Pay in lieu of notice

What it is

Pay in lieu of notice is a payment that replaces the notice period. Instead of working your notice, or spending it on garden leave, your employment ends straight away and you are paid for the notice you would have worked.

What the law says

Under the Employment and Industrial Relations Act (Cap. 452), an employer that ends an indefinite contract without giving the notice due must pay the employee a sum equal to the wages for that notice period (article 36(10)). The law works in the other direction too: an employee who leaves without giving notice owes the employer a sum, set at half the wages for the notice not given. And when the employer gives notice, the employee may stop working during it and require half the wages for the rest of the notice (article 36(8)).

For these statutory payments, “wages” excludes overtime, bonuses, allowances, remuneration in kind and commissions (proviso to article 36(12)). Anything more must come from the contract or from negotiation. See notice period.

The notice due is the longer of the statutory minimum and what your contract provides. For senior roles, the contract usually sets the figure.

What the payment should cover

The statutory minimum is wages. A senior package is more than wages, and the gap is often where the money is:

• Benefits such as health insurance, a car, allowances and pension contributions stop when employment ends. Ask for their value to be included, or for cover to continue.
• Bonus: if notice had been worked, would you have been employed on the bonus date? If so, the payment in lieu should reflect it.
• Share awards: an immediate termination date can fall before a vesting date that notice would have reached. Check the plan rules.
• Leave: untaken leave is paid separately, on top.

Pay in lieu or garden leave?

For the employer, pay in lieu ends the relationship cleanly. For you, it frees you to start a new role at once, but only if there is no post-employment restriction stopping you. Garden leave keeps you employed, and keeps the employer’s hold on you, for longer.

Which suits you depends on your next step. If you have a role to go to, pay in lieu is usually worth more to you than its face value.

Tax

Pay in lieu of notice is normally taxed as income, like the salary it replaces. Ask your tax adviser before the split of any settlement payment is agreed.

What to negotiate

• that the payment covers benefits, bonus and pension, not base pay alone;
• the termination date, against bonus and vesting dates;
• that any non-compete is shortened or released, since you are leaving at once;
• when the payment is made, and that it is made in full.