Redundancy can be a challenging and unsettling experience for both employers and employees. When an employer decides to terminate an employee’s contract due to redundancy, certain obligations must be met, including providing a notice period or making a payment in lieu of notice (PILON). PILON allows the employer to terminate the contract without requiring the employee to work the notice period. This blog aims to provide a clear understanding of how to calculate a Payment in Lieu of Notice following redundancy.
Establish the notice period
The first step in calculating PILON is to determine the notice period owed to the redundant employee. The notice period depends on the length of continuous service the employee has with the company. The notice period will be the following statutory notice, unless the contract of employment details a greater notice period:
- Less than one month of service: No statutory notice period.
- One month to two years of service: One week’s notice.
- Two to 12 years of service: One week’s notice for each year of service (e.g., six years of service would result in six weeks’ notice).
- More than 12 years of service: Twelve weeks’ notice.
Calculating payment in lieu of notice
An employee’s length of service for redundancy purposes should be calculated as at the “relevant date” in accordance with s.145 of the Employment Rights Act 1996. Where an employee has been dismissed without the statutory minimum notice to which he or she is entitled, including where payment is made in lieu of notice, s.145(5) states that the relevant date is the date on which the minimum notice would have expired had it been given.
Statutory Notice Period
So, if an employee would have reached an anniversary increasing his or her length of service during the statutory minimum notice period, had he or she not been dismissed without notice, the extra year should be included in the calculation of his or her redundancy payment.
For example, an employee with five years and 11 months’ service is entitled to five weeks’ statutory minimum notice (under s.86 of the Employment Rights Act 1996). If the employee is dismissed with a payment in lieu of notice, the redundancy payment will be calculated based on six years of service because the five weeks’ notice required under s.86 would have taken him or her past the anniversary date.
The maximum statutory notice period is 12 weeks, so a long-serving employee with 20 years and 10 months’ service, for example, is entitled to 12 weeks’ statutory minimum notice (under s.86 of the Employment Rights Act 1996). If this employee is dismissed with a payment in lieu of notice, the redundancy payment will be calculated based on 21 years’ service because the 12 weeks’ statutory notice period would give them an additional full year’s service.
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Pay Rate for Statutory Notice Pay
While there is a statutory cap on a week’s pay for the purposes of calculating statutory redundancy pay, no such cap exists for notice pay, so any payment made in lieu of notice should be paid at the employee’s normal basic pay.
The PILON amount should be equal to the employee’s basic salary (and any other specifically referenced elements from the contract of employment) for the notice period they would have been entitled to if they had worked it. The calculation would be as follows:
PILON Payment = (Basic Salary / 52.14) * Number of Notice Weeks
Employers may of course choose to pay above the statutory rates if this is more appropriate to the company culture. However, the principle of calculating length of service for a payment in lieu of notice remains the same.
PILON payments are subject to income tax and National Insurance contributions (NICs) in the UK. Since April 2018, all PILON payments, whether contractual or not, have been taxable. Employers must ensure that they calculate and deduct the correct amount of tax and NICs before making the payment to the redundant employee.
Calculating PILON following redundancy requires accuracy and compliance with UK employment laws and tax regulations. Redundancy can be a challenging time for all parties involved, but understanding the PILON calculation process can help streamline the transition, ensure fair treatment for both employers and employees and prevent claims against the employer.
If any of the issues raised in this article affect your business, please give us a call to discuss your options. We’re a friendly bunch and really keen to make a difference to your business by finding a solution that works for you and your business so call us on 01473 360160.
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