UK: Employers should review and consider redrafting Pilon clauses

The Supreme Court has ruled that, where an employer dismisses an employee with immediate effect in breach of the employment contract, the employee can choose whether to accept this breach as bringing the contract to an end.  If not, they can affirm the contract so that it continues until the end of the contractual notice period (along with any contractual entitlements which accrue during this period, unless there is express provision to the contrary).

This highlights the importance of including pay in lieu of notice provisions in employment contracts, particularly for senior employees.   However, careful drafting is advisable.  First, it is important to ensure contractual documents and staff handbooks are not contradictory.  Second, if the clause provides for immediate termination "by making a payment in lieu of notice", according to the Supreme Court this will be subject to an implied term that termination only takes effect once (i) the Pilon has been paid, (ii) the employee has received notice that the payment has been made, and (iii) the employee has received notice that the payment was being made in exercise of the contractual right to terminate with immediate effect. 

Employers with similar clauses should ensure they have appropriate systems in place to ensure all these steps are taken as quickly as possible – or should consider amending their Pilon clauses.  The problem may be avoidable if the Pilon clause provides that termination is effected by simple notice of termination under that clause, with the obligation to make a Pilon consequent on that termination but not a constituent part of it.  We would be happy to advise further if you are interested in considering amendment to your standard contracts.

Note that, even with an old style Pilon clause, the effective date of termination for statutory unfair dismissal purposes may still be the date on which the employee becomes aware of the employer dismissing them, rather than the date of any subsequent notice of payment or of the payment itself. (Geys v Société Générale, London Branch, SC)