Payment in Lieu of Notice Is not Necessarily a Material Breach

It has long been the case that, unless there is a clause in a contract of employment giving an employer the right to make a payment in lieu of notice (PILON), any such payment will be a breach of contract by the employer, making all the terms of the contract unenforceable including post-termination restrictions.

However, a recent Scottish Employment Appeal Tribunal case held that paying an employee in lieu of notice, when there was no clause in the contract, was not serious enough to repudiate the contract because it was not a material breach. As a result, the dismissed employee remained bound by the post-termination obligations in his contract. The relevant clause concerned payment for the employee's car, but the principle could be extended to restrictive covenants.

This could make it easier for employers when they wish to dismiss employees without notice. However, to be certain that employees would remain bound, it is still better to include a clause in the contract allowing for pay in lieu of notice.
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