EIM12976 - Termination payments and benefits: payments in lieu of notice (PILONs): contractual payments
EMI Group Electronics v Caldicott (71TC455)
Where an employee receives a contractual payment in lieu of
notice (PILON), it is chargeable under Section 62 ITEPA 2003 as
earnings from the employment (see
EIM00515).
A contractual PILON is one that has its source in the
contractual arrangements between employer and employee. Such
arrangements can take a variety of forms, including:
- the main contract document
- a side letter to the main contract document
- a staff handbook
- a letter of appointment
- a redundancy agreement
- an employer-union agreement.
It is important to consider all possible contractual sources.
(This text has been withheld because of exemptions in the
Freedom of Information Act 2000)
Sometimes these arrangements give the employer a choice or
discretion of giving notice or making a PILON. That was the
situation in the EMI case, where under the terms of the contract
the employer had a reserved right to make a payment in lieu of
notice. It was accepted that the right was exercised and the Court
of Appeal held that such a payment is chargeable under Section 62
ITEPA 2003.
An employer in this situation can choose not to give proper
notice and also not to make a payment in lieu under the contract.
If so, the terms of the contract are breached, and a payment for
that breach falls within Section 401 ITEPA 2003. It is dealt with
as a damages payment (see
EIM12978 and Example 3 in
EIM13924). Such cases must be examined
critically to ensure that there is evidence that the employer did
in fact choose to breach the contract. The case of Richardson v
Delaney (74TC167) is an example of a case where the High Court
rejected the employer's claim that such a breach had occurred.
If there is no contractual source for the PILON,
consider:
