Pay in Lieu of Contractual Notice: What You Need to Know
Pay in lieu of contractual notice is when a payment is made to an employee upon termination without notice.3 min read
Pay in lieu of contractual notice is when a payment is made to an employee upon termination without notice. This payment ends their employment at that point.
Overview of Payment in Lieu of Notice
When payment is made to compensate an employee for money they would have earned had they worked during their contractual notice period, it is called a payment in lieu of notice. The contractual notice period must be given as a term for a contract of employment whether expressed or implied. If it is expressed, it can be written or spoken.
Other terms may be agreed to, as well. The notice must be given in writing, or the employer can make a payment in lieu of notice when shortening the notification timeframe. A payment in lieu of notice is different from a garden leave where the employee remains employed but is not required to attend work. The employee is still under contract and cannot take another job during the notice period.
A payment in lieu of notice is applied when an employer wants to terminate an employee's services immediately. An example of when an employer would not use payment in lieu of contractual notice is when an employee is terminated for gross misconduct.
Employment Contracts and Payment in Lieu of Notice
A payment in lieu of notice provision in a contract lays the groundwork for the immediate termination of an employee. With the provision in place, an employer would not be in violation of breaching the employment contract if the provision clearly states the terms of the payment in lieu of notice. This would include the amount to be paid for this type of termination.
A normal practice for employers when drafting a payment in lieu of notice stipulation is including the provision that employment is subject to termination at any time if a payment in lieu of notice is paid for the employee's basic salary accruing during the notice period.
If an employer has not included a payment in lieu of notice provision in the contract, it can be tricky. While technically any termination of employment with a payment in lieu of notice is likely to breach an employment contract, this can be avoided with the inclusion of pay and benefits a worker would be entitled to during the notice period.
Making a payment for annual leave that would have accrued and an additional payment by way of a full and final settlement can help avoid any disagreements between the employer and employee. The situation can become more complex if the following situations apply:
- Share options are in play.
- The employee loses additional pay or benefits during the notice period because the employer is not covering them under the payment in lieu of notice.
- The employee is in the process of receiving medical treatment covered by the company's health insurance.
- The dismissal process was not handled properly.
In these situations, an employment lawyer can be consulted to make sure contractual obligations are not breached.
Calculating Payment in Lieu of Notice
When payment in lieu of notice is in progress, it should be made immediately upon termination of employment. Three options are available for making a payment in lieu of notice:
- Per the terms of employment stating the employee is entitled to the payment.
- At the employer's discretion per the terms of employment.
- Regardless of contractual rights or any provisions made.
Taxes on payments in lieu of notice vary based on how they are handled and paid. Taxes are usually paid when the payment is made at the employer's discretion and when it is stated in the terms of employment.
When payment is made, there is no contractual right or provision. This is usually due to a breach of contract. This means the payment in lieu of notice can be considered an advance payment for damages to the employee for losses and as a way to avoid a potential legal claim.
New rules affecting the payment in lieu of notice went into effect on April 6, 2018. Moving forward, employers should consider including payments in lieu of notice in employment contracts. Such a clause allows payment without breaching the contract.
If you need help with payment in lieu of contractual notices, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies Google, Menlo Ventures, and Airbnb.