How to handle notice periods
We have recently had enquiries from clients about issues surrounding employees’ notice periods – either on resignation by the employee or termination by the employer.
Getting it wrong can have important implications, potentially freeing employee’s from post termination restrictions and leaving it open for the employee to claim breach of contract.
The first step is to look at the employee’s contract of employment – the ways in which an employer can give notice to terminate an employee’s employment are usually set out here. The contract will generally have one or more of the following provisions:
To require the employee to work their notice:
1. This is straightforward. The employer gives the employee notice of dismissal and requires them to work their notice period. The termination date is the last day of the notice period and the employee receives their salary and benefits and continues to accrue holiday up until that date. The salary paid during the notice period is subject to deductions for tax and national insurance in the usual way.
If the employee is on sick leave during their notice and has an entitlement to the statutory notice period only they may be entitled to full pay (rather than SSP) during this period of sick leave.
To put the employee on garden leave:
2. Provided the employee’s contract contains a garden leave clause, an employer may give the employee notice of dismissal but require them not to work during some or all of this period. Where an employee is put on garden leave, they still receive their salary and benefits during the notice period and holiday continues to accrue up until the termination date. The salary paid during the notice period is subject to deductions for tax and national insurance in the usual way.
During garden leave you may be able to require the employee to be available for work and to inform you if they are taking holidays in the usual way.
To exercise the contractual right to make a payment in lieu of notice:
3. Provided there is a PILON clause in the contract, the employer can exercise the right to dismiss the employee immediately and pay their notice pay as a lump sum. The termination date would be the date the employee is dismissed and holiday stops accruing at this date. The PILON is subject to deductions for tax and national insurance in the usual way.
What happens if the employee is leaving by way of a settlement agreement?
The position remains the same – the employer must deal with notice in one of the ways set out above. There should be a provision in the agreement explaining which of the options has been chosen.
But what if the employer makes a PILON to an employee (whether as part of a settlement agreement package or not) and there is no provision for them to do this in the employee’s contract?
There are occasions when an employer may choose to make a PILON, even though they do not have the contractual right to do so under the employee’s contract.
Subject to a limited exception applying to ‘automatic’ PILONs, if an employer makes a PILON in these circumstances, this amounts to a breach of contract. Any money paid to the employee should be treated as damages for terminating the employee’s employment without proper notice.
By compensating the employee for terminating their contract without proper notice, it is possible (subject to the discretion of HMRC) to pay this to the employee tax free.
In terms of how this would look in a settlement agreement, there may be no express mention in the agreement of a payment for notice. Instead, the notice payment can be included in the ‘ex gratia’ or compensation payment.
Due to the tax position, making a PILON where there is no contractual right to do so is often attractive to the employee. However, it could cause problems for an employer.
To reiterate, making a PILON where there is no contractual right to amounts to a repudiatory breach of contract on the part of the employer. This means the employer can no longer rely on any terms of the employment contract.
This can cause real problems for employers, if an employee has post termination restrictions or confidentiality provisions in their contract and immediately goes to work for a competitor taking the company’s client contact details or deals with them.
Mark Emery is an employment specialist working with businesses, charities and individuals, providing advice on all HR and employment-related issues and acting on behalf of employers and individuals if disputes reach tribunal or court. Contact him on 01865 268 663.