Where an employment relationship is coming to an end, it is often beneficial to both sides to terminate the employee’s employment immediately rather than require the employee to work out their notice period. Employers may be concerned that the employee will be demotivated and unproductive during their notice period, or more seriously that the employee may be tempted to stir up bad feeling amongst their colleagues, download confidential information, damage property or taint relationships with customers. Employees may be reluctant to work their notice period as once the decision has been made to part ways, it can be a protracted goodbye.

Often, a contract of employment will include a PILON clause, which enables the employer to terminate the employee’s employment with immediate effect by making a payment in lieu of notice.

In Geys v Société Generale, Mr Geys’ contract of employment included such a PILON clause and so the employer paid a PILON into his bank account with the intention of terminating his employment with effect from the date of that payment.

However, the Supreme Court held that Mr Geys’ employment did not come to an end until he was told in clear terms that the payment made into his bank account was a payment in lieu of notice and that it was made with the intention of terminating his employment.

Further, the Supreme Court held that Société Generale had breached Mr Geys’ contract of employment and so Mr Geys could choose to accept that breach (and leave his employment) or waive that breach and continue his employment – the opposite of what Société Generale had wanted to achieve.

By failing to give clear communication of the intention to terminate Mr Geys’ employment, Société Generale failed to terminate his employment despite having paid him in lieu of notice.

If you wish to terminate an employee’s employment you should follow a fair procedure and confirm in writing that the employment is terminated, the reasons for termination and the effective date of termination. If you wish to make a payment in lieu of notice in order to bring forward the effective date of termination then you must make clear in writing to the employee that this is what you are doing.

A further question that often arises in relation to a payment in lieu of notice is whether the payment should be subject to deductions for tax and National Insurance contributions.

The general rule is that where there is a PILON clause in the employee’s contract of employment then a payment in lieu of notice must be subject to deductions for tax and National Insurance contributions.

However, even where there is no PILON clause in the employee’s contract of employment then it may be necessary to make deductions for tax and National Insurance contributions if there is a contractual agreement or custom and practice of making payments in lieu of notice.

If you wish to make a payment in lieu of notice without making deductions for tax and National Insurance contributions you should take advice on whether you are able to do so and ensure that you obtain an indemnity from the employee to confirm that they will reimburse you for any tax that HMRC may impose after the event.

For more information on this subject or any other queries about employment law, please contact Kate Booth on 01484 821309 or at katebooth@eatonsmith.co.uk
Posted Thursday 13th of June 2013