Termination Clauses in Employment Contracts
How employment contracts can be ended. Understand notice periods, termination for cause, and payment in lieu of notice.
Termination clauses define how the employment relationship can be ended by either party.
Types of Termination
Termination by Notice
Standard way for either party to end employment:
"Either party may terminate this employment by giving the other party [X weeks/months] written notice."
Summary Dismissal
For gross misconduct:
"The Company may terminate your employment without notice or payment in lieu of notice if you commit an act of gross misconduct or fundamental breach of contract."
Termination by Mutual Agreement
"This employment may be terminated at any time by mutual written agreement between the parties."
Automatic Termination
"This fixed-term contract will terminate automatically on [date] without notice being required by either party."
Notice Period Provisions
Contractual Notice
Often longer than statutory minimum:
"The notice period required to terminate your employment is:
- During probation: 1 week
- After probation: [1-3 months]"
Statutory Minimum Notice
Cannot be less than:
- 1 week if employed 1 month to 2 years
- 1 week per year of service (up to 12 weeks) for 2+ years
Notice Clause Examples
Standard:
"You must give 1 month's notice to terminate your employment. The Company must give 1 month's notice, or statutory notice if greater."
Senior Role:
"You must give 3 months' notice. The Company must give 3 months' notice or statutory notice if greater."
Graduated:
"Notice periods are:
- First year: 1 month
- Years 2-5: 2 months
- After 5 years: 3 months"
Payment in Lieu of Notice (PILON)
Contractual PILON Clause
"The Company may, at its sole discretion, terminate your employment immediately by making a payment in lieu of notice equivalent to your basic salary for the notice period. Such payment will not include benefits or bonus."
Without PILON Clause
If no PILON clause exists:
- Making a PILON is technically a breach of contract
- Employee may claim damages for lost benefits
- However, most employees accept payment without complaint
Tax Treatment
- With PILON clause: Fully taxable as earnings
- Without PILON clause: First £30,000 may be tax-free (as damages)
Garden Leave
Garden Leave Clause
"During your notice period, the Company may:
- Require you not to attend the workplace
- Require you not to contact clients, customers, or colleagues
- Require you not to perform any duties
- Require you to remain available during working hours
During garden leave, you will continue to receive full salary and benefits."
Purpose of Garden Leave
- Protects confidential information
- Allows handover period
- Client relationships cool down
- Restrictive covenants begin from end of employment
Gross Misconduct and Summary Dismissal
Gross Misconduct Clause
"The following are examples of gross misconduct justifying summary dismissal:
- Theft, fraud, or dishonesty
- Violence or threats of violence
- Serious breach of health and safety
- Bringing the Company into serious disrepute
- Serious breach of confidentiality
- Being under the influence of alcohol or drugs at work"
This is non-exhaustive - other serious misconduct may also justify summary dismissal.
Post-Termination Obligations
Return of Company Property
"On termination, you must immediately return all Company property including:
- Laptop, phone, and other equipment
- Keys, passes, and access cards
- Documents and files (physical and electronic)
- Credit cards and expense cards"
Continuing Obligations
"The following obligations continue after termination:
- Confidentiality obligations
- Intellectual property assignments
- Restrictive covenants (for stated periods)
- Cooperation with ongoing matters"
Termination Payments
Final Pay Calculation
On termination, employers must pay:
- Outstanding salary to termination date
- Accrued but untaken holiday
- Any contractual bonus (subject to terms)
- Notice pay (if not worked)
Deductions
Employers may deduct (if authorized in contract):
- Outstanding loans
- Training cost repayments
- Excess holiday taken
- Any other agreed deductions
Unfair Dismissal Protection
Termination clauses cannot override statutory rights:
- Employees with 2+ years' service have unfair dismissal protection
- Dismissal must be for fair reason and follow fair procedure
- Contractual rights to terminate don't remove these protections
Related answers
Employment Contract Requirements UK
What must be included in a UK employment contract? Learn the legal requirements for written statements of particulars and what happens if you get it wrong.
Garden Leave: Employer's Guide
Using garden leave during notice periods. When to use it, enforceability, employee rights, and drafting effective clauses.
Notice Periods UK: Employer's Guide
Statutory and contractual notice periods explained. How much notice to give, payment in lieu, garden leave, and handling notice period issues.
Frequently Asked Questions
- What is payment in lieu of notice (PILON)?
- PILON is a payment made instead of requiring the employee to work their notice period. If there's a PILON clause, the employer can end employment immediately by paying the notice period amount. Without a clause, PILON may be a breach of contract.
- Can an employer dismiss without notice?
- Only for gross misconduct. Summary dismissal (without notice) is lawful when the employee has committed a fundamental breach of contract such as theft, fraud, violence, or serious negligence.
- What is garden leave?
- Garden leave is when an employee serves their notice period but is not required to attend work or perform duties. They remain employed and receive full pay but are typically excluded from the workplace.