Taxation of payment in lieu of notice

Hi everyone,

I'm looking for esteemed opinions on the taxation of payment in lieu of notice when issued as part of a redundancy package.

The facts are as follows:
Employee is made redundant with 2 weeks notice - package is statutory plus €1500 ex gratia and notice period.

For most the notice period could be 3 months which means its the majority of the package. Employer is taxing the notice period as normal pay which means 41% plus levies for most.

The issue surrounds the definition within the 'pay in lieu of notice' in the tax booklets. This is taxable if a contract provides for this upon termination. My understanding is that the spirit of this clause is to capture large termination payments for top executives and not to tax the standard notice clause of employee contracts....is there anyone out there who could clarify?

The notice clause in this case would read something like this:
'Upon early termination, other than for gross misconduct, the employee is required to give 3 months notice. The employer may decide to offer pay in lieu of notice if the employee accepts...' my interpretation of this clause is that it gives the employer the right to put someone on garden leave...BUT it does not give the employee the right to choose pay in lieu of notice NOR does it cover the situation where the employer enforces garden leave (which is the case here)...so I think it should be included in the redundancy calc but employer says No.

Any takers?

How much notice is the Employer required to give ?

PILON - Pay In Lieu Of Notice (PILON) is taxable if its provided for in a contract - if its not provided for i.e. if the employee has no entitlement to it, then its part of the Redundancy package/can form part of the tax-free sum.

Out of interest what was the ex-gratia made up of - was it only notice due or was there any bonus?

That's exactly my point...in the clause above - would this constitute an entitlement to PILON? (i.e. the employer has enforced garden leave which has led to the PILON...it's not like I could hand in my notice and ask them to pay me 3 months notice!)

I think the employer is right to tax the PILON, as PILON is expressly provided for in the contract.

I also don't think this means that there is any entitlement on the part of the emplopyee to look for it, if s/he is given notice of termination.

zippitydooda said:

Employee is made redundant with 2 weeks notice - package is statutory plus €1500 ex gratia and notice period.

Click to expand...

Just as a matter of interest how long has the employee been with the company

Some further clarification here:-

PILON is actually damages for breach of employment contract.

Compensatory damages are always tax-free hence why the Revenue treat it as tax-free if not in the contract, and tax it if its there.

So, the appropriate question to ask is; did the Employer breach the terms of the contract* here ?

*it really doesn't matter how unfair the terms of the contract now appear to be.