Payment in Lieu of Notice

It might seem like quite a basic thing but there are often disputes about what should be paid when a payment in lieu of notice is made, and discussions about this when Settlement Agreements are entered into.

For quite a basic contract that just refers to making a payment in lieu of notice, a payment should include the person’s basic salary for the notice period but also any other benefits that they would receive during that period. For example, this might be pension payments, health insurance, the benefit of a car or a mobile phone that’s expensed by the employer and even bonus payments if they would fall due during the notice period.

There is a mechanism for an employer to reduce what is payable in the notice period, which is to put in the contract that when any right to make a payment in lieu of notice is exercised, basic pay only will apply, but you tend to only see that happening in senior people’s contracts.

The risk to an employer if they don’t include all of these other elements is that when they make a payment of basic pay only, they have made an unlawful deduction from wages and breached the contract of employment.

This could have negative consequences if they wanted to, for example, rely on clauses that continue beyond the end of employment like confidentiality provisions, intellectual property provisions and restrictive covenants.

It is also likely to put the employee that you’re trying to negotiate a Settlement Agreement with, in a frame of mind where they perceive that you are diddling them out of their entitlements and can set a bad tone to those discussions. For that reason, it is very important to think about the whole package when looking at payment in lieu of notice.

One thing that the employee will not be paid for in payment in lieu of notice is holiday that would have accrued during the notice period. This is because when you make a payment in lieu of notice you have bought the contract to an end early at a given date. Holiday should be calculated to that date.