Employers who do not need and/or wish employees to work their notice period can make a payment in lieu of notice (“PILON”). An employer will usually include a PILON clause in its employment contracts to ensure it has the option to terminate an employee’s employment at any time. However, in the absence of an express contractual right, an employer and employee may still reach agreement to end employment early by accepting a ‘non-contractual’ payment in lieu.

If a PILON is contractual, the clause in the contract should specify how the PILON is calculated and what benefits (if any) other than basic salary will be included.

If the contract is silent in this regard, it is arguable that the payment should cover all amounts that the employee would have been entitled to during their notice period. However, the method for calculating payment of an employee’s accrued but untaken statutory holidays at the time of dismissal is set out in Regulation 17 of the Working Time Regulations (Northern Ireland) 2016. Under Regulation 17, payment is only required to be calculated up to the date on which termination “takes effect”. Therefore, when an employer makes a PILON, this is when the termination takes effect meaning that the employee would not be entitled to payment in lieu of statutory holiday entitlement that would have accrued during the notice period.

It is possible that the employee will have additional contractual holiday entitlement. Ultimately, it is up to the employer to decide how any additional contractual holiday entitlement is dealt with, taking into account relevant contractual provisions. Employers may wish to include holiday entitlement that would have accrued during the notice period in a PILON to avoid any possible dispute.

If there is no contractual provision for a PILON, the payment should be deemed to represent damages that would be due under any subsequent wrongful dismissal claim. Therefore, in such instances it is prudent for the payment to include any benefits that the employee would have accrued had they worked their notice period, as this will help safeguard the employer against claims for wrongful dismissal.

As the rules on taxation of termination payments now apply equal tax treatment to contractual and non-contractual PILONs, it is sensible to have a PILON clause in employment contracts which sets out the specific elements of remuneration that will be included in the payment.