Weekly dilemma: Terminating contracts

Q We are a small company that unfortunately has to terminate the contracts of several employees. What should or should not be included in the termination package? If we are not requiring them to work their notice and are paying them in lieu, should that also include payments in lieu of any benefits they would have gained during their notice period (ie, bonuses, medical, annual leave, etc)?

I presume that the reason for dismissal is redundancy, and that less than 20 staff are affected. In this situation, you will need to consider both ‘contractual rights’ and ‘statutory rights’.

Contractual rights

You may dismiss staff by providing notice, requiring employees to work their notice or making payments to compensate for loss of notice. Sometimes contracts specify that a payment in lieu of notice (a ‘pilon’ clause) can be made. A pilon clause might also state whether a payment should reflect loss of benefits as well as salary. Unless the contract states otherwise, compensation should be paid for the full value of the contract, including value of benefits, for the notice period. Should you choose not to provide notice, you could argue for a discount where an employee mitigates their loss by obtaining other employment.

Where no contractual notice period has been agreed, then the law will imply a reasonable notice period. Notice must be at least a week per year of service up to a maximum of 12 weeks after 12 or more years’ service.

Statutory rights

Staff with more than two years’ service are entitled to statutory redundancy pay. Sometimes employers have more generous redundancy schemes, but I assume there is no such scheme in place here. A statutory redundancy payment is based on age, number of years’ service, and the amount of a week’s pay. The maximum payment is currently £9,900, which is where an employee has 20 or more years’ service and is 42 or over.

Crucially, you should ensure that the process for dismissal is fair and complies with the statutory dismissal procedure and that the reason is genuinely redundancy. Otherwise additional payments could be due for unfair dismissal.

Mark Leach, partner, Weightmans




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