What is pay in lieu of notice (PILON)? | Guide for Employers 2022 

What is pay in lieu of notice (PILON)?

There are times when an employee has resigned from their position, or the employee has been dismissed by the company and  the company does not require the employee to work their notice as per their contract of employment. When this happens, there are two options that are available to employers to enable the employee to not work their notice period, these are:

How does Pay in Lieu of Notice work? 

Pay in Lieu of Notice (PILON) is where an employer terminates an employee’s contract of employment with immediate effect and pays their notice pay, rather than them having to work their notice period. The payment in lieu is owed to the employee as a debt under their contract of employment.

If termination is due to gross misconduct, PILON is normally not paid.

The reasons an employer may wish to make a PILON include:

  • By removing the employee from the workplace immediately, preventing them having access to sensitive information;
  • By the employee carrying on being employed, it could negatively affect other team members and the company;
  • Being part of a negotiated agreement between the employer and employee.

To be able to make a PILON there must be a PILON clause in an employee’s contract of employment. If a payment is made without a clause existing, the employer will be in breach of contract by preventing the employee from working their notice.

A PILON Clause should:

  • State dismissal can be made immediately with a PILON for the duration of the notice period;
  • Confirm what payments will be made, for example, bonuses and holiday pay
  • State how and when payment will be made.

Can you offer PILON in a redundancy situation?

In a redundancy situation, an employee may not be required to work their notice, if this is the case they will be entitled to receive pay in lieu of notice. This would usually be included in their redundancy calculation.

How is pay in lieu of notice calculated?

Pay in lieu of notice is calculated by using what an employee would have earned if they had physically worked their notice period, for example, one week or one months’ notice would be the same as one week or one month’s pay.

The payment is for compensation for the employee not being required to work their notice period.

PILON vs Garden Leave: How are they different? 

Garden leave is when an employee is required to serve their notice period at home, rather than attending the workplace.

Garden Leave is usually used as a protective measure to prevent an employee who is leaving from having access to information or sensitive data that would be useful to a competitor or that would assist that employee in setting up in competition with the employer.

The main difference between PILON and garden leave is that an employee who is put on garden leave remains employed by the company and must be available to work during their normal working hours. They are obliged to perform any duties requested by the employer which could include being asked to return to work or to answer any queries. Whereas an employee who offered payment in lieu of notice is no longer an employee with immediate effect.

This means that an employee on garden leave cannot search for a new job, unlike an employee who is paid PILON. While on garden leave, the employee will receive their normal salary and have their normal contractual rights. A period of Garden Leave cannot exceed the normal notice period.

Pay in lieu of notice for different types of dismissal 

A PILON clause is required to state that if a dismissal is done from immediate effect then payment in lieu of notice can be made for the notice period.

This clause allows employers to dismiss an employee and pay them for their notice period, which would mean they are not breaching the contract of employment.

If an employee is summarily dismissed then they are not entitled to receive pay in lieu of notice. Summary dismissal usually occurs when an act of gross misconduct has taken place.

Is PILON subject to tax?

Yes, PILON is subject to income tax and national insurance deductions.

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