How do you calculate redundancy pay when making a payment in lieu of notice (PILON)?

Redundancy payments are calculated based on an employee’s length of service. But what happens if an employee who is paid in lieu of notice would have completed another year’s service if he or she had worked the notice period?

Redundancy pay and length of service

The Employment Rights Act 1996 sets out the rules for calculating a statutory redundancy payment. For each complete year of service with the employer, the employee is entitled to between half a week’s pay and one and a half weeks’ pay, depending on his or her age.

The “relevant date” and PILON

The employee’s length of service must be calculated as at the “relevant date”. If the employee is dismissed with notice, this is the date on which notice of termination expires and the employment comes to an end.

But the position is different if the employee is dismissed without notice, including the common scenario where a redundant employee is given a payment in lieu of notice (PILON).

Where an employee is dismissed without the statutory minimum notice, the relevant date for calculating length of service is the date on which the statutory minimum notice would have expired had it been given.

Adding on the statutory minimum notice period

Employees are entitled to statutory minimum notice of one week after one month’s service, two weeks after two years’ service, then an additional week for each year’s service, up to a maximum of 12 weeks’ notice.

So where an employee is dismissed without notice (but receives a payment in lieu of notice), the employer should add on the minimum statutory notice period to the employee’s service as at the date on which the employment ends.

This might take the employee past an anniversary, entitling him or her to more redundancy pay. For example, an employee who is made redundant after seven years and 11 months’ service would be entitled to a minimum notice period of seven weeks.

If the employee is paid in lieu of notice, the employer should add on seven weeks to the employee’s length of service, which would take him or her past the eight-year anniversary. The employee would therefore be entitled to a higher redundancy payment.