We recently held the first workshop in our two-part series on “Thirteen Tricky Topics” and it proved to be very popular (click here for details of part two)!   One “tricky topic” that generated much debate was how to operate a payment in lieu of notice (PILON) clause in the contract of employment.

Using a PILON clause was not really tricky until the Supreme Court decision in the case of Geys v Société Generale at the end of 2012. This case made it clear that simply paying the PILON into the employee’s bank account did not end the employment contract even where the PILON clause stated that the contract could be terminated “by making” a payment in lieu of notice. The court held that the contract only came to an end when the employee was told in clear terms that a payment made into his bank account was the PILON terminating his employment.  In the Geys case this was several weeks after the PILON had been made.  Not only did the disconnect between the termination and the payment allow Mr Geys to successfully argue that the employer was in breach of contract, the court said he could therefore elect to ignore the breach and keep the contract alive – the exact opposite of what the employer set out to achieve.

The Geys case means that:

  • you need to make it clear to the employee on termination that you are terminating under the PILON clause – say so in the dismissal letter.
  • the contract should state that the employment contract ends when notice of termination is given, not when the PILON is made.
  • it is important to keep a close link in time between termination and the making of the PILON.  Ideally, the PILON should be paid on dismissal but, if that is not practicable, as soon as possible thereafter. Delaying the payment exposes employers to an argument that the contract has not ended until the PILON is paid or that it is in breach of contract. 

Most of our delegates used PILON clauses in their employment contracts and were confident of the benefits of them.   However, all agreed that the timing issue was a new twist and the possibility that an employee could keep the contract alive if the employer operated the PILON clause incorrectly was the worst possible outcome.  We had much debate about PILONs generally:

  • What should a PILON include? The trend seems to be towards salary-only PILONS and certainly these are easier to operate as calculating the value of benefits can lead to dispute.
  • Benefits, bonuses and commissions should be expressly excluded, if that is the intention.
  • Must a PILON include pay for holiday that would have accrued during the notice period?  Not in most cases, although it is arguable if there is an imprecise reference to “benefits” being part of the PILON.
  • Does the £30,000 tax free payment apply to a PILON?  Usually not.