An employer may enter into a fixed term contract with an
employee but, for some reason, may decide to terminate the
engagement early.
Example
An employer engages the services of an employee for a fixed
term of 12 months.
However, the job is completed in 8 months and the employer
has no further need for the services of the employee.
The employer terminates the contract after 8 months but pays
the employee their remuneration for the full 12 months. The NICs
position will depend upon the terms of the original contract.
If the contract provides that in the event of the fixed term
being curtailed in any way the employer will make a payment in lieu
of remuneration (a PILOR) for the remaining period, then the right
to that payment arises out of the terms of the contract. The
employer and employee have agreed as part of the terms on which the
employee will provide his services that the employee shall in
certain circumstances be entitled to certain payments (including
the PILOR).
The right to the payment specified in the contract forms part
of the rewards for the employee’s services. The payment is
therefore earnings and will attract a Class 1 NICs liability.
If the contract does not provide for the making of a PILOR in
the event of the employer terminating the contract before the
expiry date, then any payment on account of lost remuneration is
compensatory. It is not earnings and therefore there is no
liability for NICs.
If an employee has contracted to work for a fixed term and
the employer has contracted to provide work for that period, any
termination by the employer in advance of the expiry date
constitutes a breach of the contract between them and entitles the
employee to claim damages.
The employer’s payment is compensation to satisfy the
legal claim to damages and is made to forestall such a claim. As
explained in
NIM02520 (on PILONs) a compensation
payment does not constitute earnings and does not attract liability
for NICs.
