Payment in lieu of notice, commonly called PILON, allows an employer to end an employee’s employment without requiring them to work their notice period. Instead of working their notice, the employee receives a payment reflecting what they would have received during that period.
PILON is commonly used when employment ends through dismissal, redundancy or a settlement agreement.
How Does Payment in Lieu of Notice Work?
Typically, an employee works their notice period before their employment ends. With PILON, employment can end immediately.
For example, an employee may have a contractual notice period of six months. Their employer could terminate their employment immediately and make a payment covering their notice entitlement. The amount due will depend on the employee’s contract and circumstances.
Where PILON is used, the employment contract ends immediately. This is different from garden leave, where employment continues throughout the notice period.
How Does PILON Work in a Settlement Agreement?
PILON is commonly included within settlement agreements where the employer and employee have agreed that employment will end without notice being worked. A payment in lieu of notice clause should explain what the employee will receive for their notice period.
This allows the employment relationship to end immediately rather than requiring the employee to remain employed throughout their notice. However, PILON should be distinguished from any additional compensation offered under the settlement agreement.
Notice pay is generally money the employee is already entitled to receive. The settlement compensation is usually a separate payment made in return for settling specified legal claims.
Garden Leave vs PILON: What Is the Difference?
Garden leave and PILON can both mean an employee stops attending work, but they work differently.
With garden leave, the employee remains employed throughout their notice period. They continue to receive their normal pay and contractual benefits.
With PILON, employment usually ends immediately. The employee receives payment instead of working their notice period.
A Simple Way to Think About PILON
Think of your notice period as the remaining time on your employment clock. Normally, that clock keeps running while you work your notice. With garden leave, the clock still runs, but you stay away from work.
With PILON, the clock stops immediately. Your employment ends, and your employer pays you instead of requiring you to work the notice period.
For example, if you have three months’ notice, PILON can allow your employment to end now rather than three months from now.
This distinction can be important. Remaining employed during garden leave can affect benefits, bonuses, restrictive covenants and when the employee can start working elsewhere.
Is Payment in Lieu of Notice Taxable?
Yes. Payment in lieu of notice is generally subject to income tax and National Insurance contributions.
PILON represents earnings the employee would have received if they had worked their notice period. It should therefore not be confused with certain qualifying termination payments, where the first combined £30,000 may potentially be paid tax-free.
Employers may also need to calculate taxable post-employment notice pay (PENP) when an employee does not work their full notice period. The tax treatment of a settlement agreement depends on what each individual payment represents.
Can You Negotiate Payment in Lieu of Notice?
The basic PILON entitlement is not usually something that can simply be negotiated upwards. The amount will generally reflect what the employee should receive for their notice period under their contract and applicable law.
However, the treatment of notice can form part of wider settlement agreement negotiations. For example, discussions may cover when employment ends, whether notice is worked and what other compensation is being offered. It is important to separate money you are already entitled to receive from additional settlement compensation.
When Should PILON Be Paid?
There is no universal rule stating that PILON must always be paid immediately after signing a settlement agreement. The payment date should be set out in the employment contract, settlement agreement or other arrangements governing the termination.
Where PILON forms part of a settlement agreement, the agreement should clearly explain when payment will be made. Check this carefully before signing so you understand when you should receive the money.
What Is the Statutory Notice Period?
Employees are generally entitled to a minimum statutory notice period once they have worked continuously for their employer for at least one month.
The statutory minimum is:
- One week’s notice after one month of employment
- One week for each complete year of employment between two and 12 years
- 12 weeks’ notice after 12 years of employment
An employment contract can provide a longer notice period than the statutory minimum. Where contractual notice is longer, the contractual provisions should be considered when establishing the employee’s notice entitlement.
PILON vs Severance Pay: What Is the Difference?
Severance pay and payment in lieu of notice are not the same. PILON replaces the pay an employee would have received during their notice period.
A severance or settlement payment is usually additional compensation connected with the termination of employment.
A settlement agreement may contain both.
For example, an employee could receive PILON for their notice period alongside an additional compensation payment for settling employment claims. Understanding the distinction is particularly important because the payments can receive different tax treatment.
What Is Included in Payment in Lieu of Notice?
What is included in PILON can depend on the employment contract and how the payment arises. It will normally include the pay due for the relevant notice period.
Depending on the contractual terms and circumstances, other elements may also need to be considered. These could include bonuses or commission. Accrued but untaken statutory holiday must also be paid when employment ends. The agreement should clearly identify the different payments being made rather than combining everything into one figure.
Do I Have to Accept Payment in Lieu of Notice?
Accepting payment in lieu of notice depends on your employment contract. If the contract contains a valid PILON clause, the employer may be entitled to end employment immediately and make payment instead of requiring notice to be worked.
If there is no PILON clause, the employer can ask the employee to agree to payment in lieu of notice. An employer generally cannot force an employee to agree to PILON where the contract does not provide for it. Ending employment without giving the required notice could potentially amount to a breach of contract.
When Is Payment in Lieu of Notice Used?
PILON is commonly used where an employer wants employment to end without requiring the employee to work their notice period.
This might happen following:
- A settlement agreement
- Redundancy
- Dismissal
- An agreed departure
It can provide a clean break for both sides. The employer does not have to keep the employee in the workplace during their notice period. The employee can also move forward without having to work that period.
Whether PILON is appropriate will depend on the employment contract and the circumstances surrounding the termination.
Have You Been Offered PILON as Part of a Settlement Agreement?
PILON can make up a significant part of the money shown in a settlement agreement. However, it should not automatically be treated as additional compensation. Our specialist settlement agreement solicitors can help you distinguish between what you are already owed and the additional amount being offered to settle your claims.
We can usually review your agreement and advise you on the same day.
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Frequently Asked Questions About Payment in Lieu of Notice
Does PILON Mean My Employment Ends Immediately?
Usually, yes, payment in lieu of notice ends your employment immediately. With PILON, the employment normally terminates without the employee working their notice period.
This is different from garden leave. During garden leave, the employee remains employed until their notice period expires.
Is PILON Part of the £30,000 Tax-Free Settlement Agreement Allowance?
Generally, no, payment in lieu of notice is not part of the £30,000 tax-free settlement agreement allowance. PILON and amounts treated as post-employment notice pay are generally subject to income tax and National Insurance.
The £30,000 exemption applies to qualifying termination payments rather than ordinary notice pay.
Is PILON Included in a Settlement Agreement?
A PILON can be included in a settlement agreement. Many settlement agreements include PILON where employment ends immediately rather than after the employee works their notice period.
The agreement should clearly distinguish PILON from additional compensation being paid to settle legal claims.
