Payments in lieu of notice: When to say "No, thank you"

Legal Notes

with Gavin Goffe

Wednesday, May 25, 2011    

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MOST workers think they know what a payment in lieu of notice is. Far more are unaware of the circumstances in which they can use a notice period to their advantage to secure the maximum benefit for themselves when they are soon to be dismissed. In this article, we look at the considerations that ought to impact on an employee's decision whether to accept a payment in lieu of notice, as opposed to working out the entire notice period.

As the term suggests, a payment in lieu of notice (commonly referred to as a payment in lieu) is immediate compensation equivalent to the amount of notice required under the contract. If one month's notice is required to terminate the contract, the payment in lieu should be what the employee would have earned as salary or wages for that one month. Once the payment is made, the employment contract comes to an immediate end, even if it contains a provision requiring notice of termination to be given to the employee, and even if it was scheduled to end at some later date. A payment in lieu is generally only made in circumstances where the employer is obliged to give notice of termination to the employee. A payment in lieu is therefore not required where a worker gives notice to the employer, or where the worker retires, walks off the job, is summarily dismissed for gross misconduct, or dies. Notice of termination is not required where the employee has a genuine fixed-term contract and it expires as scheduled. Neither is it required if the contract should become incapable of performance because of events outside of the control of the parties, such as Judgment Day (assuming it wasn't reasonably foreseeable). In most other cases, including redundancies or dismissals for poor performance, notice must be given to the employee and the possibility exists that a payment in lieu could be made.

The first thing an employee should know is whether he or she has a right to refuse a payment in lieu. The law provides that an employee has the option to accept a payment in lieu. It cannot be imposed on a worker, but must be mutually agreed between the parties. If, however, the employment contract gives the employer the right to terminate the contract upon making a payment in lieu, that will be considered advance mutual agreement. Many workers, therefore, consented in writing to receive a payment in lieu of notice from the moment they signed the employment letter or contract, some without even knowing it. It's worth your while to take another look at your employment letter to see whether that applies to you.

A worker who has the right to insist on receiving notice instead of payment in lieu must weigh the value of the notice period against the value of immediately receiving cash. Generally, the more benefits and perquisites that a position brings, the less advantageous it will be to accept a payment in lieu of notice. For example, the bank executive who accepts a payment in lieu of notice may need to immediately return the company SUV, the Blackberry® Torch, the health insurance card(s) and any other company property without receiving any additional compensation for the loss of these benefits unless there was a term of the employment contract to that effect. Absent such a term in the contract, a payment in lieu only includes the salary

and commissions.

If there is no provision that allows the employer to make a payment in lieu, then it is entirely up to the employee to accept such a payment. If an employer dismisses an employee and the latter refuses to accept the payment in lieu, then the employer must continue to extend to the employee all the benefits that he or she was contractually entitled to receive for the duration of the notice period. The only exception to this obligation is where the employee is asked not to work for the notice period and there are benefits which are expressly or impliedly for business purposes only. For instance, it is common for company cellphones to be restricted to business calls only, but less common for the use of the company car to be restricted to business trips only. Thus, an employee who is sent on paid leave for the notice period could be required to return the cellphone but not the car.

The issue of the employee's entitlement to a bonus and or profit share after he or she has been dismissed without notice is one that requires careful consideration. In most

local organisations, bonuses and profit sharing are discretionary. It is rare for an employee to have a contractual right to receive either. Thus, an employee cannot claim to be entitled to receive a bonus as part of their payment in lieu of notice unless the contract specifically provides for it. It doesn't matter that it was likely that the employee would have received a bonus had they remained employed for the notice period. Therefore, if you are given the option of accepting a payment in lieu of notice shortly before bonuses are announced, be careful that you're not being penny wise and pound foolish.

Another circumstance where accepting a payment in lieu might not be in an employee's best interests is where there are key dates in terms of years of service that need to be reached before the employee will be entitled to receive other benefits. Most important in this category is the vesting date under any pension plan. Pension plans are structured so that more benefits accrue to members the longer they remain employed. A notice period may be long enough to ensure that the employee is vested in the pension plan and therefore entitled to additional benefits. An employee who accepts a payment in lieu and terminates his or her contract shortly before reaching that target date could make a huge mistake and deprive him or herself of millions. Another example concerns redundancy payments.

An employee must be continuously employed for 104 weeks before he or she is entitled to receive a redundancy payment. An employee who is made redundant and accepts payment in lieu of notice on the 103rd week will not be entitled to the redundancy payment that he or she would have received had they stayed on for the notice period.

On the other hand an employee who, by the terms of his or her employment contract, is prohibited from working for anyone else for the duration of that contract may want to terminate it by accepting the payment in lieu, thereby allowing him or her to immediately take up another job offer.

The decision to accept payment in lieu is an important one which should be carefully considered by employees from the moment they are negotiating their employment contracts until the bitter, or sweet, end.

Gavin Goffe is a Partner at Myers, Fletcher & Gordon and is a member of the firm's Litigation Department and Labour Law Practice Group. Gavin may be contacted via or on twitter @ggoffe. This article is for general information purposes only and does not constitute legal advice.




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