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HR tip: Calculating pay-in-lieu of notice

22nd May 2008
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These questions are being answered by Learn HR, a market leader in the provision of HR and payroll training and nationally-recognised professional qualifications.

Question:
"How is pay-in-lieu calculated?"

HR tip:
There is no designated formula as such because pay-in-lieu is a sum of money agreed by employer and departing employee due to the fact the latter is not being given his or her full period of due notice.

Were you to dismiss an employee without due notice and without compensation, he or she would doubtless sue you for damages and win the case. The court would then award compensation at a level such that the employee neither loses nor gains by your unlawful action. It would determine the length of due notice and assess the net, not gross, pay the employee would otherwise have received. It would add the value of lost benefits, such as use of car.

If the notice period were lengthy, the court would take into account the effort the employee was making to secure alternative employment and reduce the compensation if another job had been secured or little effort was being made. And again, if the notice period were lengthy, compensation would be discounted to reflect that it was being paid in one lump in advance rather than spread over several months. The resulting sum of compensation would be awarded as liquidated damages. However, most employers and employees seem satisfied with a payment equivalent to gross pay for the notice period, but do check the tax situation.

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