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Contract Termination
Terminate an employee's contract (Leaver)
Terminate an employee's contract (Leaver)
Rebecca Russell avatar
Written by Rebecca Russell
Updated over a week ago

This article explains how to terminate an employee's contract in PayFit, and how the relevant termination payments are calculated.

What are employees' rights when leaving?

All employees who leave employment must:

  • Be paid for the worked notice period

  • Be paid for any unused annual leave.

  • Receive contractual pay such as allowances and benefits up to their leave date.

  • Receive a P45 and a final payslip on or before the payday.

The employer can deduct any overtaken holiday pay, or overpayments of salary only if it's stated in their employment contract.

The employer does not have to pay the unworked notice if this is stated in the employment contract, or if the employee has breached the contract by not working their notice.

Statutory minimum notice periods

Employees must be given notice before their employment ends. The statutory (minimum) notice periods are:

  • At least one week's notice if employed between one month and 2 years.

  • One week's notice for each year if employed between 2 and 12 years.

  • 12 weeks' notice if employed for 12 years or more.

An employer may give more than the statutory minimum, but they cannot give less. You should always refer to the employment contract. For further information, please refer to this guidance from ACAS.

Feature Overview: Contract terminations

✅ PayFit automatically calculates any payments due to an employee when they leave the company (payment in lieu of notice or payment in lieu of holiday).

✅ Any contract termination payments calculated by PayFit can be overwritten.

✅ You can edit or cancel a contract termination at any time up until you run payroll. If you need to amend or cancel a contract termination after payroll is run, please let a member of the PayFit support team know and we can help.

✅ P45s are automatically issued to the employee when running your payroll for the month.

❌ Admins cannot finalise a contract termination in a future month. P45s are only generated once payroll is generated in the month the employee is leaving.

❌ Contract terminations cannot be processed in bulk.

Terminate a contract in PayFit

To terminate an employee's contract;

  1. From the employee's record, choose the Employment tab.

  2. Under the Contract section, click Terminate contract.

  3. Enter the relevant reason for leaving. You'll be asked for specific dates based on the reason for leaving. I.e. Date notice given, or Final day of work.

  4. Click Continue to termination payments.

  5. Review the termination payments. If necessary, click Overwrite amount to add your own values. For further information on each of payments, please refer to the Termination payments section.

  6. Click Continue.

  7. Under the 3. Payment After Leaving section, choose whether the employee will receive further payments after their contract has been terminated. For further information about payments after leaving, please refer to this Help Centre article.

  8. If the employee's space was activated with their professional email address, you can select the option to send the employee an email, to remind them to change their login email address.

  9. Click Save.

  10. If you have any recurring payments or deductions, you'll be prompted to end these if applicable, then click Save.

  11. Once you refresh your browser, the employee's status shows as Leaving this month and a Contract termination section is visible on the Employment tab.

Edit or cancel a contract termination

Admins can edit or cancel the termination at any point in the month that the employee's contract was terminated on PayFit, or the following month.

To do this;

  1. From the employee's record, click the Employment tab.

  2. Under the Contract termination section, click Edit termination details or Cancel termination, as necessary.

Once the contract termination is processed and your payroll is run, the contract termination details are included on the FPS and submitted to HMRC.

Note: HMRC advises against changing an employee's leaving date. That's because it can cause the employee's record to be duplicated, causing a discrepancy in their records.

Termination payments

Payment in lieu of notice (PILON)

Payment in lieu of notice is calculated if the employee's leave date is before their contractual notice period ends. If PILON is not calculated but you'd still like to pay a notice period, from the Employment tab, under the Contract termination section, simply click Give PILON anyway. You can also override the amount calculated by PayFit using the Overwrite amount option.

For further details about the calculation, please refer to this Help Centre article.

Pay in lieu of holiday (PILOH)

If an employee has undertaken or overtaken annual leave, PayFit calculates the payment or deduction due. If necessary, you can override the number of days, or the amount, by clicking Overwrite amount.

For further details about the calculation, please refer to this Help Centre article.

Redundancy pay

Statutory redundancy pay is calculated as follows:

  • half a week’s pay for each full year you were under 22

  • one week’s pay for each full year you were 22 or older, but under 41

  • one and half week’s pay for each full year you were 41 or older

  • the employee must worked for at least two years to be eligible

The weekly rate of statutory redundancy is capped at £525, so if an employee earns more than this they will only receive £525 maximum and if they earn less than this they will be paid based on their actual earnings.

If it's agreed that the employee will receive a higher redundancy payment, simply click Add occupational redundancy amount under the Contract termination section.

Ex-gratia or Settlement payments

The first £30,000 of ex-gratia or settlement payments are not liabile to tax and national insurance. Anything over £30,000 is subject to tax for the employee and Class 1A NIC for the employer.

There is no specific calculation for ex-gratia or settlement agreements, they are usually agreed upon termination and tend to include damages and compensation for the loss of employment.

Settlement payments

Settlements are usually paid when trying to settle a potential claim brought against the employer. Employees who receive a settlement agreement cannot take an employer to an employment tribunal. These agreements might relate to redundancies but can be used in a number of situations.

Ex-gratia payments

An ex-gratia payment is a discretionary payment made by an employer where there is no contractual obligation to do so.

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