NIM02570 - Class 1 NICs: Earnings of employees and office holders: Payments made on termination of employment: Payments in lieu of remuneration (PILORs)

An employer may enter into a fixed term contract with an employee but, for some reason, may decide to terminate the engagement early.

Example

An employer engages the services of an employee for a fixed term of 12 months.

However, the job is completed in 8 months and the employer has no further need for the services of the employee.

The employer terminates the contract after 8 months but pays the employee their remuneration for the full 12 months. The NICs position will depend upon the terms of the original contract.

If the contract provides that in the event of the fixed term being curtailed in any way the employer will make a payment in lieu of remuneration (a PILOR) for the remaining period, then the right to that payment arises out of the terms of the contract. The employer and employee have agreed as part of the terms on which the employee will provide his services that the employee shall in certain circumstances be entitled to certain payments (including the PILOR).

The right to the payment specified in the contract forms part of the rewards for the employee’s services. The payment is therefore earnings and will attract a Class 1NICs liability.

If the contract does not provide for the making of a PILOR in the event of the employer terminating the contract before the expiry date, then any payment on account of lost remuneration is compensatory. It is not earnings and therefore there is no liability for NICs.

If an employee has contracted to work for a fixed term and the employer has contracted to provide work for that period, any termination by the employer in advance of the expiry date constitutes a breach of the contract between them and entitles the employee to claim damages.

The employer’s payment is compensation to satisfy the legal claim to damages and is made to forestall such a claim.

As explained in NIM02520 a compensation payment does not constitute earnings and does not attract liability for NICs.