Where there is a written contract there is usually no difficulty
in determining what the terms of the contract of employment are.
They are those terms which are set out in the contract documents.
It is also worth remembering that the Employment Rights Act
1996 requires the employer to provide the employee with written
particulars of the terms of their employment. These written
particulars can be used as evidence of the terms of the
employment.
However, even if there is no contractual entitlement to a
payment there may be a liability for NICs if it is customary to
make such a payment. This can be the case in respect of PILONs
where there is no written provision for such a payment to be made
but the employer always makes such a payment instead of giving the
necessary notice. This can be described as a ‘custom’
or ‘expectation’ but it does not mean that the payment
is in any way contractual. The payment is one made
‘’automatically’’ without any consideration
of individual employees’ circumstances.
You should not be misled by the terminology but should rather
look to determine the nature of the payment. As long as it is a
consistent pattern in the workplace that a PILON will always be
made in place of the due period of notice, and the process is
automatic, then the payment will effectively form part of the
employment relationship which underlies the services which the
employee provides. It will therefore be earnings for the purposes
of NICs (see
NIM02010 for information regarding the
meaning of “earnings”). This may be the case even if
the individual employee claims to be unaware of the condition. The
important point to establish is not whether an individual knows
about the practice but whether it is an expected part of the
employment relationship where the individual works.
Remember also that an expectation or custom can be
industry-wide or confined to a small group within a business.
Another important point to bear in mind is that the length of
time the custom or expectation has been in place is not a crucial
factor. It is more important to determine whether the condition is
an expected part of the employment. It is therefore possible for an
expectation or custom to be established very quickly where it is
clear to employees that an employer intends to follow a particular
line.
You should not normally contend that an expectation or custom
exists if the employer has in place a procedure for assessing what
payment is to be made to employees who do not receive full notice.
If there is a genuine critical assessment of individual
employees’ circumstances so that PILONs are not made
automatically, no custom will have been established. Such an
assessment could involve, for example, deciding whether an employee
is likely to find another job within the notice period or taking
into account what benefits would have been received. In these
circumstances the individual could not be certain that a particular
payment would be made in lieu of notice and therefore there is no
‘’expectation’’ or
‘’custom’’ and the PILON is not
‘’earnings’’ for NICs purposes. It is more
likely to represent compensation or damages and there will be no
liability for NICs.
If, however, employees are invariably given a gross PILON as
the result of the procedure being applied then the question arises
whether a genuine critical assessment is being made.
