Where an employer does not wish a leaving employee to work the notice period required under their contract (irrespective of which party has initiated termination), a payment in lieu of notice (PILON) in respect of the time and benefits of the notice period can be paid.

PILONs can either be contractual or ad hoc. A PILON becomes contractual where the right is specified in the CONTRACT or other contract documentation - the employer takes the right to make such a payment, rather than allowing the employee to work the notice period. The alternative is an ad hoc PILON, where the decision is made without pre-meditation and is non-contractual. Where the right is contractual, exercising the right does not breach the contract and thus all the contract terms (e.g. non-competition clauses) are still operative. Where the right is exercised in an ad hoc manner and there is no contractual right, the employer can exercise the right but, in that case, this destroys the contract and other clauses cannot then be relied upon by the employer - thus a non-competition clause would cease to have effect.

Taxation Effect
Since the attitude of the Inland Revenue continues to harden against all such payments being tax free, these comments are suggestive only. If the contract stipulates that a payment in lieu can be made in the above circumstances then the company, in making the payment, must deduct tax and national insurance from the payment since the Revenue regard it as a commitment to pay. However, if the PILON is made on an ad hoc basis then (subject to a limit - currently £30,000) no tax or national insurance will normally be payable. This understanding has been altered a number of times in recent years, so it may be worth checking this with the employer's Tax Inspector. The ability to make the payment gross can also depend on what has happened previously. Thus, if the employer has made a habit of making PILONs the Inland Revenue may argue that by custom and practice there is an implied clause, and thus the payment should be subject to tax and national insurance deductions.

What to Pay
Where the decision that the employee should not work is made by the employer, although the situation regarding payment in respect of the wages that would otherwise be payable is fairly clear, if there are contractual benefits to which the employee is entitled, the payment should reflect these or else their provision should be continued during what would otherwise be the notice period. For example, if an employee is entitled to private use of a company car then such use should normally be allowed - or compensation paid if not (the calculation of value here can be complex). However, if the use of the car is restricted only to business use then this facility may not be necessary, as if the employee is not working then the use of the car must be nil. Since holidays normally accrue in relation to service then the employee will normally be entitled to compensation for the holiday that would have accrued had the notice period been worked. Since the employee is not required to work most employers would argue that since the period is being paid for, without a requirement on the part of the employee to work, the holiday is paid for. It may be best to state this in any clause.

Obviously, any holiday accrued (but not taken) as a result of earlier employment should be paid for. A similar examination to those set out above needs to be conducted for each contractual benefit. Trying to calculate a payment in respect of some such items may pose such problems that it may be easier to allow the benefits to subsist. This may particularly be the case with contractual bonuses, where these are time/service based rather than performance related.

An employee may have taken in excess of what would strictly be allowed by their service to termination date. Only if the contract stipulates or the employee specifically agrees should there be any clawback of such excess. Further, only if the employee specifically signs to that effect should the monetary value be deducted from monies due for wages etc.

Where LOANS remain outstanding it may be possible to gain agreement to deduct the balance from the PILON - once again this should only be done where there is a specific agreement. Ideally, the loan agreement should address this point (e.g. only granting the loan on the understanding that, in the event of a termination of employment no matter what the cause, the outstanding balance can be deducted from any amount due).