Payment in lieu of notice: to be used in the contract of employment?

Insight

Payment in lieu of notice

The effect of this is that employees receive their notice pay upfront in one lump sum, which allows their employment to come to an end. In order to be able to do this without being in breach of contract, there needs to be an express payment in lieu of notice clause in the employee’s employment contract.

Employees often welcome receiving a payment in lieu of notice as they are then getting paid for work they are not having to do. It also brings their employment to an end sooner, meaning that they can start work with a new employer straight away.

It is also important to check the employee’s employment contract as to their rights regarding payment in lieu of notices, as sometimes contracts set out how any payment in lieu of notices are calculated (i.e. basic salary alone and/or including some benefits).

However, employers sometimes wish to make a payment in lieu of notice to an employee where there is no notice clause in the employee’s contract.

In such a case, by making a payment in lieu of notice without the contractual right to do so, an employer would be in breach of contract, which then means it may not be able to rely on provisions like restrictive covenants in the contract that would otherwise survive termination of employment.

To try and combat against this, it may be beneficial to enter into a settlement agreement with the employee, whereby you can make a payment in lieu of notice to them but then expressly include fresh restrictive covenants into the agreement, mirroring those in the employment contract, so that they then do apply following a termination of employment.

Payment in lieu of notice: to be used in the contract of employment?