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The relationship between PILON and termination payments

Payment in lieu of notice can be given to the employee rather than requiring them to work their notice period. Under a contract of employment (and indeed by statute where there are no contractual terms in place), the parties are required to give notice to one another when they want the working relationship to come to an end.

The minimum statutory notice required to be given by an employer pursuant to the Employment Rights Act 1996 is one week if the employee has been employed for one month or more, but less than 2 years, and then one week for each year thereafter to a maximum of twelve weeks. The minimum notice to be given by an employee is one week and is not increased by length of service. Most employment contracts will require longer notice periods of notice to be given.

Depending on the wording of the contract, an employee will receive the basic pay that they would have earned had they worked their notice and they may (or may not) be entitled to additional bonus or other payments that they would have earned during this time.

Notice pay is taxable, whether paid as a result of work performed or in lieu. When it comes to settlement agreements, care must be taken to ensure the appropriate treatment of the relevant portions if a payment is expressed as a lump sum settlement rather than notice and ex-gratia payments being distinct.

Taxation of ex-gratia payments can be complex appropriate legal and tax advice should be taken by both the employer and employee before a settlement agreement is finalised.

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