Benefits of a PILON clause

 - Published:  19 November, 2010
Page 25 

Once an employee has accrued at least four weeks' continuous employment, they have the statutory right to a minimum notice period of one week. This increases by one week's notice for every year of service up to a maximum of 12 years for example, six years' service gives an entitlement to six weeks' notice.

However, it is possible that, for some roles, you might have contractual notice periods which are more generous than the statutory minimum for example, managers who get three months' notice.

If your contractual notice periods are shorter than the statutory provisions, an employee can ignore what is written in their contract in other words, the statutory notice period automatically overrides anything you have agreed.

However, if you dismiss an employee without giving them sufficient notice, you are likely to find yourself on the receiving end of a breach of contract claim. This could get costly if your actions deprived them of the salary (and any benefits) that they would have received had they been able to work out their full notice period.

Ignoring the tribunals

For more senior staff, as bonuses are likely to be involved, this could add up to a substantial figure. This is why so many claims of this nature are heard in the High Court. Unlike the tribunal, which can only hear breach of contract claims of up to a maximum of £25,000, it is unrestricted in the amount it can award. Also, if you dismiss an employee in breach of contract, they are automatically released from any contractual obligations in their contract such as restrictive covenants.

Depending on the nature of their role, this could leave you exposed, as the employee would be perfectly free to set up in competition against you or work for a competitor.

What is a PILON?

This is where a "payment in lieu of notice" or PILON clause comes into its own. It allows you to dismiss an employee immediately, providing you pay them what they would have earned had they worked out their entire notice period.

Plus, with some clever drafting, you can get away with paying them basic salary only. This is done by stating that a PILON payment will not include any bonus, commission or any other benefit that the employee would otherwise be entitled to during the notice period.

With probationary staff, set notice periods at the statutory minimum of one week and limit any benefits offered during this time. For example, don't give these employees any bonus payments or private health insurance until they have satisfactorily completed their probation period.

You can still require an employee to work out their notice period even with a PILON clause.




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