the EDT and that the EDT was the 2 March 2016. The Respondent claimed that the EDT was 2 February (date of termination letter), or 24 February 2016 (date payment was to be made). The date was important as it meant the difference between 4 or 5 years’ continuous service.

The Tribunal made reference to the case of Societe Generale v Geys [2012] UKSC 63 which set out rules employers must adhere to when seeking to enforce PILON clauses. To effectively terminate an employee’s contract through use of a PILON clause the employer must:

  • Notify the employee clearly and unambiguously that the employer is terminating the contract of employment and that it is doing so in accordance with the relevant PILON clause contained in the contract.
  • Specify the date on which the termination takes effect; and
  • Notify the employee of the date upon which the PILON was made or will be made.

It was established in Geys that if notice is given after payment is made, then the contract terminates when notice is received by the employee. In the more usual scenario (as in this case) where notice is given before payment is made to the employee, the contract will only terminate on the date of the payment (unless an express term exists to the contrary in the PILON clause). Such termination will only ever be effective if the employer has properly executed the PILON clause.

If a PILON clause is not properly exercised when terminating an employee’s contract then the employer will unlawfully dismiss the employee and will be in breach of contract. The employee then has two options:

  1. Accept the employer’s breach so the employment is brought to an end; or
  2. Affirm the contract of employment.

The Applicant claimed that the Respondent was not contractually entitled to make a PILON and by doing so was in breach of contract. The Tribunal however disagreed with the Applicant, finding that the wording of the PILON itself was clear in its intention and it was entirely the choice of the Respondent whether or not to exercise the clause. Therefore the Respondent was contractually entitled to make the PILON.

The Tribunal then applied the rules established in Geys. The Tribunal examined the first point; did the Respondent clearly and unambiguously notify the Applicant that it was terminating and was doing so in accordance with the PILON clause? It is not sufficient for the employer to merely notify the employee of its intention to pay in lieu of notice. The employer must go further than that in order to trigger the PILON clause. It must specify that the termination is taking place in accordance with the relevant PILON clause contained in the contract.

The Respondent in this case had issued a termination letter to the Applicant that did notify the Applicant she was to receive a payment in lieu of notice, but failed to make reference to the Respondent’s contractual right to do so, and as a result did not comply with Geys. The letter should have directly referred to the PILON clause it was seeking to invoke.

The Tribunal did find the Respondent had complied with Geys on the two other points; specifying the date that termination was to take effect, and notifying the employee of the date when the PILON would be made. In order to correctly exercise the PILON clause the three elements from Geys must be satisfied and in this case only two of three were. As a result the Respondent was in breach of contract and it was for the Applicant to decide whether to accept the breach or affirm the contract. The Tribunal concluded that the Applicant did not accept the Respondent’s breach and therefore the Applicant’s employment did not terminate on 2 February 2016.

The Tribunal then considered the alternative date of termination submitted by the Respondent of 24 February. The Tribunal found that had the PILON clause been exercised properly the Applicant’s employment would have terminated on 24 February when she received payment in lieu of notice. However the termination letter only served to give notice to the Applicant that her employment would be terminated in accordance with the normal terms of her contract. Even on receipt of the payment in lieu of notice by the Applicant, her employment continued. The Tribunal concluded the Applicant’s EDT was 2 March 2016 and her employment was lawfully terminated at the end of the four weeks’ contractual notice period triggered by the termination letter dated 2 February 2016. The Applicant therefore had five years’ continuous service as opposed to the 4 years stated by the Respondent.

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