An introduction to payment in lieu of notice

When an employee leaves employment, unless they have been immediately dismissed for gross misconduct, their departure will be subject to a notice period. The notice period which applies is usually set out in the contract of employment, although statutory minimum periods apply regardless of the position set out in the contract.

There will be a period of notice which is required to be given by the employee if they resign and a period of notice which is required to be given by the employer if they dismiss. Employees will generally work during their notice period. However, there can be circumstances where the parties would rather end the relationship as soon as possible. This can be done by paying the employee in lieu of what would have been their notice period.  

How are employers able to do this?

We have set out some introductory facts below:

1. Employers only strictly have the right to pay in lieu of notice if there is an express clause in the contract of employment allowing them to do so, known as a payment in lieu of notice (PILON) clause.

2. Employers and employees can always agree that the employee will be paid in lieu of notice even if there is no PILON clause in the contract of employment. Any agreement should be recorded in writing.

3. If you pay in lieu of notice and terminate employment immediately without honouring the notice period when you do not have an express PILON clause in the contract of employment,  you will be in breach of contract. The departing employee could rely on this breach to argue that any contractual terms which would otherwise survive termination (for example, restrictive covenants) are no longer binding on them.

4. If you are considering including a PILON clause in your contracts of employment, then you should make sure you make it clear whether the payment you would be making in lieu is of basic salary only or salary and benefits (such as a car allowance). If the contractual clause is silent on this then you are likely to owe salary and benefits which can work out to be very expensive.

5. If you do not have PILON clause in your contract and you do not want the employee to actively work in the business during their notice period then you should consider whether, as an alternative, there is a garden leave clause in their contract employment entitling you to require them to stay away from work during their notice period.