Payment in Lieu of Notice
To follow on from last week’s blog about notice periods, I thought I’d throw some light on how paying an employee in lieu of notice operates.
When an employee’s contract is put on notice of termination, be it through redundancy, dismissal or resignation, rather than the employee working for the specified period of notice, employers may prefer, for varying reason, to terminate the contract immediately. This would involve paying the employee up to the end of the specified notice period but terminating the contract with immediate effect i.e. paying in lieu of notice.
Waiving the right of notice
The Minimum Notice and Terms of Employment Acts 1973 to 2005 allows for either party to voluntarily waive their right to notice. For example an employee may want to leave before the notice period has expired and the employer agrees. In that situation the contract ends on the date the employee physically leaves the employment and the employer is not liable for any further payment beyond this date.
What the Contract of Employment states
Under the Minimum Notice and Terms of Employment Acts 1973 to 2005, in order for the employer to have the unilateral right to pay in lieu of notice a clause allowing payment in lieu of notice must be included in the contract of employment. If this clause is not included in the contract, then paying in lieu of notice has to be by agreement between the employer and the employee.
In a situation where an employee accepts an employers offer to pay in lieu of notice, the date the contract ends is the date on which the employee physically leaves the employment. However, the date that the notice would have ended, often referred to as the notional termination date, is the date that the employer must use to calculate normal pay due and to calculate the annual leave entitlement of the employee. In a redundancy situation where payment is made in lieu of notice, statutory redundancy entitlement must also be calculated up to the notional termination date.
There is a further issue to consider. If the clause allowing payment in lieu of notice is included in the contract, then the employee will be liable to pay tax on the notice period payment. If, however it is not included in the contract, but is agreed between the parties, then the payment for the notice period is not taxable.
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