Over the next two months we will be looking at some of the common confusions which occur at the end of the contract. When does employment actually end and how best can the company protect itself when an employee leaves?

This month we will look at the notice terms required when an employee resigns and when an employer dismisses - whether the employee must be allowed to work out their notice period or whether notice can be cut short by a payment in lieu.

The minimum notice periods to be served by both the employee and the employer are set out in statute but can be increased (but not decreased) by the contract. The employee's requirement to serve notice can be extended to allow the employer sufficient time to replace that individual. In addition, useful clauses can be added to ensure that an employee's exit is as smooth as possible and areas of dispute are minimised.

Notice by the Employee

An employee's statutory notice period is minimal, with an employee only being required to serve one week's notice if they have over one months' service. This is rarely sufficient to allow the employer to replace an individual and employers therefore often require a longer period in the contract. The more crucial the position, the longer the notice period imposed.

If the employee refuses to work the full notice period then the employer can include clauses to allow the recoupment of costs in replacing the employee. These are not often used in practice but their presence in the contract may have a dissuasive effect on the employee. It should be made clear to employees that, if they wish to leave before their notice period has expired, that they will not be paid for the full notice period, just to the last day of employment.

Notice by the Employer

The notice required from the employer is more generous and directly linked to the employee's length of service. Employees with at least one month but less than two years' service are entitled to at least one week's notice from the employer. Employees with two years' continuous service or more are entitled to one week's notice for each complete year, up to a maximum of 12 weeks' notice.

It is not unusual for an employer to offer a longer period of notice to provide a key employee with more security. At executive level, a period of six months or more is not uncommon. Next month, we will consider how these notice periods can be used to limit an executive's actions during that period by placing the executive on garden leave.

Summary and constructive dismissal

The one situation when the employer will not need to serve notice is in a summary dismissal situation. This is where the employee is guilty of gross misconduct. In this situation, the employee's conduct can be seen as bringing the contract to an immediate end by striking at the heart of the contract. However, employers are reminded that to avoid unfair dismissal claims a fair process must still be followed.

Similarly, if the employer's behaviour is deemed sufficient to fundamentally breach the contract then the employee can leave immediately, without serving notice. Interestingly however, they do not necessarily need to leave immediately; if they remain for a short period until they gain alternative employment, this will not necessarily invalidate their constructive dismissal claim.

The right to pay in lieu of notice (PILON)

Unless the right to make a PILON payment is included in the contract, if the employer requires the employee to leave immediately (and be paid in lieu) this will be in breach of contract. This can invalidate important contractual protections such as restrictive covenants. By providing a PILON clause, the employer can clarify the position by providing that payments for holiday and bonuses (which would normally accrue in the notice period) will not be paid. The potential downside of this clause is that its inclusion makes the PILON contractual and therefore subject to tax and NIC.

Some employers choose not to include the PILON clause and instead make a payment as a damages payment for failure to give proper notice. However, these payments have been closely examined by HMRC to see if they should be taxed as a PILON payment in situations when an employer always makes such payments without consideration of each individual circumstance. This option will be removed from 6 April 2018 when all PILON payments (contractual or otherwise) will be subject to tax and NIC.

Smooth Exit

Disputes can occur in relation to the practicalities of an employee leaving. Employers should ensure that the contract provides for the return of company property. Property would include physical property (laptop, phone and documents) and other property including key passwords for company social media accounts and other IT systems, confidential and other proprietary information stored on employee's own systems. The employer can request that any such property on employee's systems are deleted.

The contract should provide the employer with the right to make deductions from final salary payments for damaged property. It is worthwhile to include a clause to allow for deductions for other unpaid debts such as taking more than their holiday entitlement and for clawbacks such as training costs.

Holiday is also a common area for dispute. It is sensible to include a provision requiring the employee to take any outstanding leave in their notice period, if an employer does not want to make a payment in lieu of such holiday.

Next month we will consider the complexities in this area when the employee remains in employment during the notice period but is required to remain away from the workplace (garden leave) and how the employer can minimise its risks in that scenario.