Payment in lieu of notice (PILON) – unfair dismissal vs wrongful dismissal explained

A payment in lieu of notice (PILON) is a lump sum paid to an employee instead of requiring them to work their notice period. Whether and how it is paid can significantly affect when the employment contract ends, and what claims are available.

When is a dismissal not a dismissal?

The answer often depends on whether the issue is one of unfair dismissal vs wrongful dismissal, and how the courts treat situations where a payment in lieu of notice is made – or not made.

At first glance, terminating someone’s employment with immediate effect may seem straightforward, but as the case of Geys v Societe Generale shows, the contractual position can be far more complicated.

Unfair dismissal vs wrongful dismissal – the difference matters

Terminating someone’s employment with immediate effect without cause, brings the employment contract to an end – right? Wrong. You could be excused for thinking that handing an employee a letter expressing that his employment was being terminated with “immediate effect” was a terminal event. It certainly would give rise to a claim of unfair dismissal, but what about the contractual position and more importantly when would it be sensible for the employee to keep the contract alive?

For the distinction between wrongful dismissal and constructive dismissal, see our constructive dismissal solicitors page.

Payment in lieu of notice explained in Geys v Societe Generale

The Court of Appeal has grappled with this issue in the long-running case of Geys v Societe Generale. Mr Geys was the unlucky recipient of such a letter. If his employment was terminated summarily on the date purported by his employer he lost out on a tidy bonus payment that would have become payable had he remained employed for a further period. Mr Geys’ contract provided that notice had to be given or a payment in lieu of notice made. Neither was, as the employer terminated his employment immediately and made no payment at the same time as it purported to end the employment relationship.

Mr Geys could have let matters lie if he had wanted to pursue an unfair dismissal claim but as his bonus payment was sizeable, it made sense to reserve his position and assert that the employment relationship continued. His solicitor wrote to the company refusing to accept the employer’s breach of contract. A draft settlement agreement quickly followed.

When does the employment contract legally end?

A week later, the company credited an amount of money to Mr Geys’ bank account which he assumed amounted to a payment in lieu of his notice entitlement, although this was not made clear. A few weeks later, his solicitor wrote to the company stating that Mr Geys still considered himself to be employed – the employer had not made it known that the payment was intended to be a payment in lieu of his notice entitlement. In response to this, the employer wrote to confirm that the payment made had indeed been a payment in lieu of notice and that it had terminated his employment summarily at the earlier meeting.

The question is, when did the contractual employment relationship cease? At the meeting? When the payment was made? When the employer confirmed later what the payment was for? If it was the third option then Mr Geys would have been a very happy man (given the circumstances) as he would be entitled to a (very large) bonus.

Practical lessons for employers and employees

The employer appealed to the Court of Appeal, which overturned the High Court and held that termination took effect when the payment was actually made — not when it was communicated. Mr Geys appealed to the Supreme Court. The Supreme Court [2013] UKSC 63 restored the High Court’s decision, confirming that a PILON must be clearly communicated to the employee to be effective. Silent payment into a bank account, without explanation, was not sufficient. The employment contract therefore continued until the employer’s written confirmation — and Mr Geys was entitled to his bonus.

This case may prove complicated when looking at unfair dismissal cases and breach of contract cases together. For the purposes of unfair dismissal, the date of dismissal is the effective date that the dismissal is communicated (in this case at the meeting). In breach of contract cases,it is when the obligation required by the contract- either to give proper notice or to make a payment in lieu of notice, is performed.

This could have interesting consequences for employers electing to terminate summarily at the beginning of a month and only paying notice later in the month with the usual payroll run (as is typical in compromise agreement cases). Arguably, the employment only ends when the payment is made.

For advice on unfair dismissal, wrongful dismissal or PILON, see our wrongful dismissal solicitors and unfair dismissal solicitors pages.

Employers can find guidance on our terminations and redundancy page.