When does payment in lieu of notice become effective?

The Ashtons Legal Employment team often advises employers to expressly reserve the right to pay a departing employee in lieu of notice, in addition to the usual notice provisions specifying the requisite periods of notice.

When exercising this right, however, employers need to tread carefully. The contractual right to pay in lieu of notice gives employers a greater degree of flexibility.

For example, an employer may plan to close a site, thus creating a redundancy situation. If the employees working at that particular site all have different notice periods, the ability to pay in lieu of notice means that the employer can advise the employees of their dismissals all at the same time, set a date for closure and pay each employee in lieu for either all or the balance of the notice period.

This makes things much easier for the employer, who otherwise may have had the logistical nightmare of different employees finishing on different days.

Another example is when an employee is dismissed for capability or conduct reasons and their continued presence at work will cause disruption. If the employer has the ability to pay in lieu of notice, the employee can be removed from the premises and paid in lieu of notice, therefore eliminating the problem of having a difficult and unproductive employee remaining in the office whilst working out their notice period.

However, a recent Supreme Court decision reminds employers of the importance of communicating the decision to pay in lieu of notice to the employee. In Societe General v Geys, Mr Geys was told at a meeting in November 2007 that he was being dismissed and was escorted from the premises. During December 2007, there were discussions between his solicitors and Societe General about the termination and on 18 December, a payment of the equivalent of three months’ salary was paid into his bank account.

Although this equated to a payment in lieu of his notice period, Societe General did not actually tell Mr Geys that this was what the payment was until he was sent a letter stating this, which he received on 6 January 2008. He did not receive a breakdown of what the monies represented until 7 or 8 January. It was imperative that the exact date of dismissal was determined as if he had been dismissed in 2007, his bonus would have been £7m; if the dismissal took place in 2008, the bonus rose to £12m.

One question for the Supreme Court was did the payment in lieu of notice in December 2007 terminate the contract of employment, even though Mr Geys was not expressly told that this was what the payment was for until January 2008? The Supreme Court decided that it did not and held that there is an implied term that a payment in lieu of notice clause is only effective when communicated to the employee. The dismissal took place on 6 January 2008.

Lady Hale commented that it was “obviously necessary” that the employee is “notified in clear and unambiguous terms, that such a payment has been made and that it is made in exercise of the contractual right to terminate the employment with immediate effect.”  She held that an employee 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.”

There were several factors in play in this case and other issues were determined, but the result was that the contract was terminated in 2008 and Mr Geys can now claim £12m instead of £7m. The dismissal could have been dealt with properly and the contract lawfully terminated in 2007, but Societe General’s slip up cost them dearly.

Whilst the facts may have been unusual in this case, the universal lesson to all employers is that if you are going to rely on a contractual ability to pay in lieu of notice, then make sure that this is confirmed to the employee in writing, unambiguously and clearly, so that both parties know where they stand and the timing of the effective date of termination cannot be called into question.

Read more about our Employment team.