A Guide to Payment in Lieu of Notice (PILON)

When an employee leaves your business – whether through resignation, redundancy, or mutual agreement, understanding their rights and your obligations around notice periods is essential. One area that often causes confusion is Payment in Lieu of Notice (PILON). As a small business owner, getting PILON right helps you protect your company’s interests, maintain compliance, and ensure a smooth transition for everyone involved. In this guide, we’ll break down what PILON is, why it matters, and how you can handle it confidently and fairly, without the legal jargon.

In This Guide

1. Notice Periods and The Law
2. What Is PILON and Why It Matters
3. Drafting and Enforcing a PILON Clause
4. Calculating PILON Payments
5. Holiday Pay and Accrual Considerations
6. PILON vs Garden Leave
7. Common Scenarios: Redundancy, Resignation, Misconduct
8. Practical Tips for Employers and Employees
9. Frequently Asked Questions

Key Takeaways

• PILON Defined: Payment in lieu of notice allows an employer to end employment immediately by compensating the employee for the notice period they won’t work.
• Business Importance: PILON safeguards commercial interests by preventing access to sensitive information and minimising workplace disruption.
• Contractual Must-Haves: A well-drafted PILON clause should clearly specify included elements (salary, benefits, bonuses) and payment timing.
• Statutory vs Contractual: Employers must honour at least statutory notice but can offer longer contractual notice; PILON can substitute either with a lump-sum payment.
• Holiday Pay and Accrual: By default, PILON need not include holiday that would have accrued during the unworked notice period unless the contract says otherwise.
• Tax Treatment: PILON is earnings and subject to income tax and National Insurance.

Understanding Notice Periods & The Law

Under UK law, employees have the right to a minimum statutory notice period based on length of service – from one week after one month’s employment, rising to 12 weeks after 12 years. Employment contracts may extend these periods but cannot shorten them below the statutory minimum. During a working notice period, employees must receive their normal pay and entitlements and any contractual benefits.

What Is PILON and Why Does It Matter?

Payment in lieu of notice (PILON) is a contractual mechanism enabling an employer to terminate employment immediately by paying the employee a lump sum equivalent to the remuneration they would have earned during the notice period they forgo. For businesses, PILON is crucial in certain circumstances to:

• Protect Confidentiality: Restrict outgoing employees’ access to sensitive data or systems.
• Maintain Productivity: Avoid potential workplace disruption or underperformance during notice.
• Streamline Exits: Provide a clear, swift mechanism for agreed departures, often in redundancy or settlement contexts.

Drafting and Enforcing a PILON Clause

A robust PILON clause should:

• Specify the effective date of termination (notice given, payment date or end of notice period).
• Detail exactly what is covered – basic salary, any guaranteed bonuses, commission or benefits to be included or excluded.
• Reference any mitigation duties on the employee, where appropriate

Without a contractual PILON clause, employers must secure the employee’s explicit agreement to payment in lieu to avoid breaching contract.

Calculating PILON Payments

Calculation varies by pay structure:

• Fixed Monthly Salary: Multiply monthly pay by unworked notice months.
• Variable Pay: Use the average earnings over the 12 weeks before notice, replacing any unpaid weeks with earlier paid weeks.

All payments representing notice pay are treated as earnings and are subject to income tax and National Insurance contributions, regardless of whether the employment contract contains a PILON clause. Only qualifying termination payments that are not earnings may benefit from the £30,000 tax exemption.

Holiday Pay and Accrual Considerations

Where employment terminates immediately under a PILON provision, holiday entitlement generally stops accruing on the termination date. Employers must still pay for any accrued but untaken statutory or contractual holiday up to that date. Contracts should clearly state whether any additional compensation is payable in respect of benefits or holiday that would otherwise have arisen during the notice period.

PILON vs Garden Leave

What’s the difference between PILON and Garden Leave?

While both mechanisms remove the employee from duties during notice, key differences are:

• PILON ends employment immediately; the employee may work elsewhere.
• Garden Leave keeps the employee employed, maintaining entitlements and restrictive covenants but prohibiting work for others or accessing company premises until notice ends.

Common PILON Scenarios

• Redundancy: Employers often opt for PILON to accelerate the process, paying both notice and statutory or enhanced redundancy entitlements concurrently.
• Resignation: Employees must give statutory/contractual notice; PILON only applies if mutually agreed or contracted.
• Gross Misconduct: Employees dismissed for gross misconduct are generally not entitled to notice pay or PILON because the employer may summarily dismiss them. However, employers should ensure they have reasonable grounds for treating the conduct as gross misconduct and have followed a fair disciplinary process.

Practical Tips for Employers and Employees

Employers should:

• Include clear PILON clauses in their employment contracts.
• Communicate termination terms in writing, specifying payment details.
• Calculate variable pay accurately, documenting the method.

Navigating PILON and notice regulations can be complex. Let Norton Loxley support you in drafting precise PILON clauses and ensuring compliant, fair exit processes. Contact us today to safeguard your business and empower your people.

Frequently Asked Questions

What is PILON payment?

PILON is a lump-sum paid instead of working the notice period, covering basic pay and any contractual extras specified in the clause.

Does PILON include holiday pay?

Not automatically; it covers notice pay only. Any holiday accrued up to the termination date is paid separately, unless the contract provides otherwise.

Do you accrue holiday during PILON?

Generally speaking, no: under PILON, employment ends immediately, so holiday usually stops accruing from the termination date. However, any holiday already accrued must still be paid, and the contract may provide otherwise.

Is PILON pensionable?

No – PILON is usually not pensionable, but it can be pensionable if the employment contract or scheme rules specifically say so, or if the employer continues pension contributions during the notice period. PILON normally ends employment immediately, so pension contributions usually stop, though contractual terms can override that.

Can employers offer PILON on redundancy?

Yes, it accelerates exit and protects business interests while ensuring statutory or contractual redundancy entitlements are me.

What if my contract has no PILON clause?

In the absence of a contractual PILON clause, an employer may need the employee’s agreement to terminate employment immediately with a payment in lieu. Otherwise, there is a risk of a wrongful dismissal or breach of contract claim.

If you are paid in lieu of notice when is your termination date?

PILON usually means your termination date is the date the payment is made, so employment ends immediately or on the date the employer specifies rather than at the end of the full notice period.

Can an employee refuse PILON?

Where a valid contractual PILON clause exists, the employer can usually exercise that right without the employee’s consent. If no such clause exists, agreement may be required.