The Importance of PILON Clauses and Why Settlement Agreements Sidestep the Rules on Notice
Wednesday 29th March 2023
A settlement agreement is a legally binding agreement made between employers and employees in order to settle employment disputes such as grievances and Employment Tribunal claims. They may also be used when terminating the employment of an employee as a way to waive any claims and protect the business while potentially offer a more favourable and amicable ‘way out’ of the business for the employee.
The first step we take when asked to draft a settlement agreement is to review the employee’s contract of employment to check arrangements on termination and relevant notice pay.
Settlement agreements allow employers to sidestep the usual notice rules. Under a settlement agreement, an employer can pay an employee their notice pay without requiring them to work their notice period, regardless of the employment contract terms. As part of the settlement agreement, the employee will sign a waiver of claims which protects the business from wrongful dismissal claims. However, in an ordinary dismissal situation, an employee is entitled to work their notice period if the contract does not include a payment in lieu of notice (PILON) clause.
A PILON clause allows employers to pay employees in respect of their notice period without them having to remain in the business. In some circumstances it is not desirable or practical for an employee to work their notice period. Having a PILON clause in the contract allows an employer to remove an employee immediately without any breach of contract. In the absence of a garden leave clause, being able to enforce PILON is essential for employers in businesses dealing with highly confidential information as they may want the employees removed from exposure to such information as soon as possible. Employers should review their current employment contracts, hypothetically considering their position should they wish to dismiss an employee. This will allow them to establish what position that would leave them in and how protected their business would be, especially where employees have been in the business for a long period of time.
Comment
Employers should always take legal advice in respect of drafting contracts, not only to ensure they protect the business but to also ensure they are legally compliant.
