In addition to specifying the period of notice, a contract of
employment may provide expressly for a sum to be paid instead of
that notice being given.
Such wording in a contract means that the contract actually
provides that in the event of the employment being terminated
prematurely a PILON will be made.
The intention behind this payment is exactly the same as in
any PILON situation. The employer wishes to satisfy the
employee’s entitlement to damages in the event of the
required notice not being given. The payment is therefore included
in the contract as an alternative to the period of notice to
forestall any possibility of legal action for damages. In the event
that the due notice is not given there will be no breach of
contract as long as the alternative payment is made – there
can therefore be no action for damages in respect of a breach of
contract.
The PILON is contractual because the payment is provided
for in the contract of employment. Where a PILON is paid in such
circumstances the payment is earnings for the purposes of
Class 1 NICs because it is something to which the employee becomes
entitled as part of the terms on which they agreed to provide their
services. It is therefore part of the employee’s rewards for
their labour – and satisfies the definition of
“earnings” in section 3(1) of the Social Security
Contributions and Benefits Act 1992 because it is
“remuneration…derived from an employment”. See
NIM02010.
In some cases, the contractual arrangements may give the
employer a choice or discretion of either giving the required
notice or making a PILON. In such a case an employer may decide not
to give proper notice and also not to make a PILON under the
contract. If he takes this line, the terms of the contract will be
breached, and any payment made in respect of that breach will be a
compensatory payment made in consideration of the
individual’s entitlement to damages as a result of the
breach.
You should examine the evidence carefully in these cases to
confirm that the employer actually chose to breach the contract.
The tax case of Richardson v Delaney (to be reported) is an example
of a case where the High Court rejected the employer’s claim
that such a breach had occurred.
See examples 2 and 3 in SE13924.
