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Pay in lieu of notice

Generally speaking in employment contracts, there is a statutory right to a notice period of one week minimum (having worked for that employer for a minimum of 4 continuous weeks). If your employer has included in your contract a notice period which is shorter than this, it is not valid, as your statutory right overrides the shorter time period. Please note that if your employer has included in your contract a notice period which is longer than the statutory minimum, this will override.

For every year of employment you fulfill after the 4 weeks continuous employment, you will receive an extra week’s notice period (which continues increasing for 12 years).

What is a PILON Clause?

A PILON clause (payment in lieu of notice) is a clause that employers can incorporate into employment contracts which, if validly created, allows the employer to dismiss the employee immediately, as long as they pay them the amount they would have received throughout their notice period.

Incorporating a PILON clause into an employment contract is therefore an effective way of retaining control over the dismissal of employees. Additionally, if the PILON clause is constructed effectively, the employer may also exempt themselves from having to pay anything over and above the basic salary of the employee involved. This is done by excluding payments including commission, a bonus or any other benefit.

The Effects of a PILON Clause

An express PILON clause will have the effect of terminating the employment contract immediately. Do be aware of the fact that the clause could either be express or discretionary. A discretionary PILON clause differs slightly. This type of clause gives the employer discretion as to whether he would like to give a payment in lieu of notice, rather than the contract automatically being terminated. Without any PILON clause, the employer will not be able to terminate the contract immediately without the notice period.

Garden Leave

If you are placed on ‘garden leave’, you will receive full pay but your employer is likely to prohibit you from carrying out any special duties or services. The aim of this type of leave is to get you out of the office. This could be to protect the company’s interests, or so that your employer can investigate any misconduct.

Under a PILON Clause, the Employer Must Communicate its Decision to Terminate to the Employee

Not only does the PILON clause have to be written satisfactorily into the employment contract, the employer also has to ensure that they communicate the decision to terminate a contract using this clause to the employee. It is not until the employer has specifically given the employee notice of their decision to terminate the contract, and exercised their contractual right to provide a payment in lieu of notice, that the employment contract is considered effectively terminated.

Why Does it Matter what Date the Employment Contract is Terminated?

The steps involved in terminating an employment contract using a PILON clause are important because they are required to solidify the exact date the contract has been terminated. This is crucial to both the employee and the employer, because if valid notice of termination using this method has not been given, the employee may even be able to treat the contract as still in force. This means that the employee would be able to claim lost income/compensation for the time he was not at work (during the time the contract was still technically ongoing), and therefore claim a large sum in damages on top of the money received as a result of the PILON clause.

Ben Jones - Partner & head of employment law

Ben Jones – Partner & head of employment law

As an employer, it is therefore important to ensure that the PILON clause you have included in employment contracts is not only valid, but that if you decide to use it, you have effectively communicated to the employee in question your decision to do so. Only then will you have effectively terminated the employment contract.

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