Payment in lieu of notice clauses

You either have one in your contract or you do not - the law will not imply one into the contract.

So what are they and how do they affect you ? - This article explains it all!

Every employee is entitled to notice of dismissal unless he or she is guilty of gross misconduct. The amount of notice is:

• what is in the contract; or
• some reasonable implied period - for the chairman it might be six months or a year down to one week for someone lower down in the company; or
• the statutory minimum if greater than either of the above.

The statutory minimum notice from the employer is nothing in the first month. Then for the remainder of the next two years it is a week. After that, it rises by a week per completed year up to a maximum of 12 weeks.

If a company wants an employee to leave, it has a number of choices:

1. it can ask him or her to work during the notice period - all payments are fully taxed;
2. it can sack immediately and pay damages for breach of contract in not giving notice. The amount of damages is the amount of money the employee would have received in his or her hand had he or she worked during the notice. In other words, it is the net amount. Many companies, however, pay the gross amount of notice money thinking that because genuine damages for breach of contract can be tax free the employee should get the gross amount. In fact, this is wrong but we can explain how to use this to your advantage and get more money than you are entitled to;
3. it can make a payment in lieu of notice if it has the power, even a discretionary power, to do so in the contract. If it does make a payment in lieu of notice in this way, the whole payment is taxed.
4. It can negotiate before terminating. The Inland Revenue take the view that a negotiated payment in this way without any breach of contract is taxable. We can advise if this can be avoided.

If the employer does not have the power to make a PILON but claims to have done so, the payment is damages and the company has breached the contract.

An employer often pays an employee less than an amount, which would cover wages and benefits during the full period of notice. An employer's argument is that the employee is able to mitigate his loss (an obligation that all departing employees have). He (and this is obviously particularly true of younger employees with long periods of notice) is only entitled to recover his "loss" and if the individual obtains alternative employment within the notice period, such loss will obviously be reduced. We regularly advise on this issue of mitigation and on the related topic of early receipt discount. This is an important point for companies wishing to rely on the Combined Codes for Corporate Governance, which state that companies must be robust on the issue of mitigation.

The reason that mitigation sometimes becomes a dispute between the Company and the employee is not usually because the employer disputes that the employee is owed money but that it disagrees as to the amount. The courts will, if necessary, decide when the employee could or should have got alternative employment but it is the amount of the deduction for mitigation (with optimism on the side of the employer against pessimism on the side of the employee) that is often the most controversial part of the negotiations as to an appropriate severance package. We are experts at negotiating severance or termination packages and will advise you quickly and efficiently on what you are entitled to.

For companies we can draft service agreements that provide for a mechanism for putting mitigation into use when terminating executives. For non-executive directors and companies we can review existing service agreements and advise on compliance with best practice.

Where there is a clause in the contract of employment providing for a PILON it gives certainty to both employer and employee as to the amount of compensation that the employee will receive upon the contract being terminated. There is one obvious disadvantage, which is that the payment made under such a clause is taxable in full. One significant benefit to an employer of having a PILON in the contract is that using it to terminate employment means that the contract ends at that time properly and without breach. This is certain to keep alive ongoing obligations in the contract of employment that would otherwise fall by virtue of the breach of contract. Such obligations are often called restrictive covenants, which this firm is very experienced at both advising on and drafting for companies.

Other points – loss of the chance to claim unfair dismissal

An employee dismissed without being given the right period of notice is said to be wrongfully dismissed. If there is no contractual right for the employer to make a payment in lieu of notice then the employee has been wrongfully deprived of the benefit of remaining in work for the notice period. As the employee should, according to the contract, have remained in work during the notice period his or her employment has ended earlier than it should have done. In some cases, the notice period would have taken the employee over the one-year threshold for claiming unfair dismissal.

In such a situation the breach of contract by the employer has deprived the employee of the right to claim unfair dismissal. Between 1999 and July 2003 the law was such that an employee in these circumstances could claim as damages for breach of contract the amount of salary, benefits and bonus that he or she would have been able to claim as unfair dismissal had his or her employment lasted until he or she qualified for unfair dismissal. This was the decision of an appeal case called Raspin v United News Shops Ltd 1999 in which a shop assistant was dismissed three weeks before she would have been able to claim unfair dismissal. The case decided that an employee deprived of the ability to claim unfair dismissal in these circumstances could be awarded compensation as breach of contract damages. In July 2003, however this case was overruled by a new case called Virgin Net Ltd. v Harper. This case is good news for employers who can now wrongfully dismiss before the 1-year date is up even though the notice period would have taken the employee over the qualifying period.

There is one small point to make, however, about this important new case. It is that it made a distinction between cases where the complaint is about the dismissal being in breach of contract and cases where it is the conduct of the employer prior to dismissal that is in issue. The new case left open the prospect that Mrs Raspin type cases (conduct prior to dismissal) could still succeed in the future. Specific advice on this area should be taken.

The law on claiming damages for breach of contract for being deprived of a notice period remains the same. For example, this firm has recently concluded negotiations for a senior executive who had not remained an employee during his notice period would have been dismissed before he got to 2 years' service. The problem for the executive was that unless he got to 2 years the company would take back its generous pension contributions and refund his contributions after deducting tax. By negotiating with the company and pointing out that it did not have a right to dismiss without notice we were able to ensure that the executive remained in employment and therefore secured the value of his pension benefits.

Summary

Payment in lieu of notice clauses are good news for employers in that they allow immediate termination within the terms of the contract. They can provide certainty at a time of dispute and can reduce the amount of money that to which an employee is entitled. A downside is that such a clause can reduce the ability of the company to take advantage of the £30,000 tax-free limit.
Such clauses can sometimes be good news for an employee but mostly they reduce the scope for negotiation by employees. Employees commencing employment should check the proposed terms carefully and negotiate on the existence and content of such a clause.