NIM02520 - Class 1 NICs : Earnings of employees and office holders : Payments made on termination of employment : Payments in lieu of notice (PILONs) : General

A PILON is a payment made by an employer in place of giving an employee advance notice that their employment is to be terminated.

Contracts of employment – the period

Contracts of employment may be for a fixed period, for example for three years, or for an unspecified period.

Contracts for fixed periods automatically end on the expiry of the fixed period but unspecified periods continue until they are terminated.

Notice of termination

Except in the case of a fixed period contract reaching the end of the fixed period, an employee is entitled to advance notice that their employment is to be terminated.

Ordinarily, the amount of notice which has to be given is stipulated in the contract. However, if a period of notice is not stipulated, then a reasonable period must be given. That period must be not less than the statutory minimum period specified in the Employment Rights Act 1996 (previously the Employment Protection (Consolidation) Act 1978). NIM07000 refers.

If there is no written contract of employment, the Employment Rights Act 1996 provides that the employee is entitled to a statutory minimum period of notice as follows :

• period of continuous service of at least one month but less than two years – one week
• period of continuous service of between two and twelve years – one week for each year of continuous service
• period of continuous service of twelve years or more – twelve weeks

Breach of contract

If an employer terminates an employee’s contract of employment without giving them the requisite notice in advance, the employer has committed a breach of contract.

In such circumstances the employee is entitled to sue the employer for damages for the breach. The amount of damages is the amount of earnings lost by the employee in not being allowed to work out the period of notice.

Earnings or damages

“Earnings” is defined in section 3(1) of the Social Security Contributions and Benefits Act 1992 as “including any remuneration or profit derived from an employment”.

In order to constitute earnings a payment has to be derived from the employment. That is, it must be received because of the employment and for no other reason. See NIM02010.

A payment made in settlement of a claim for damages for breach of contract is not made because of the employment but rather because the employer has acted in some way contrary to the terms of employment to the detriment of the employee. Such payments are therefore compensatory and are not within the definition of earnings for Class 1 NICs purposes.

Payment in lieu of notice and NICs

A PILON is a payment made to an employee to :

• satisfy their legal claim to damages by compensating them for loss due to a breach of contract, and
• forestall a legal action for such breach.

Because a true PILON is compensatory it cannot be regarded as earnings for NICs purposes. It does not, therefore, attract a liability for Class 1 NICs.

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