What Does Payment in Lieu of Notice Mean?

Typically, a notice period would be worked by an employee up to the date the notice period ends. PILON is a way for an employer to terminate an employee’s employment immediately without the notice period being worked.

In this circumstance, the employer will pay the employee for the time they would have worked their notice period.

How does pilon work?

If an employee’s notice period is 6 months, their employment contract can be terminated immediately. The employer would then pay them compensation for 6 times their monthly salary.

PILON and settlement agreements

Typically when an employer issues a settlement agreement, they are looking to terminate their employment quickly. The settlement agreement allows the employer to do this without any implications arising in the future. 

A payment in lieu of notice clause within the agreement enables the employer to compensate the employee for the notice period allowing for a quick clean break between the two parties.

Garden leave Vs PILON

Both of these terms are associated with the termination of an employee’s employment contract.

The biggest difference is that garden leave requires the employee to work their notice period but they are not required to attend. During garden leave the employee is still classed as ‘employed’ by the company.

Payment in lieu of notice tax

PILON payments cover the notice period which would have typically been paid as normal salary to the employee. Payment in lieu of notice is typically a lump sum of their required notice period multiplied by their monthly salary and would therefore be subject to NI and tax contributions.

How to negotiate pilon

The payment in lieu of notice amount is not really negotiable because it represents the required amount of notice multiplied by the employee’s monthly salary. Both of these are fixed amounts stated in the employee’s contract.

Payment in lieu of notice may be something that is negotiated as a term within a settlement agreement.

When should pilon be paid?

In most cases payment in lieu of notice is paid to the employee immediately once  a settlement agreement has been signed and has become legally binding.

Statutory payment in pilon

If an employee has worked for more than one month, they are entitled to the minimum statutory notice period. In this scenario, the employee would be entitled to one week’s notice.

Payment in lieu of notice Vs severance

Severance pay and payment in lieu of notice are not the same. PILON is compensation of lost salary that would have been earned if the employee has worked their notice period.

Severance payments can be compensation paid to the employer as part of a settlement agreement. Although the severance payment can include payment in lieu of notice they are two different definitions.

What is included in pilon?

Payment in lieu of notice is compensation or payment for work or service. In this specific scenario, compensation is paid but the employee is not required to work during this period.

Any entitlements an employee would be eligible for under their normal employment contract would also be applicable during their notice period.

Do I have to accept pilon?

If PILON is not a clause within the employment contract, then an employer cannot force an employee to accept payment in lieu of notice. If the employer dismissed an employee before their notice period terminates, the employee is well within their rights to take their claim to the employment tribunal.

When to use pilon?

PILON is typically used by an employer who wishes to terminate an employee’s employment as quickly as possible. It can be a clause within a settlement agreement to speed up the contract termination by compensating the employee instead of them working their notice period.

It’s an advantage for the employer for a speedy termination and in some cases an advantage to the employee who is compensated without having to work their required notice period.