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Payments in Lieu of Notice

When an employment is terminated, the employer often makes a 'Payment in lieu.' He says to the employee "You are now dismissed, here is a payment instead of (in lieu of) the notice you would normally have received. You need not work your notice." The employer will then get the signed agreement of the employee for the payment. Many employers views of what may be done are wrong, they do not have the right to do this as such unless it is set out in the contract of employment. He is usually saved because the payment of full salary which he makes will normally cover any liability for damages.

One common problem is this area was resolved. Assume an employee is entitled to four weeks' salary. The employer pays a large(-ish) sum, in excess of salary he might have paid had he asked the employee to work out his notice, and the employee waives his or her right to notice. Because of the strange wording of the Employment Protection (Consolidation) Act 1978, (now superseded by the Employment Rights Act 1996), many had thought that such an employee would still be entitled to salary covering the notice period. The theory was that the Act allows the employee to waive his or her right to notice, but not the right to salary in lieu of such notice. In other words he could 'have his cake and eat it' and be paid twice for work he had not, in fact, done anyway!

But Scotland's Court of Session - that country's equivalent of the High Court - has made it clear that an employer will not have to pay out twice in such a situation. Provided the employee is fully compensated by the payment made by the employer, his or her waiver of the right to notice will also entail waiving the right to salary in lieu of that notice.

Related questions often arise about the rights of the employee to holiday pay and also the taxation of any such payments. In each case, a well drawn contract, and or form of notice and receipt, can do much to ease the doubts and problems of both employer and employee. The Working Time Regulations now do much also to strengthen, if not clarify, rights which formerly were rather weak.

An important further issue is whether such payments are taxable. A recent decision has also clarified this. Where the contract reserves the right for the employer to insist on this, then any payment is made as, and under, the contract, and is therefore taxable. A payment made where no such provision exists is treated as compensation paid as a result of a breach of the contract. It is therefore not paid under the contract and is not, generally, taxable. The distinction may still not be quite clear, and specific advice must be taken in relation to any particular situation. A further case (EMI Group Electronics Ltd v Coldicott Times 31 August 1999), clarifies also that a payment in respect of the contractual notice period itself will also be taxable.

Important: Please note that our law-bytes are retained for archival purposes only. The law changes, and these notes are often, now, out of date. You must take direct advice on your own personal situation and the law as it currently stands.
All information on this site is in general and summary form only. The content of any page on this site may be out of date and or incomplete, and you should not not rely directly upon it. Take direct professional legal advice which reflects your own particular situation.
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18 October 2013 200 18 October 2013