If the employer and employee both agree that the employment
should terminate immediately on payment of a “sum in lieu of
notice” – that is, on payment of a PILON – this
subsequent agreement between the parties does not constitute a term
on which the employee agreed to provide their labour. See
NIM02530 for guidance regarding
contractual PILONs.
The payment represents the price the employer is paying for
the employee’s agreement to forego the notice to which they
would otherwise be entitled, and is being made to compensate the
employee for the loss of earnings during the period of notice.
It cannot, therefore be regarded as a reward for labour. It
does not constitute earnings and therefore no NICs are due in
respect of the payment.
But see also SE12855 and SE13924 for general information
regarding “compromise agreements”.
