Payment in Lieu of Notice 2026 | Meaning & When It’s Used

Payment in Lieu of Notice (PILON) is an operationally attractive option for employers because it allows an exit to be executed quickly. It is also a legally sensitive decision, because PILON interacts with contract rights, tax treatment and litigation risk. Used correctly, it supports clean exits and risk control. Used casually, it can trigger avoidable claims, weaken post-termination protections and create HMRC exposure.

What this article is about: This is a compliance-grade employer guide to when and how Payment in Lieu of Notice can be used lawfully, how it interacts with contractual notice, redundancy exits, settlement agreements and tax rules, and what employers must decide and document to reduce enforcement risk, cost exposure and reputational harm.

Section A: What is Payment in Lieu of Notice in UK employment law?

Employer question:
What does Payment in Lieu of Notice actually mean in law, and what happens when we use it?

Payment in Lieu of Notice (PILON) is a mechanism that allows an employer to bring an employment contract to an immediate end while paying the employee the value of the notice they would otherwise have worked. Crucially, PILON is not the absence of notice. Notice is still given, but the obligation to work that notice is discharged by payment rather than performance.

From a legal perspective, PILON is therefore a dismissal decision with contractual and statutory consequences, not merely a payroll or administrative shortcut. The moment PILON is triggered, employment ends immediately. The employee ceases to accrue statutory and contractual rights such as holiday entitlement, pension accrual and continuity of employment, subject to the precise terms of the contract.

For employers, this immediacy is often the primary attraction. PILON is commonly used where allowing an employee to remain in the workplace during their notice period would create operational, commercial or reputational risk. Typical scenarios include senior exits, breakdowns in trust and confidence, sensitive restructures, or situations where system access, client relationships or workforce stability could be compromised.

However, the legal effect of PILON depends heavily on how and why it is used. Where the employment contract contains an express PILON clause, the employer is contractually entitled to terminate immediately and make the payment specified by the clause. In those circumstances, the dismissal will not usually amount to a breach of contract, provided the payment is calculated correctly and paid at the appropriate time.

Where there is no contractual PILON clause, the position is more complex. An employer may still choose to terminate immediately and make a payment equivalent to notice pay, but this will generally amount to a technical breach of contract, even if the employee suffers no financial loss. That distinction matters, because a breach of contract can have knock-on effects for post-employment restrictions, litigation risk and settlement strategy.

It is also important for employers to understand what PILON does not do. Paying in lieu of notice does not legitimise an otherwise unfair dismissal, does not remove the need for a fair process where required, and does not, by itself, prevent tribunal claims. PILON addresses the notice obligation only. It does not cure procedural defects, discrimination risk or unfair dismissal exposure.

From a compliance and risk-management standpoint, PILON should therefore be viewed as a tool for managing exit risk, not as a neutral or consequence-free option. Used correctly, it allows employers to control exits swiftly and lawfully. Used incorrectly, it can create avoidable claims, tax exposure and loss of contractual protections.

Section A summary: Payment in Lieu of Notice allows employers to end employment immediately while paying notice pay instead of requiring notice to be worked. Legally, it is a dismissal mechanism with significant contractual, tax and litigation consequences. Whether PILON is lawful and low-risk depends on contract terms, calculation accuracy and the wider dismissal context, not simply on making a payment.

Section B: When can an employer lawfully use Payment in Lieu of Notice?

Employer question:
Can we use Payment in Lieu of Notice whenever we decide to end employment immediately?

An employer cannot lawfully use Payment in Lieu of Notice in all circumstances. Whether PILON can be used without creating legal exposure depends first and foremost on the terms of the employment contract, and secondly on how the decision is implemented in practice.

The lowest-risk scenario for employers is where the employment contract contains an express PILON clause. A properly drafted PILON clause gives the employer a contractual right to terminate employment with immediate effect and to make a payment in place of notice. Where such a clause exists, the employer is not in breach of contract by dismissing without requiring the employee to work their notice, provided the clause is exercised in accordance with its terms. This includes paying the correct sums and complying with any conditions attached to the clause, such as timing or method of payment.

Where there is no PILON clause, the employer does not have an automatic right to terminate employment immediately and substitute notice with a payment. If the employer nonetheless dismisses with immediate effect and pays a sum equivalent to notice pay, this will usually amount to wrongful dismissal, because the contractual obligation to give notice has not been honoured in the manner agreed. While the employee may suffer no financial loss, the existence of a breach can still carry legal consequences.

In practice, many employers take a commercial view and proceed with non-contractual PILON where the operational risks of keeping the employee in post outweigh the legal risks of a technical breach. This is particularly common in senior exits, sensitive disputes or situations involving client relationships or confidential information. Employers should be clear, however, that this is a risk-based decision rather than a legally neutral option.

A further lawful route is mutual agreement at termination. Even where the contract does not provide for PILON, the parties may agree at the point of exit that the employee will leave immediately in return for a payment equivalent to notice pay. This agreement should be clearly documented. While this does not retrospectively convert the dismissal into a contractual PILON, it can significantly reduce the risk of dispute and is often used as a precursor to a settlement agreement.

Employers should also be cautious about assuming that paying notice pay after the event automatically remedies an unlawful dismissal. The timing of payment matters. A delayed or incorrectly calculated payment may increase exposure to claims, particularly where the employee argues that the employer has repudiated the contract.

Ultimately, the decision to use PILON is not simply a question of whether payment can be made, but whether the employer is contractually entitled to make that payment in substitution for notice. Where that entitlement is missing, employers must consciously weigh the operational benefits of immediate termination against the legal risks that follow, including exposure under statutory notice period rules.

Section B summary: Employers can lawfully use Payment in Lieu of Notice where there is an express contractual right to do so or where immediate termination is mutually agreed at exit. Using PILON without a contractual clause will usually amount to wrongful dismissal, even if notice pay is made. Employers should treat non-contractual PILON as a managed risk decision rather than a default approach.

Section C: What must be included in a Payment in Lieu of Notice payment?

Employer question:
When we make a PILON, what are we legally required to pay, and what can we lawfully exclude?

What must be included in a Payment in Lieu of Notice depends primarily on the wording of the employment contract and, in its absence, on what the employee would have been entitled to receive had they worked their notice period. This is an area where employers frequently make costly assumptions, either by overpaying unnecessarily or underpaying and exposing themselves to claims.

At a minimum, a PILON must cover the employee’s basic pay for the notice period they are entitled to receive, whether statutory or contractual, whichever is longer. Where the employment contract contains a PILON clause, the clause will usually define how the payment is calculated and what elements of remuneration are included. Employers should follow this wording precisely. A failure to do so can itself amount to a breach of contract, even where the employer has a right to terminate with immediate effect.

Beyond basic pay, the inclusion of benefits and allowances depends on contractual entitlement. If the contract provides that benefits continue during the notice period, or that PILON must reflect the full package the employee would have received had they worked their notice, those benefits should be reflected in the payment or compensated for in cash. Common examples include car allowances, private medical insurance contributions and contractual allowances. Where benefits are silent or expressly excluded, employers are not generally required to compensate for them.

Bonuses and commission are a common source of dispute. Employers are not automatically required to include bonuses or commission in a PILON. Only bonuses or commission that are contractually guaranteed during the notice period must be included. Discretionary bonuses, or commission that is contingent on future performance or targets that cannot be met once employment has ended, will usually fall outside the scope of a PILON unless the contract expressly provides otherwise. Employers should be particularly careful where arrangements are described as “contractual” but remain performance-contingent, as this is often where disputes arise in practice, including disputes over discretionary bonus wording and commission pay entitlements.

PILON also does not extend the employment relationship. Once employment has ended, the employee will not continue to accrue statutory or contractual rights such as holiday entitlement or pension contributions, unless the contract expressly states otherwise. Employers are, however, still required to pay for any accrued but untaken holiday up to the termination date, as this is a separate statutory entitlement and commonly addressed through holiday pay calculations.

Employers should also be alert to the distinction between PILON and other termination payments. PILON represents payment for notice that should have been worked. It should not be confused with compensation for loss of employment, redundancy pay or ex gratia sums. Blurring these categories can create tax errors and undermine the clarity of termination documentation.

From a risk-management perspective, the safest approach is for employers to treat the PILON calculation as a legal exercise, not a payroll convenience. This means reviewing the contract, identifying what would have been payable during notice, and documenting how the figure has been reached. Failure to do so is one of the most common triggers for wrongful dismissal claims and post-termination disputes.

Section C summary: A lawful Payment in Lieu of Notice must at least cover basic pay for the relevant notice period and must reflect any contractual entitlements that would have applied during that period. Benefits, bonuses and commission are only included where contractually guaranteed or where entitlement would have crystallised during notice. PILON does not extend employment or future accrual of rights, but accrued holiday up to termination must still be paid. Accurate calculation and clear categorisation are essential to avoid claims and tax risk.

Section D: What happens if we dismiss without notice and without a PILON clause?

Employer question:
What are the legal consequences if we terminate immediately but the contract does not allow Payment in Lieu of Notice?

Where an employer dismisses an employee with immediate effect and the employment contract does not contain a PILON clause, the dismissal will usually amount to wrongful dismissal. This is because the employer has failed to comply with the contractual requirement to give notice in the manner agreed, even if the employee is subsequently paid a sum equivalent to notice pay.

Wrongful dismissal is a breach of contract claim, distinct from unfair dismissal. The focus is not on whether the dismissal was fair, but on whether the employer complied with contractual and statutory notice obligations. In many cases, the financial value of a wrongful dismissal claim will be limited to the notice pay the employee should have received. However, the existence of a breach can have wider legal and commercial consequences beyond immediate financial exposure.

One of the most significant risks concerns post-employment restrictive covenants, such as non-compete, non-solicitation and confidentiality clauses. Where an employer commits a repudiatory breach of contract by dismissing without notice and without a contractual right to do so, the employee may argue that they are no longer bound by those restrictions. Enforceability in these circumstances is fact-sensitive and not automatic, but employers should assume that a breach materially weakens their position and increases the risk that restrictions will not be upheld.

The absence of a PILON clause can also reduce an employer’s leverage in negotiations. An employee who has been wrongfully dismissed may be more inclined to bring or threaten claims, particularly if they move quickly into competing employment or allege reputational or financial loss. This frequently shifts the balance of power in settlement discussions and can increase the overall cost of exit.

It is also important to recognise that paying notice pay after the event does not necessarily cure the breach. While prompt payment may limit financial loss, the breach itself will usually have occurred at the point of dismissal. Delayed payment, incorrect calculation or failure to reflect contractual entitlements can further compound the employer’s exposure.

That said, courts do not treat every technical breach in the same way. The seriousness of the breach and the surrounding circumstances will be relevant when assessing remedies and enforceability of post-termination provisions. However, from a compliance and risk-management perspective, employers should not rely on this uncertainty and should instead treat the absence of a PILON clause as a material contractual risk.

For employers concerned about repeated exposure, the solution is preventative rather than reactive. Ensuring that contracts contain clearly drafted PILON provisions gives employers flexibility to manage exits quickly while preserving contractual protections and reducing litigation risk.

Section D summary: Dismissing an employee immediately without notice and without a contractual PILON clause will usually amount to wrongful dismissal, even if notice pay is made. While financial exposure may be limited, the breach can undermine restrictive covenants, weaken negotiation leverage and increase dispute risk. Employers should treat the absence of a PILON clause as a significant compliance issue and address it through contract drafting.

Section E: What is the difference between Payment in Lieu of Notice and garden leave?

Employer question:
Should we use Payment in Lieu of Notice or garden leave when exiting an employee?

Payment in Lieu of Notice and garden leave are often treated by employers as interchangeable tools for managing exits, but legally and practically they operate in very different ways. Choosing the wrong mechanism can create unnecessary cost, loss of control or enforcement risk.

Where an employer uses Payment in Lieu of Notice, the employment relationship ends immediately. The employee ceases to be employed, stops accruing contractual and statutory rights, and is generally free to work elsewhere from the termination date, subject to any enforceable post-employment restrictions. PILON therefore prioritises speed and finality, but at the cost of ongoing control over the individual.

By contrast, if an employee is placed on garden leave, the employment contract remains in force for the duration of the notice period. The employee continues to be employed, continues to be paid, and continues to accrue rights and benefits in the usual way until the contract terminates at the end of the notice period. During garden leave, employers may restrict attendance at the workplace, contact with clients or colleagues, and access to systems, while still requiring availability to work if contractually permitted.

From a risk perspective, garden leave is often the preferred option where the employer is concerned about competition, client poaching or misuse of confidential information. Because the employment relationship continues, in-employment obligations and post-termination restrictions remain enforceable throughout the garden leave period, effectively delaying the point at which the employee can compete.

However, garden leave has cost and operational implications. Employers must continue paying salary and benefits throughout the notice period, even where no productive work is being done. For employees with long notice periods, particularly at senior level, this can be expensive. There is also a risk that prolonged garden leave may contribute to employee relations issues if it is perceived as punitive or disproportionate.

PILON is often preferred where the employer wants a clean and immediate break, for example following a breakdown in trust and confidence, in redundancy situations, or where speed is critical. The trade-off is that the employer relinquishes ongoing control and must rely on post-employment restrictions, which may themselves be vulnerable if PILON is misused or poorly documented.

For most employers, the choice between PILON and garden leave is strategic rather than purely legal. It involves balancing speed, cost, control, enforcement risk and reputational considerations, taking into account the employee’s role, seniority and access to sensitive information.

Section E summary: Payment in Lieu of Notice ends employment immediately and prioritises speed but limits control. Garden leave preserves the employment relationship during notice, allowing employers to maintain control and delay competition, but at ongoing cost. Employers should choose between the two based on risk profile and commercial impact, not convenience.

Section F: How does Payment in Lieu of Notice work in redundancy situations?

Employer question:
Can we use Payment in Lieu of Notice in a redundancy, and what must we get right to remain compliant?

Payment in Lieu of Notice is commonly used in redundancy situations, particularly where employers want to implement organisational change quickly or avoid the disruption of employees working their notice period during a restructure. However, redundancy does not dilute or replace an employer’s notice obligations. The statutory and contractual notice framework continues to apply in full.

Where an employee is dismissed by reason of redundancy, the employer must still give the employee their statutory or contractual notice, whichever is greater. If the employer does not require the employee to work that notice, it must be satisfied either by allowing the notice period to run or by making a Payment in Lieu of Notice. Terminating employment immediately without notice and without payment will expose the employer to wrongful dismissal claims, even where the redundancy itself is genuine and properly justified.

Statutory notice entitlement is based on length of service. Employees with at least one month’s service are entitled to a minimum of one week’s notice. This increases to one week for each complete year of service between two and twelve years, up to a maximum of twelve weeks. Where the employment contract provides for a longer notice period, the contractual notice must be honoured in full, either by working notice or by PILON, in line with statutory notice period rules.

Employers must also clearly distinguish between PILON and redundancy pay. PILON compensates the employee for notice that is not worked. Redundancy pay compensates for the loss of the role itself. These are separate legal entitlements and should be calculated, documented and paid separately, even if they are paid at the same time. Confusing or combining these payments can create disputes and tax errors, particularly where redundancy pay is involved.

The use of PILON does not remove or shorten the obligation to carry out a fair redundancy process. Employers must still follow appropriate consultation procedures before dismissal takes effect. This includes individual consultation and, where applicable, collective consultation obligations. Failure to comply with redundancy consultation requirements can result in significant protective awards, regardless of whether notice pay has been made.

From a commercial perspective, PILON can be an effective way to manage timing, morale and operational continuity during a redundancy exercise. However, this benefit is only realised where notice entitlements are respected, payments are clearly categorised, and communication with affected employees is transparent and accurate.

Section F summary: Payment in Lieu of Notice can be lawfully used in redundancy situations, but it does not reduce or replace statutory or contractual notice obligations. Employers must keep PILON and redundancy pay distinct and ensure that consultation requirements are fully met. Misuse of PILON in redundancy can undermine an otherwise fair dismissal and create avoidable legal and tax risk.

Section G: Is Payment in Lieu of Notice taxable?

Employer question:
How is Payment in Lieu of Notice taxed, and where do employers commonly get this wrong?

Payment in Lieu of Notice is taxable, but the way it is taxed is governed by specific statutory rules that employers must apply carefully. HMRC does not treat PILON as compensation for loss of employment by default. Instead, it is treated as earnings to the extent that it represents pay the employee would have received had they worked their notice period.

The key concept employers must apply is Post-Employment Notice Pay (PENP). PENP represents the amount of basic pay an employee would have earned during the notice period that has not been worked. This amount must be treated as earnings for tax purposes, regardless of whether the PILON is contractual or non-contractual.

In calculating PENP, employers must use the notice period they were required to give, not the notice period the employee was required to give. Where statutory and contractual notice periods differ, the longer period will usually apply. Employers who incorrectly apply the shorter period or use the employee’s notice obligation risk undercalculating taxable earnings and creating HMRC exposure.

PENP is subject to income tax and both employee and employer Class 1 National Insurance Contributions. This applies even where the employment contract does not contain a PILON clause. The contractual basis of the payment does not determine its tax treatment. What matters is whether the payment represents earnings that would have arisen during notice.

Any amount paid in excess of PENP may qualify as a termination payment. Termination payments benefit from the £30,000 income tax exemption, meaning the first £30,000 is not subject to income tax or employee National Insurance Contributions, although employer National Insurance Contributions may still apply depending on the structure of the payment. Statutory redundancy pay falls within this exemption and should not be included in PENP calculations.

Employers frequently make errors by treating entire termination packages as tax-free or by failing to allocate sums correctly between PILON, redundancy pay and ex gratia compensation. These errors are particularly common where Payment in Lieu of Notice is included within a wider settlement or redundancy package. HMRC scrutiny in this area remains high, and employers are liable for underpaid tax and National Insurance even where mistakes arise from misunderstanding rather than intent.

From a compliance perspective, employers should ensure that PILON is clearly identified and separately itemised in payroll and termination documentation. Calculations should be recorded and capable of explanation if challenged. Where termination arrangements are complex or high value, specialist tax advice should be taken before payments are made.

Section G summary: Payment in Lieu of Notice is taxable as earnings to the extent that it represents Post-Employment Notice Pay. PENP is subject to income tax and employee and employer Class 1 National Insurance Contributions regardless of whether PILON is contractual. Only amounts paid in excess of PENP may benefit from the £30,000 termination payment exemption. Accurate calculation and clear categorisation are essential to avoid HMRC challenge.

Section H: Does Payment in Lieu of Notice affect unfair dismissal or tribunal claims?

Employer question:
If we pay Payment in Lieu of Notice, does that protect us from tribunal claims?

Paying Payment in Lieu of Notice does not protect an employer from unfair dismissal claims or other statutory employment claims. This is a common and costly misconception. PILON addresses the employer’s obligation to give notice only. It does not legitimise the dismissal itself and does not correct defects in decision-making, process or treatment.

Unfair dismissal focuses on the reason for dismissal and the procedure followed. Even where an employer pays full notice pay through PILON, an employee may still succeed in an unfair dismissal claim if the employer cannot show a fair reason for dismissal and that a fair procedure was followed. For example, dismissing an employee for redundancy without proper consultation, or for misconduct without a reasonable investigation, will not be cured by paying notice in lieu.

PILON also does not prevent claims for discrimination, whistleblowing detriment, automatic unfair dismissal or other statutory protections. In these cases, tribunals will examine the employer’s conduct and motivation rather than whether notice pay was made.

Where PILON is correctly applied, it can significantly reduce or eliminate exposure to wrongful dismissal claims by satisfying the employer’s notice obligations. However, this protection depends on the payment being lawful, accurately calculated and made promptly. Where PILON is non-contractual or miscalculated, wrongful dismissal exposure may still arise.

Employers should also be aware that the manner in which PILON is communicated can influence dispute risk. Abrupt or poorly explained terminations, even where notice pay is made, are more likely to result in grievances or claims. Clear explanation of the legal basis for PILON and confirmation of entitlements can reduce escalation, even where the dismissal itself is contested.

From a strategic perspective, PILON should be treated as one component of a wider exit strategy rather than a substitute for lawful decision-making. Employers who rely on PILON as a shield against claims often discover that it offers no protection beyond the notice obligation.

Section H summary: Payment in Lieu of Notice does not prevent unfair dismissal, discrimination or other statutory claims. It satisfies notice obligations only and may limit wrongful dismissal exposure if used lawfully. Employers must still ensure that the reason for dismissal and the process followed are fair and compliant.

Section I: Using Payment in Lieu of Notice in settlement agreements and negotiated exits

Employer question:
How should Payment in Lieu of Notice be handled in settlement agreements and negotiated exits?

Payment in Lieu of Notice is a common feature of settlement agreements and negotiated exits, particularly where employers want to achieve a swift and controlled termination while reducing the risk of post-termination claims. In these situations, PILON should be treated as a distinct legal and tax component of the overall exit package, not simply wrapped into a single termination figure.

From a contractual perspective, settlement agreements are often used where there is no express PILON clause or where there is uncertainty about the employer’s contractual entitlement to terminate immediately. While a settlement agreement does not retrospectively amend the original employment contract, it can record the parties’ agreement that employment ends immediately and that a specified payment is made in satisfaction of notice obligations. This can significantly reduce the risk of wrongful dismissal claims and bring clarity to the basis on which the employment relationship has ended.

Tax treatment is a critical consideration. PILON represents earnings to the extent that it constitutes Post-Employment Notice Pay and must be taxed accordingly. Employers should therefore ensure that PILON is clearly identified and separated from other termination payments within the settlement agreement. Other sums, such as compensation for loss of employment or redundancy-related settlement payments, may fall within the £30,000 tax exemption, but only if correctly categorised. Poor drafting in this area can expose employers to HMRC challenge and liability for underpaid tax and National Insurance.

Settlement agreements also provide an opportunity to address post-termination obligations in a controlled way. Where there is concern that restrictive covenants may be vulnerable due to the manner of dismissal, employers often use settlement agreements to reaffirm confidentiality obligations, non-derogatory statements and, where appropriate, restrictions on future conduct. This is particularly relevant in senior exits or situations involving client relationships or sensitive information.

Employers must also ensure that all statutory requirements for a binding settlement agreement are met. The employee must receive independent legal advice on the terms and effect of the agreement, the adviser must be appropriately qualified and insured, and the agreement must comply with the statutory conditions for validity. These requirements cannot be waived, even where the employee appears willing to accept the terms without advice.

From a commercial and risk-management perspective, PILON within a settlement agreement should be viewed as part of a broader strategy to achieve finality and certainty. The objective is not simply to end employment quickly, but to secure enforceable protections and minimise the likelihood of future claims. Achieving this requires careful drafting, accurate payment allocation and realistic assessment of litigation risk.

Section I summary: Payment in Lieu of Notice is frequently used in settlement agreements to facilitate immediate termination and manage dispute risk. Employers must clearly separate PILON from other termination payments for tax and legal purposes and ensure statutory settlement agreement requirements are met. When structured correctly, PILON supports clean and enforceable exits; when handled poorly, it can create additional exposure.

Section J: Payment in Lieu of Notice (PILON) FAQs

What is Payment in Lieu of Notice?

Payment in Lieu of Notice (PILON) is a payment made by an employer to end employment immediately instead of requiring the employee to work their notice period. Notice is still given in law, but the obligation to work that notice is discharged by payment. PILON ends the employment relationship straight away and does not extend employment or ongoing accrual of rights.

Can employers use PILON whenever they want?

No. Employers can use PILON without significant legal risk where there is an express contractual right to do so or where immediate termination is mutually agreed at the point of exit. Using PILON without a contractual clause will usually amount to wrongful dismissal, even if notice pay is made, and should be treated as a managed legal risk rather than a default option.

Can an employee refuse Payment in Lieu of Notice?

If the employment contract gives the employer the right to make a PILON, the employee cannot refuse it. Where there is no contractual right, PILON should be agreed between the parties. Without agreement, immediate termination may expose the employer to breach of contract claims.

Does PILON include bonuses and commission?

Only bonuses or commission that are contractually guaranteed and would have crystallised during the notice period must be included in a PILON. Discretionary bonuses or commission linked to future performance or targets that cannot be met once employment has ended are not usually included unless the contract expressly provides otherwise.

Does PILON include benefits and allowances?

Benefits and allowances are included in a PILON only where the contract provides that they continue during the notice period or where the PILON clause requires payment of the full remuneration package. Employers should not assume benefits are excluded unless the contract clearly states this.

Does PILON include holiday pay?

PILON does not extend employment, so holiday does not accrue beyond the termination date. However, employers must still pay for any accrued but untaken holiday up to termination, as this is a separate statutory entitlement.

Is Payment in Lieu of Notice taxable?

Yes. Payment in Lieu of Notice is taxable as earnings to the extent that it represents Post-Employment Notice Pay. This amount is subject to income tax and employee and employer Class 1 National Insurance Contributions. Only payments above PENP may qualify for the £30,000 termination payment exemption.

Does paying PILON prevent unfair dismissal claims?

No. Paying PILON only satisfies the employer’s notice obligations. It does not prevent claims for unfair dismissal, discrimination or other statutory protections. Employers must still show a fair reason for dismissal and that a fair procedure was followed.

Does PILON affect restrictive covenants?

Where PILON is made under a contractual right, restrictive covenants will usually remain enforceable. Where an employer dismisses without notice and without a PILON clause, restrictive covenants may be weakened or unenforceable, depending on the seriousness of the breach and the specific facts of the case.

Is there a legal limit on how much PILON an employee can receive?

There is no statutory cap on the amount of PILON. However, the payment should reflect the remuneration the employee would have received during the notice period. Excessive or poorly categorised payments can create tax risk and disputes.

Conclusion

Payment in Lieu of Notice is a valuable exit tool for employers, but it should be treated as a legal and commercial risk decision rather than an administrative shortcut. PILON interacts with contractual rights, statutory notice obligations, tax treatment and post-termination protections. Employers who apply it without contractual authority, miscalculate the amount due or confuse PILON with other termination payments can create avoidable claims, weaken restrictive covenants and expose the business to HMRC liability.

The lowest-risk approach is to ensure contracts contain clear PILON provisions, to calculate payments defensibly by reference to contractual entitlements and the relevant notice period, and to document how the figure has been reached. Employers should also remember that PILON does not cure unfairness or prevent statutory claims. The reason for dismissal and the process followed remain central to tribunal risk.

Used strategically, PILON supports controlled exits, limits disruption and reduces wrongful dismissal exposure. Used casually, it can undermine an otherwise defensible termination. HR teams and business owners should therefore adopt a compliance-first approach that links every PILON decision to clear contractual authority, accurate calculation and the wider dismissal strategy.

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