Related posts:No related photos. TheCourt of Appeal’s ruling to reverse its decision on notice payments may havetax implications for PilonsItoften suits companies to dismiss an employee without giving the full noticeperiod. Is the employee entitled to his full pay for the balance of the noticeperiod, even if he gets a new job in the meantime?Theanswer to this question can make a big difference to an employee’s terminationpay as Rowley found when he was dismissed by Cerberus Software. Cerberus purported to dismiss Rowley summarilyfor gross misconduct. A tribunal found there was no justification for this.Rowley’s notice period was six months, but he started a new job after only amonth. Did Cerberus owe him one or six months’ pay? The answer depends on the employment contract.Insome contracts the employer is expressly entitled to terminate the contractwithout notice by making a payment in lieu of notice (Pilon). If the employerterminates summarily and makes a Pilon, there will be no breach of contract.The employee is then entitled to the full amount of notice pay as a debt fromthe company. This is on top of anything he may earn in new employment.Butif there is no contractual Pilon clause, the employer will break the employmentcontract if it does not give the right notice period. Crucially, the employeeis then entitled to damages for breach of contract, instead of a contractualdebt. The employee has a duty to minimise the damages he suffers by trying tofind a new job. What he earns in new employment will be deducted from what hisold employer owes him for breach of contract. Theterms of Rowley’s contract were therefore vital. The contract said thatCerberus “may” make a Pilon. What does this mean? The EAT said itmeant that Cerberus had two choices when dismissing Rowley. It could eithergive him six months notice of termination or dismiss him without notice and payhim six months in lieu as a debt. Since Cerberus had not given Rowley anynotice of termination, it had evidently opted for the second choice and nowowed him six months’ money in full.TheCourt of Appeal has just overturned that decision on the basis that Rowley’scontract said the company “may” make a Pilon. This meant that whenCerberus dismissed Rowley without notice, it could elect whether or not to makea Pilon. Because it had chosen not to do so, the company had breached thecontract and owed Rowley damages, not a contractual payment as a debt. Rowley,therefore, had to give credit for his earnings in his new job, so he was dueone month’s pay, not six.Thedecision may have implications for taxation of Pilons. The first £30,000 of Pilons is often taxfree if it represents damages for breach of contract, but taxable if it is acontractual payment. Thedecision in Rowley may be helpful where companies have reserved the contractualright to make a Pilon. If the company does not make a Pilon, but agrees apayment to the employee to settle his claim, the employee could argue that,under Rowley, the payment represents damages and, therefore, is tax free up to£30,000. Doubtless the Revenue will resist this argument.Companieswill still be concerned to make contractual payments under Pilon clauses whenthey want to enforce the contract after termination ñ non-compete clauses, forexample. This is because such provisions are not enforceable if the employeehas been dismissed in breach of contract. The Pilon will be fully taxable andthe company will have to bite the bullet of being liable for all the Pilon,even if the employee starts a new job during the notice period.Keypoints–Avoid Pilon clauses in contracts unless you will need to enforce contractualterms after termination–If you must use one, express it so it is at the company’s option–If you need to enforce the contract, elect to make a Pilon to avoid a breach ofcontract–Otherwise, do not make a Pilon. Negotiate to pay damages for breach of contractByJill Kelly, a partner with Tunbridge Wells law firm Thomson Snell &Passmore Firm allowed to benefit from its contract breachOn 30 Jan 2001 in Personnel Today Previous Article Next Article Comments are closed.
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