EIM12979 - Termination payments and benefits: payments in lieu of notice (PILONs): agreements

Instead of acting unilaterally as in EIM12978, employer and employee may reach an agreement to terminate without proper notice on payment of a PILON.

Where this is done before termination is in prospect, it is simply a variation in the terms of employment and any subsequent PILON will be contractual and taxable under Section 62 ITEPA 2003, following EIM12976.

If it is done only as part of the process of termination rather than under an existing practice that the parties expect to implement (see EIM12977), the payment will not be from the employment but from the agreed terms for its destruction and is dealt with as a damages payment. In those circumstances the payment falls within Section 401 ITEPA 2003 even though no breach of contract occurs. Bear in mind that the employer may anticipate not being able to give due notice for commercial reasons (see EIM12978) and so be in breach of contract. The agreed payment may then represent settlement of the potential claim that the employee could make to an employment tribunal and is to be treated in the same way. If the agreement settles an existing contractual provision, Section 62 ITEPA 2003 will apply (see example EIM13924).

Note that an agreement may simply put into effect a pre-existing entitlement, see example 2 in EIM13924.