Understanding Payment in Lieu of Notice

What is it?

Payment in lieu of notice (PILON) is the payment made to an employee when their employment contract is terminated without prior notice. This payment is made instead of the employee working their notice period and receiving pay in the normal way.

When an employee is leaving a business there are plenty of reasons for confusion surrounding their pay, notice period and, in some cases, termination of employment.

These mistakes can be very costly to employers, especially when it comes to PILON, as an up-to-date contract can be the difference between a tribunal hearing and a civil parting of ways.

How to Approach PILON

Employers should take plenty of care and consideration when dealing with a PILON. The approach an employer takes will depend on the provisions included in the employment contract that was signed by the employee in question. In some cases, employment contracts may specify that termination of the contract can be made instantly by making the PILON for the employee’s notice period.

What Do You Need to Pay?

Additional benefits included in the employment contract that remained active during the notice period are normally honoured, even if there is no contractual clause for PILON in the original contract.

Employers should be reminded that the termination of employment with PILON when there is no contractual provision will result in a breach of contract. In this case, the employer should compensate by including pay and any additional benefits the employee would have accrued during their notice period. To avoid later discrepancies, some employers may include a payment for any holiday days that will have been lost during the notice period.

Where an employer has a contractual right to terminate employment with PILON then they payment should be made subject to normal deductions for tax and national insurance.

Where the employer does not have such a right and has not established a practice of terminating employment with PILON then the payment can be made without deductions (subject to a maxim of £30,000) but we would advise employers to take advice first on making PILON tax free as this is an area of law HMRC are currently reviewing.

Please note, when an employee is dismissed for gross misconduct, PILON isn’t normally paid.

Gardening Leave

Gardening leave is different to PILON as in this situation the employee continues to be employed by the employer through the duration of the notice period. Gardening leave is preferable to PILON where the employee is in a key position and is (or may be) leaving to join a competitor. As the employees duty of trust and confidence to the employer will continue during the period of gardening leave then they cannot carry out work for their new employer or do anything that may disadvantage their current employer.

If you require any further advice on payment in lieu of notice, please get in contact with one of our employment law and HR consultants on 0114 241 7092