Termination Pay in the UK

Posted November 7, 2022
Categories: Guide, Payroll, UK

A question we get asked a lot by our clients is the types of payment that they need to pay when terminating in the UK. Below is a brief guide to termination pay in the UK:

Pay in Lieu of notice

There are situations where an employer might want to dismiss an employee without having them serve out their notice. Possible reasons for this include the employee’s request to leave without working their notice, the employer’s concerns that the employee will disrupt the rest of the workforce or not carry out their job properly if they work their notice period, or the employee’s continued presence in the workplace with access to systems and information.

The employee’s employment can be terminated instantly without the requirement for them to serve out their notice period if they are instead paid in lieu of notice. If an employee leaves before the end of their notice period, the company still has to pay them the equivalent of their salary. Using PILON will avoid violating the conditions of the employment contract.

Unless the contract specifies otherwise, payment in lieu of notice need not include holiday pay that would have accrued during the notice period, i.e. after the date of termination.

Gardening leave

The employee’s employment agreement will continue in effect during the entire time of garden leave up until the date of termination. The employee is still under the employment of the company throughout the garden leave time, but has no obligation to report to work.

Redundancy Pay

The employee may be eligible for statutory redundancy pay from the employer if they have 2 years’ continuous service, and they were laid off because there was a legitimate need to make redundancies in your workplace. The employees gross salary is used to calculate redundancy pay. Statutory redundancy payments made to the employee below are based on the following full years’ of service:

up to age 22 – half a week’s pay
age 22 to 40 – 1 week’s pay
age 41 and older – 1.5 weeks’ pay

The employee will not be required to pay taxes on the statutory redundancy payment. The amount of money the employee can receive is capped at £571 per week, and the maximum service that the employees is entitled to receive redundancy pay is 20 years.

Settlement Agreements

When an employee and an employer come to terms on the resolution of any potential legal claims by the employee against the employer, they enter into a legally enforceable contract known as a settlement agreement.

However, a settlement agreement is not always used solely when an employee leaves their job. In the event of a disagreement throughout the course of work, a settlement agreement can be used to resolve the issue amicably.

When an employee is not performing well and neither the company nor the employee wants to engage in a lengthy capability process, a settlement agreement can be useful since it allows both parties to stop the employment relationship quickly and on mutually agreeable terms.

Both the company and the employee will have input into the final terms of the settlement. Once all the details have been worked out, a written settlement agreement will be drafted, including the claims the employee will waive in exchange for the monetary settlement.

Benefits for time off

Any paid time off that has been accrued but not used by the time an employee leaves their position must be compensated for. On termination of employment only may a payment in lieu of notice be made.

In cases when the employer offers more paid time off than is required by law, the contract should specify what will happen to accrued time off in the event of termination.

More information on Notice Period

Statutory Notice

Notice requirements for ending employment are set forth in detail under the Employment Rights Act of 1996.

Typically, if an employee has been with the company for more than a month but less than two years, the employer must provide two weeks’ notice before terminating their employment. Each year of employment after that earns an additional week of notice, up to a maximum of 12 weeks.

After the first month, employees who want to resign must give at least one week’s notice.

Contractual Notice

Since the law establishes the bare minimum length of notice that must be given by each party, the contract of employment can provide for a greater notice time, but cannot grant a shorter notice period. If the contract specifies a shorter notice period than the law requires, the law will apply and the contract will be interpreted as though it includes the law’s notice requirement. Many employment contracts stipulate a notice time that is longer than the legally required one week. This is because most businesses will require more than a week to replace the departing worker, train the new hire, and give the departing worker time to finish any unfinished business and give a thorough handover. Our HR Specialists are on hand to answer any queries you may have with termination pay in the UK.