Your Settlement Agreement Solicitor

Your Settlement Agreement Solicitor

Episode 22: Am I Entitled To Pay In Lieu Of Notice If I Am On Sick Leave?

Welcome to episode 22 of Your Settlement Agreement Solicitor with your host, Geoffrey Caesar, a solicitor of England and Wales specialising in settlement agreements.

In this episode, we’re diving into a common query around Payment in Lieu of Notice, or PILON, and how it applies when an employee is on long-term sick leave. Many employees and employers alike wonder: if an employee is on long-term sick leave, should PILON be paid at the usual contractual salary, or does sick leave impact the amount?

Understanding how PILON works when sick leave is involved can be essential for employees navigating termination situations, especially if health has been a factor. Let's break it down and shed light on what the law requires.

What Is PILON?

Payment in Lieu of Notice, or PILON, is a sum paid by an employer to an employee when the employer decides to terminate the employee's contract immediately without requiring them to work through their notice period. This payment is intended to cover what the employee would have earned had they worked through the notice period, reflecting their usual earnings and, in most cases, any other contractual benefits.

When an employer exercises PILON, the employment relationship ends immediately, and the employer essentially buys out the notice period by paying the employee their notice pay in a lump sum. This can be advantageous for both parties, allowing the employee to move on without delay and enabling the employer to end the contract cleanly.

How Is PILON Calculated?

Under UK employment law, PILON is typically based on the employee's full contractual salary. It includes all amounts that would have been paid during the notice period if the employee had continued working, such as base salary, holiday pay, and potentially other contractual benefits like pension contributions or car allowances, depending on the terms in the employment contract.

What Happens if the Employee Is on Long-Term Sick Leave?

A situation can become more complex when an employee is on long-term sick leave. Employers sometimes question whether they need to calculate PILON based on the full contractual salary or if they should base it on the reduced rate the employee receives while off sick.

The answer is clear: when an employer makes a PILON, they are required to pay the employee at their full contractual salary, irrespective of whether the employee is off on long-term sick leave. UK employment law stipulates that PILON must reflect the employee’s normal earnings as if they were actively working during the notice period.

So, even if an employee is on statutory sick pay (SSP) or company sick pay at a reduced rate, PILON calculations should still be based on their usual salary, not their sick pay rate.

This legal requirement ensures that employees are not disadvantaged in cases where they are unfit to work due to illness. The underlying principle is that, since the employer is ending the employment without the employee working through their notice period, the employer must compensate for the notice period at the rate the employee would typically earn. By opting to exercise PILON, the employer is voluntarily bypassing the notice period and, therefore, must fulfill its contractual obligations fully.

PILON vs. Working Through Notice on Sick Leave

It’s essential to distinguish between PILON and situations where the employee is required to work out their notice period. If an employee works their notice while on sick leave, the pay may indeed reflect the sick pay rate, depending on the terms of the employment contract and the notice period length.

However, with PILON, the employment relationship ends immediately, and there’s no "working through" the notice period. Consequently, the employer must pay the PILON as if the employee were fully available and working.

What if There’s a Dispute?

If there’s a dispute or confusion about PILON and the amount owed, the first step should always be to review the employment contract. Clear language around PILON, notice pay, and sick pay provisions can often clarify entitlements.

Where no clear answer is found, or if it’s not addressed in the contract, employers and employees may consider seeking advice from an employment law solicitor such as me to understand their rights and obligations fully.

Final Thoughts on PILON and Long-Term Sick Leave

The question of PILON on sick leave is a topic that comes up regularly, particularly for employees who may feel vulnerable about their job security due to their health status.
Knowing that the law protects their right to a full PILON payment can be reassuring, as it ensures they will not lose out financially if their contract is terminated while they are on sick leave.

For employers, understanding the rules around PILON can help avoid potentially costly disputes and ensure the end of the employment relationship is handled smoothly and in compliance with the law.

Thank you for tuning into this episode of Your Settlement Agreement Solicitor. If you have questions about PILON, settlement agreements, or other employment law concerns, please don’t hesitate to reach out. I’m here to make complex legal issues clear and to help you find the best path forward in your employment journey.

I’m Geoffrey Caesar, Your Settlement Agreement Solicitor.