One more reason to favour a PILON clause

The dispute over the dismissal of the AA’s former chief executive provides an illustration of why it can make sense to include a payment lieu of notice (PILON) clause in a contract of employment. Had it not been for such a clause, the AA would have risked paying out a higher sum in litigation over the termination of his contract.

Mr Mackenzie had assaulted a more junior member of staff at a hotel where they had attended a strategy event earlier that day after drinks in the bar. He was immediately suspended. However, before disciplinary proceedings were started, he obtained medical evidence which he claimed accounted for his behaviour and gave 12 months’ notice of resignation in accordance with his contract. The AA responded by dismissing him summarily on the grounds of gross misconduct.

Mr Mackenzie then issued proceedings for wrongful dismissal. He argued that, if his claim for wrongful dismissal succeeded, damages should be assessed on the basis that the AA would have dismissed him on notice and placed him on sick leave. This was an important point for Mr Mackenzie, since the PILON clause stated that the payment in lieu of notice was limited to his basic salary. The AA was not required to include anything in his PILON to reflect the annual bonus that he would have expected to have earned during the notice period.

The Court of Appeal said that the trial judge had been entitled to find that there was no reasonable prospect of this argument succeeding at trial. That was because making a payment in lieu of notice was clearly the least burdensome (ie cheapest) way of lawfully ending the contract, if summary dismissal was not legally available. This “least burdensome rule” was a well-established principle when assessing damages for breach of contract, and applied to employment contracts and commercial contracts alike.

This case illustrates that PILON clauses have two key advantages. Not only do they offer a way of lawfully ending the contract when the employer does not want their employee to work out their notice period, but they can also be used to limit the amount of compensation payable if it is on the wrong end of a wrongful dismissal claim.

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