INGRID'S BLOG.
PILON....
This week has seen me struggle with the tricky and complex subject of payments in lieu of notice [PILONs].
I got the call for help from a colleague of mine who I have worked with in the past. “I’ve just been dismissed” they say, “Oh my goodness how awful”, I say, etcetera, etcetera. When you work in HR you know that this type of call normally means something’s gone pear shaped in the separation process between employee and employer. It never fails to surprise me how many dismissal processes still go badly wrong, even ones that should be relatively straight forward.
Anyway, back to my colleague’s problem, following the meeting in which they were verbally dismissed, the HR manager had written to them asking for signature on a compromise agreement the offer being a tax free £30,000 PILON. If my colleague refused this offer then they stated 3 months salary plus allowances less tax and NI contributions would be paid. My understanding is that the £30,000 was the higher amount for my friend to receive but a lesser amount for the company to pay out. Win –win you might think, but I was not so sure!
This is where it all gets very complicated, and let me state now that I do not consider myself to be an expert in this particular aspect of employment law. My understanding is that because in this instance there was a clause in my colleagues contract of employment that states “the company reserves the right to make a PILON based on salary level and subject to tax and NI deductions as appropriate” , the PILON offered is contractual and therefore indeed subject to tax. This is what I put in writing to my colleague about the situation.
“Under this ‘Compromise Agreement you the employee are receiving an amount of money instead of working a notice period which in my mind contrary to what they suggest in their letter to you, translates as a PILON. It is clearly not a redundancy payment – which is a more legally acceptable tax exempt situation.
If an employee works the contractual notice period the salary and allowances are taxed in the normal way but the position is less clear with a PILON. Is it taxable as a payment under the employment contract or is it a tax free compensation payment for loss of employment?
Its all rather complex and I do not claim to be an expert but my understanding is that case law suggests that if THERE IS NO PILON AGREEMENT in the contract of employment any PILON in the compromise agreement is not considered as a payment under employment contract law. This means that the payment is classed as compensation for breach of contract [by the employer] and can be paid tax free up to a maximum of £30,000.
If the contract of employment DOES CONTAIN A CLAUSE FOR THE EMPLOYER TO MAKE A PILON the payment is subject to tax because it is regarded as a payment made under contract law. This contract appears to have such a clause. Interestingly in addition to the contract clause, case law supports the fact that even when there is no contractual right for the employer to make a PILON, when they habitually do so the Tax & Revenue people take the view that the PILON becomes an “IMPLIED” term of the contract and so fully taxable – there is no definitive decision that I can quote form the courts at this time about what is termed “auto-pilons”
So my advice to you is to be very careful, don’t sign anything until you are 110% sure that the supposed £30,000 tax free payment is really tax free. My concern for you at the moment is that it is not.
Compromise agreements are by their nature pretty much final when you sign there is some statement about “full and final payments”. In other words once you sign the agreement all counter claims against the employer, are full and FINAL. So if you find some time down the line you have to pay tax on the £30,000 anyway, you have no ability to seek reimbursement from the employer. Recent case law has been tightening up in favor of the Inland Revenue
My advice is that you make sure the solicitor signs a certificate confirming that everything including tax liability has been explained to you before you sign the agreement.
If you are liable for tax – and I really think you might be then seeking the full amount of notice entitlement such as car allowance, holiday entitlement etc etc would be advantageous. You need to do your sums but I am very skeptical of the current offer – mainly because of the tax implications.
Interestingly company property such as computers, mobile phones etc are far more valuable to the employee than the actual cash value of the asset to the employer, particularly so in the case of company cars. There is definitely an ability to negotiate with such things and have them included in severance packages.”
Dismissal situations are never easy, it’s a terrible thing to have to dismiss someone from their employment and it is not so nice being the ‘dismissed’ either. Whatever the reason for the severance of employment, it’s important that the employee is still treated fairly and with respect at all times. No one wants to lose their job and in the midst of all the emotional trauma associated with such situations, feeling that the employer is dishonouring their duty of care to give the fairest severance package pushes stress levels even higher. Professional HR managers must at all times remain objective in such situations; they are still the bridge between what is right for the company and what is fair for the employee.
So if anyone reading this blog thinks that my perception of the situation is wrong please let me know, or indeed if anyone can add to the advice please do so. Comments invited.