Termination payments and benefits: payments in lieu of notice (PILONs): damages and agreements
In general terms where an employer unilaterally dismisses the employee with less notice than the employee is entitled to (whether by contract or statute) then the employer has breached the contract.
A PILON in such circumstances represents damages for breach of contract (see EIM13005) and is taxable only under Section 401 ITEPA 2003 unless there is a practice in place (see EIM12977).
The employment terminates with the employer’s action.
It should be remembered that an employer would not normally breach a contract if it can be avoided due to the threat of legal action for damages but sometimes in redundancy cases it may not be possible to give due notice because of practical considerations when running or shutting down a workplace. The working presumption to adopt is therefore that the employee will have been given proper notice. This presumption should be overturned only if there is evidence to support it.
PILONs may also result from an agreement between employer and employee, see EIM12979.