CONTRACTS - 26.01.2006

Pay in lieu of notice

Revamping your contracts

You’re about to carry out a spring-clean of your employment contracts and are particularly interested in giving yourself the right to get rid of an employee and pay them in lieu of notice (using a PILON clause). However, before going ahead, you want to know what the principal advantages are that you’d gain by amending your contracts. What are they?

No breach of contract

Unless an employee is guilty of gross misconduct (which justifies summary dismissal), he’s entitled to receive notice of the termination of his employment contract. Failure to give this will constitute a breach of contract. This means that any contractual restrictions would cease to apply as the contract has been broken and an employee is no longer bound by its terms. However, this breach would entitle the employee to sue you for damages. These will not only include the net pay that he would have received, but compensation for the loss of any contractual benefits that he’s entitled to, e.g. bonus payments. Using a PILON clause means that there’s no breach on your part and that the contractual restrictions will continue to apply.

Restrictive covenants

Any restrictive covenants contained in the contract will continue to operate as originally intended. Should you dismiss without having a clause in place, the terms of these covenants would cease to bind the employee. This could cause you serious problems. For example, the affected employee would be free to go and work for a competitor during their notice period, or even steal some of your customers. The more senior the employee, the greater the potential damage that could be caused.

Benefits

Another advantage of PILON clauses is that you can use them to exclude employees’ entitlement to benefits during the notice period. This is particularly useful in the case of more senior staff who; (1) are under longer notice periods, e.g. three or even six months; (2) are entitled to a greater range of benefits such as income protection, and; (3) enjoy higher company pension or bonus payments than more junior staff. For this reason, you should consider whether or not you want to exclude some or all benefits on departure and if so, whether this will apply to all staff, or just some.

Creating a clause

We know that this sounds really obvious, but your PILON clause must make the level of remuneration that an employee is entitled to very clear. In other words, if you only intend paying basic salary in this period, then say so.

Of course PILON clauses aren’t always the perfect solution - we’ll return to this soon.