Blog: Santa Claus and the PILON clause

Santa Claus has come to the end of another round of present distributing. His task is becoming harder because of the number of log burners replacing fireplaces so he is in a bad mood. This is compounded by the fact he is staring at a plate of lettuce and a glass of tap water as he needs to work off the 39,786,437.5 mince pies and 4,253,865 schooners of sherry that he consumed on 24 December.

He has also just completed his annual round of redundancies among the elves. As ever he makes a payment in lieu of notice (PILON) to the ones he has to let go, together with a redundancy payment.

He is just about to make the bank transfer into their accounts when news comes from the workshop that some of the toy-making tools from the shed where Elf 73 worked have gone missing. Santa is livid. His first thought is that he is going to withhold the payments to Elf 73.

Can he do that?

If Elf 73’s employment contract contains a PILON clause, that clause could state that the Santa will not be liable to pay all of the PILON to the elf where, before payment is made, Santa discovers that the elf has committed an act of gross misconduct such that Santa would have been entitled to summarily dismiss the elf. In the absence of such wording in the PILON clause, Santa would remain committed to paying the PILON once the elf had been told that he was dismissed and that a PILON would be made instead of the elf working his notice.

The same consideration applies if the redundancy payment includes an enhanced element, i.e. if the wording of the policy is written so that it allows ‘claw back’ of the enhanced element if the employer discovers gross misconduct prior to payment, then the enhanced element of the redundancy payment could be withheld.

The answer for angry Santa is regrettably that in the absence of any helpful contractual terms the strictly correct sequence of events is to make the payments to the employee and then sue for his losses.  The courts tend to frown on employer’s “self help” remedies such as refusing to make a payment once the employer has committed to paying it, although it is perhaps understandable why some employers would want to do so.

Another really frustrating thing is the rule in wages legislation which holds that if an employer makes what is deemed to be an unlawful deduction from wages then that debt to the employer is lost or forfeited forever, and the employer can’t then seek to recover those monies in any other way.  More bad news for Santa!

So the answer, once again, is to take advice before you take any steps once you find yourself in a similar position to Santa.  Also, if Santa had come to us before he did the dismissals we could have shown him a suite of lovely repayment clauses in our settlement agreements that would have done the trick nicely. They would have saved his blood pressure and some money.

If, like Santa, you have any elf matters or PILON queries you’d like to discuss, do please get in touch.

(And I didn’t even make the joke about “elf and safety”)

Simon Martin
Partner & Solicitor, Menzies Law

Email Simon Martin