Notice Periods and Termination

A notice period is the amount of time an employer or employee must give before ending the employment relationship. UK law sets statutory minimum notice periods, but the employment contract can provide for longer periods.

Statutory Minimum Notice

The Employment Rights Act 1996 sets the minimum notice an employer must give based on the employee’s length of continuous service:

The statutory minimum notice an employee must give the employer is 1 week, regardless of length of service (unless the contract states a longer period).

Example

An employee with 7 years of continuous service is entitled to a minimum of 7 weeks’ notice from the employer. The employee, in turn, must give at least 1 week’s notice (or whatever the contract requires).

Contractual Notice

Most employment contracts specify notice periods that exceed the statutory minimum. Common contractual notice periods include:

The longer of the statutory or contractual period applies. An employer cannot contractually reduce the statutory minimum.

Probationary Period Notice

During a probationary period, contracts often specify a shorter notice period (commonly 1 week). Once probation ends, the full contractual notice period applies. The statutory minimum still applies during probation — 1 week’s notice from the employer after the first month of employment.

Payment in Lieu of Notice (PILON)

Payment in lieu of notice means the employer pays the employee for the notice period without requiring them to work. PILON can work in two ways:

Contractual PILON

If the contract contains a PILON clause, the employer can make a lump-sum payment instead of the employee working their notice. Contractual PILON is:

• Taxable as earnings through PAYE
• Subject to National Insurance contributions
• Reported through RTI
• Subject to auto-enrolment pension deductions

Non-Contractual PILON

Since April 2018, all payments in lieu of notice are treated as earnings and taxed through PAYE, whether or not the contract includes a PILON clause. The amount subject to tax and NICs is the post-employment notice pay (PENP), calculated as basic pay for the unworked notice period.

Garden Leave

Garden leave means the employee remains employed during the notice period but is not required to attend work or perform duties. The employee:

• Continues to receive full pay and benefits
• Remains bound by the employment contract (including restrictive covenants and confidentiality)
• Cannot start working for a new employer
• Continues to accrue holiday entitlement

Garden leave must be expressly permitted by the employment contract. Without a garden leave clause, requiring the employee to stay at home could be a breach of contract.

Summary Dismissal

An employer can dismiss an employee without notice (summary dismissal) only in cases of gross misconduct. Examples include:

• Theft or fraud
• Violence or threats of violence
• Serious health and safety breaches
• Gross insubordination
• Being under the influence of drugs or alcohol at work

Even in cases of gross misconduct, the employer should follow a fair disciplinary procedure before dismissing. Failure to do so can lead to an unfair dismissal claim, regardless of the misconduct.

Termination and Final Pay

When employment ends, the employer must process the final pay through PAYE payroll . The final pay typically includes:

Tax Treatment of Termination Payments

P45

The employer must provide a P45 to the departing employee and send the information to HMRC through RTI. This must be done on or before the employee’s last payday.

Resignation

When an employee resigns, they must give the notice specified in their contract (or the 1-week statutory minimum). The employer can:

• Accept the notice and let the employee work it
• Place the employee on garden leave
• Make a payment in lieu and end employment immediately
• Waive the notice entirely and release the employee early

If an employee leaves without giving proper notice, the employer may be entitled to recover losses, though in practice this is rarely pursued.

Wrongful Dismissal

Wrongful dismissal occurs when an employer terminates employment without giving the correct notice (or pay in lieu) and there is no justification for summary dismissal. The employee can claim damages equal to the pay and benefits they would have received during the notice period.

Wrongful dismissal is different from unfair dismissal, which is a statutory right based on whether the employer had a fair reason and followed a fair process.

Notice Period and Accounting

Final pay and termination payments create entries in the employer’s accounting records :