Payment in lieu of notice is where an employee receives notice pay from their employer instead of working their notice period when their employment is terminated without notice. Payment in lieu of notice, or PILON, can apply to many different types of dismissal. In this article, we look at the rules on PILON and how you can check you are receiving your full entitlement.
Employees with more than one month’s service are entitled to a minimum statutory notice period upon termination of their employment contract.
Statutory notice provides that an employee has to receive a minimum of one week’s notice for every full year that they have been employed by their employer up to a maximum of 12 weeks. If you have been employed for less than one year, but more than four weeks, you are statutorily entitled to one week’s notice.
In many cases, employers will extend the length of notice period from the statutory minimum under the terms of the employee’s employment contract (‘contractual notice’). Contractual notice cannot be shorter than the employee’s relevant statutory entitlement.
On occasions, an employer may wish to terminate an employee’s employment immediately, that is, irrespective of the notice period to which they are entitled. This may be because the employee has requested it or because the employee has access to sensitive or confidential information or because the employer is concerned that the employee may disrupt the rest of the workforce or not carry out their job properly if they work their notice period. Pay in lieu of notice (or PILON) is one way to achieve this.
PILON or payment in lieu of notice allows an individual’s employment to be terminated immediately without them needing to complete or work their notice period. Instead, the employer pays the exiting employee the amount they would have earned had they worked their full notice period.
As an employee, your employment contract will set out if you are, or may be, entitled to PILON. If you have been dismissed or resign and would prefer to leave immediately without working your notice period, you can always request that your employer gives you a PILON.
Even if there is no reference in your employment contract to a PILON, it may be that your employer is happy to let you go straightaway. However, you should be prepared for your request to be refused.
If you choose to leave your employment or are dismissed by your employer, you may receive PILON rather than having to work your full notice period.
Often, the employment contract under which you are employed will provide that payment in lieu of notice should be made or can be made at the employer’s discretion if you are dismissed or resign. If an employer makes a PILON in circumstances where the employment contract does not allow for it, the employer may be in breach of the contract.
If the PILON is made in accordance with the employment contract, the contract will usually set out the terms of payment, including what will be taken into account in calculating the payment. Benefits and other payments may not be included. However, if the payment is in breach of the employment contract, the employer will usually need to pay an amount equivalent to any benefits or other payments that the employee would have received had they worked their notice period as well as the salary to which they would have been entitled. This is because, in the case of a breach, the payment is, essentially, an advance damages payment, or compensation to the employee for the breach. The employer may also include an amount for holidays which would have accrued during the notice period.
If an employer decides to make a PILON, they must provide written notice of this decision to the employee. The employee’s employment will then have terminated, their employment contract will have ended, and they are free to look for work elsewhere. It is, however, important to remember that even though your employment contract has ended, you may still have duties under it, such as confidentiality obligations and restrictive covenants, which may prevent you from working for certain competitors or taking other employees with you.
Where an employee is dismissed for gross misconduct, it is usually unlikely that a PILON will be made.
Payment in lieu of notice is often be made in redundancy situations.
If you are facing redundancy, and you have worked for your employer for more than one month, you have a statutory right to be given a certain amount of notice. This has to be the minimum notice period by law:
- 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
You may be entitled to more notice if your employment contract provides for this.
In the case of redundancy, employers can bring terminate the contracts of employees being made redundant immediately, meaning the employees do not have to work their notice period. In such cases, the employees should still by law be paid for the notice period. This should be communicated to the employees as part of the redundancy consultation process.
Pay you in lieu of notice would be in addition to your statutory redundancy pay entitlement. Payment may be wrapped up with any redundancy or termination payments made by the employer to the employee. However, for tax reasons, it is important to be clear as to what constitutes the PILON and what is a termination payment.
PILON is not to be confused with garden leave which is a separate concept. Where PILON applies, the employee’s employment is terminated immediately, and the employee is paid the amount they would have earned had they worked their notice period. Because the employment has terminated, the relationship between the employer and employee has ended, the employment contract terms are no longer binding and the employee is free, for example, to find work elsewhere.
If an employee is placed on garden leave, their employment contract will remain effective for the duration of the period of leave until the date the contract is terminated. This means they are still employed by their employer for the garden leave period but are not required to go into their place of work. They will continue to be paid and accrue their rights and benefits in the usual way during the garden leave period and technically they could be required by their employer to undertake work.
If your employment has been terminated (other than for gross misconduct) and your employer dismisses you immediately without PILON, you may be entitled to a payment. Check your employment contract to see if there is a clause for payment in lieu of notice.
If your contract does include terms for PILON, raise a query with your line manager, HR department or other point of contact to query the reasoning. If this fails, take advice on your legal options.
The contractual term may, for example, stipulate when PILON takes effect, e.g. whether it is on the date notice of termination is given, the date the PILON is actually made, or the end of what would have been the notice period. This will be important to understand when calculating how much you should receive.
The contract may also stipulate the amount that will be paid, which could, for example, cover basic pay but not benefits, bonuses or commissions during the notice period.
Payment in lieu of notice does not have to include holiday that would have accrued during the notice period, i.e. beyond the date of termination, unless the contract provides otherwise.
If your employment contract does not provide for PILON, your employer would generally not be able to terminate your contract with immediate effect without the notice period and they may be in breach of contract for dismissing you with pay in lieu of notice. This also means any post-employment restrictive covenants would no longer be legally binding on the employee.
PILON is taxable and this is the case regardless of whether the payment is made in accordance with the employment contract or otherwise. The rules and calculations are however complex. Essentially, an employee will pay income tax and Class 1 National Insurance Contributions (NICs) on the amount of basic pay which they would have been paid had they continued to be employed during their notice period. This amount is known as PENP or post-employment notice pay. Any amount paid in addition to PENP will be classified as termination payment and taxed accordingly.
In calculating PENP, the notice period to be taken into account is that to be given by the employer, not the employee (if they are different) and is the longer of either statutory notice or contractual notice. The term ‘basic pay’ includes any amount which the employee would ordinarily give up through a salary sacrifice scheme but does not include any commission payments, overtime payments, benefits in kind or bonus payments. In addition, it does not include any statutory redundancy payment (and possibly any contractual redundancy payment), which will be deemed a termination payment.
The first £30,000 of any termination payment is not taxable and termination payments are not subject to employee NICs.
So, by way of example, Emma is told that she is being dismissed with immediate effect. Her employment contract provides for payment in lieu of notice at her employer’s discretion. Emma has a 90-day notice period and her gross basic salary is £2,500 per month. In the previous pay period, there were 30 days. Emma is paid £10,000. Emma’s PENP is therefore (2,500 x 90)/30 = £7,500 and this amount will be subject to tax and NICs. The remaining £2,500 termination payment will be exempt from income tax as it falls within the £30,000 exemption.
The tax rules surrounding PILON are complicated and can involve detailed calculations on your employer’s part. If you are to receive PILON, ask your employer to send you a copy of the calculations and if you wish, that they go through the calculations with you. Ensure that you understand and agree with the figures and how they have been worked out. If in doubt, take professional advice to ensure you are receiving your full entitlement.
Payment in lieu of notice is commonly used as part of settlement agreements and negotiated exits. Since such agreements tend to arise as a result of, or for the avoidance of, workplace disputes or redundancies, it may be in both parties’ interests for the employment contract to be terminated quickly and without the notice period being worked. It will be important to understand that any settlement payment takes account of all of your entitlements that apply, such as PILON or any other figures such as redundancy pay and holiday pay.
If you have been asked to discuss or sign a settlement agreement, take legal advice. The agreement will not be legally binding on your employer unless you have taken independent advice on the terms of the agreement.
Do you have a question about PILON?
If you need to take more formal action you might be able to make a claim in the employment tribunal if your employer:
- doesn’t pay you for your notice period
- tells you to leave straight away without pay in lieu of notice
- doesn’t pay you the right amount
DavidsonMorris are experienced employment law specialists offering guidance and support to employees facing dismissal and issues with payment for notice. If you believe your employer is potentially in breach of contract or if you have not received your full entitlement to PILON, contact us for advice.
What does PILON mean?
PILON stands for Payment In Lieu of Notice. It is a payment made to an employee when dismissed instead of the individual having to work their notice period.
Do I pay tax on Pilon?
Yes, employees are taxed national insurance and income tax in the usual way for earnings for any PILON payments, both contractual and non-contractual.
What does PILON mean in redundancy?
In a redundancy situation, PILON means you will be paid not to work your notice period. Payment should cover your usual salary for the period of notice as well as any other payments due.
Last updated: 20 February 2020