Legal Updates

Employment Law: Termination - Constructive Dismissal - Payment in Lieu of Notice (PILON) - PILON Payment or Termination Payment?

In this case of Clinton v HMRC [2010], an employer sought to terminate the employment of an employee and the employee sought to bring a claim for constructive dismissal against the employer. The employer paid the employee a ‘termination payment’ sum substantially the same as the employee’s entitlement by way of payment in lieu of notice (PILON). It was deemed by the Tax Chamber First Tier Tribunal (of the HMRC) that the payment was not made pursuant to a contractual entitlement but rather to extinguish the employee’s claim for constructive dismissal.

The significance of this decision was that the first £30,000.00 of the termination payment was therefore tax free, and the entire amount exempt from National Insurance contributions. The drafting of the PILON clause in this case is what caused much of the dispute.

It is important that PILON clauses in employment contracts are appropriately worded so as to ensure there is no discrepancy at such time as an employee leaves an employer’s employment.

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© RT COOPERS, 2010. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances.