Making a payment in lieu of notice (PILON) to an employee is not problematic where the employer has reserved the right to do so in the employee’s contract of employment. The Court of Session (the Scottish equivalent of the Court of Appeal) has recently ruled, however, that where an employee has an express contractual right to notice and there is no PILON clause, one will not be implied.
What this means in practice
Where an employer fails to pay pursuant to an express PILON clause under which the employee is entitled to be paid in lieu, the contract is not breached but is lawfully terminated. This means:
- a payment made pursuant to an express PILON clause will be subject to deductions for tax and national insurance; and
- an employee will not be expected to mitigate his loss or give credit for any earnings received from other employment during the notice period.
By contrast, if the employer goes ahead and pays in lieu where there is no PILON clause, it will be in breach of contract. This means:
- a claim is likely where either the employer does not make a payment for the full notice period, or where an employer only pays in lieu of salary, rather in lieu of both salary and benefits;
- any post-termination restrictions will fall away as a result of the breach;
- any tribunal would be awarded damages, which are only taxable in the employee’s hands to the extent that they exceed £30,000; and
- a successful claimant will still be expected to mitigate his losses (ie, try and find other work) and to give credit for any earnings received from other employment during the notice period.