“If I terminate an employee (or they resign) and I want to make a payment in lieu of notice instead of them working their notice period, do I still record their last working day as the date at the end of the one-month notice period?”
No, it is a bit of a common myth that the effective date of termination (i.e. last working day with the company) still falls at the end of what would have been the notice period where a payment in lieu of notice (PILON) is made.
A PILON is effectively “instead of” the employee working their notice period. This means therefore that you are cutting all employment ties with them on their last working day and whatever their notice period is (be it through dismissal or resignation), it is paid as a lump sum payment in their final salary.
Put in practice therefore if an employee resigns on 1st May 2016, they have a one month notice period and therefore if they were required to work their notice their effective day of termination and last working day would be 31st May 2016. Both parties agree it is not in either of their interests for the employee to work and therefore as there is provision for a PILON in the employee’s contract, the employee will stop working on 1st May itself. The one month’s salary is still payable and is paid in the company’s May payroll however, the employee’s effective date of termination is 1st May 2016 because the PILON acts to remove what would have been the notice period.
It can also work part way through a notice period. Therefore if an employee had served notice to resign on 1st May but the employer only needed them for a couple of weeks they could, for example, stop working on say Friday 13th May and the remainder of their notice period i.e. 2.5 weeks approximately, would be the PILON. In this scenario therefore the effective date of termination would be Friday 13th May because it is the last day they are physically attending work and the remaining notice is paid instead of it being worked.
NB this is not the same scenario where an employee is placed on garden leave. Garden leaves seeks to continue the contract of employment albeit the employee is effectively suspended from their duties and stays at home for the duration of their notice period.
If in doubt when seeking to exercise a PILON clause, please contact the MILS employment team.
Motor Industry Legal Services
Motor Industry Legal Services (MILS Solicitors) provides fully comprehensive legal advice and representation to UK motor retailers for one annual fee. It is the only law firm in the UK which specialises in motor law and motor trade law. MILS currently advises over 1,000 individual businesses within the sector as well as the Retail Motor Industry Federation (RMI) and its members.