NIM02550 - Class 1 NICs: Earnings of employees and office holders: Payments made on termination of employment: Payments in lieu of notice (PILONs): Expectation, custom and "automatic" payments

Written contracts

Where there is a written contract there is usually no difficulty in determining what the terms of the contract of employment are. They are those terms which are set out in the contract documents.

It is also worth remembering that the Employment Rights Act 1996 requires the employer to provide the employee with written particulars of the terms of their employment. These written particulars can be used as evidence of the terms of the employment.

Expectation or custom

However, even if there is no contractual entitlement to a payment there may be a liability for NICs if it is customary to make such a payment. This can be the case in respect of PILONs where there is no written provision for such a payment to be made but the employer always makes such a payment instead of giving the necessary notice. This can be described as a ‘custom’ or ‘expectation’ but it does not mean that the payment is in any way contractual. The payment is one made “automatically” without any consideration of individual employees’ circumstances.

You should not be misled by the terminology but should rather look to determine the nature of the payment. As long as it is a consistent pattern in the workplace that a PILON will always be made in place of the due period of notice, and the process is automatic, then the payment will effectively form part of the employment relationship which underlies the services which the employee provides. It will therefore be earnings for the purposes of NICs (see NIM02010 for information regarding the meaning of “earnings”). This may be the case even if the individual employee claims to be unaware of the condition. The important point to establish is not whether an individual knows about the practice but whether it is an expected part of the employment relationship where the individual works.

Remember also that an expectation or custom can be industry-wide or confined to a small group within a business.

Another important point to bear in mind is that the length of time the custom or expectation has been in place is not a crucial factor. It is more important to determine whether the condition is an expected part of the employment. It is therefore possible for an expectation or custom to be established very quickly where it is clear to employees that an employer intends to follow a particular line.

Procedures in place to determine PILON

You should not normally contend that an expectation or custom exists if the employer has in place a procedure for assessing what payment is to be made to employees who do not receive full notice. If there is a genuine critical assessment of individual employees’ circumstances so that PILONs are not made automatically, no custom will have been established. Such an assessment could involve, for example, deciding whether an employee is likely to find another job within the notice period or taking into account what benefits would have been received. In these circumstances the individual could not be certain that a particular payment would be made in lieu of notice and therefore there is no “expectation” or “custom” and the PILON is not “earnings” for NICs purposes. It is more likely to represent compensation or damages and there will be no liability for NICs.

If, however, employees are invariably given a gross PILON as the result of the procedure being applied then the question arises whether a genuine critical assessment is being made.

Post-employment notice payment (PENP)

But see NIM02555 which explains how, from 6 April 2018, the part of a termination payment that represents the earnings that an individual would have received had they worked their notice period are treated as earnings and subject to Class 1 NICs.