Payment in lieu of notice: PILON guide for HR

PILON Guide for employers

Dismissing an employee or having an employee resign can cause complications, especially if it’s the result of a workplace dispute or disagreement. Sometimes it can be easier to end the employment before the employee’s notice period.

This is where making a payment in lieu of notice, or PILON, can be useful. A PILON is where an employee is paid for the contractual notice period, but they do not need to work their notice. “In lieu” is French for “in place of,” so the whole phrase means payment in place of notice.

This guide will provide you with everything you need to know about PILON from an HR and employer’s perspective.

It’s important to be able to distinguish between a PILON and other payments that can be made upon employee termination, like redundancy payments, terminations payments or settlement payments. These all need to be treated separately and have different tax implications.

What is PILON?

Payment in lieu of notice is when an employee receives payment after being dismissed or resigning rather than working their notice period. The payment is compensation to reimburse the employee for lost salary wages due to not working their notice period.

Is PILON different from garden leave?

PILON should not be confused with garden leave, as the two are very separate concepts. Unlike when placed on garden leave, when a PILON is used, the employee’s contract is immediately terminated and they can seek work elsewhere during their notice period. They are no longer bound by their employment contract. Although post-employment restrictive covenants may still be in place, they are no longer employed.

When an employee is on garden leave, they cannot work anywhere else as they are still technically employed even though they are not allowed to enter the workplace. The employment contract is still in force and the employee should still make themselves available to their employer until the garden leave is over and the contract terminated.

Garden leave is the preferred method when you no longer want an employee to be present in your place of work but you don’t want them to work for another employer.

When is PILON used?

PILON can be used in a few different circumstances. The most common of these are when:

• It has been agreed through negotiation between the employer and the employee when they choose to resign
• There’s concern about the impact of the continued employment on other employees or the company in general
• To prevent the employee’s access to sensitive information about the company.

PILON is not normally used when an employee has been dismissed for gross misconduct, as they will not be entitled to any compensation in this circumstance.

PILON clause in employees’ contracts

To use PILON, you must first include a clause in the employee’s contract. If PILON is not provided for within the contract, you will be in breach of the contract if you invoke it since you’ll be preventing the employee from working without having the contractual right to do so.

It’s therefore highly recommended that you include a PILON clause in every employee’s contract to cover what will happen in the event of PILON being used. You are not obligated to make a PILON if you dismiss the employee, but it’s better to have the option.

It’s essential that the PILON clause in the contract is very detailed and provides for when, how and what you will pay the employee if you use a PILON. The clause should clearly state that the employee can be immediately dismissed by making a payment in lieu of basic salary for the notice period.

We also recommend that you state whether you will pay only the employee’s basic salary for the notice period. By doing this, you are limiting how much you have to pay the employee. Without it, you could end up having to pay any additional bonus pay the employee would lose, commission or cover the loss of company perks on top of their basic salary.

If the employee is paid on an hourly basis, it’s recommended to state that you will pay the average number of hours worked over a certain period as their basic salary.

If a PILON clause is not included in the employee’s contract, you could be in breach by preventing them from working if you invoke one. However, ACAS states that you can use a PILON if the employee agrees to it. Although, it also says that an employee cannot be forced to come to an agreement and they could make a claim in an employment tribunal if they are “dismissed sooner than their notice period ends.”

Suppose the employee is reluctant to agree to PILON. In that case, you can try to come to an agreement and include payment of bonuses, commission, and compensation for the loss of benefits to persuade them to agree and mitigate the loss of earnings, including all other benefits the employee would have accrued during their notice period.

These extra payments would have to be paid anyway if there is no PILON clause in the contract, as you would effectively have to pay advance damages for loss of earnings.

Coming to an agreement about a PILON payment is often to the benefit of both parties since the individual can also start a new job while still technically in their notice period with you.

It is crucial you seek the employee’s agreement before using a PILON to minimise the risk of them making a claim for a breach of contract, where you may have to pay much more than you expected to.

By breaching the contract and using a PILON when you don’t have the contractual right, it would mean that you can no longer rely on the contract. The effect of this would be that the post-employment restrictive covenants included in the contract no longer apply.

It’s important that you notify an employee in writing when you are using a PILON. This should be very clear and unambiguous and should state that it is in accordance with the employer’s contractual right to terminate their employment effective immediately.

How is PILON calculated?

If the PILON calculations are stipulated in the employee’s contract, the payment will be determined on those terms. Otherwise, PILON calculations are usually calculated by working out what the employee would have received during their notice period. Depending on whether the employee earned a salary or was on an hourly rate, the method for working out a PILON payment will vary.

You will also need to determine if the employee was due any payment for untaken holidays or should have the payment deducted for any overtaken holidays.

This highlights the importance of including a PILON clause in the contract so that making a calculation will be clear when it comes to invoking one.

When should PILON be paid?

PILON should be paid when an employee has been dismissed but you do not want them to work their notice period. It is often used when there has been a dispute or disagreement between the employee and the employer.

PILON is usually used to end the relationship between the parties in a way that works for everyone. The employee will be paid and is free to find new employment in the meantime, and the employer doesn’t have to deal with the broken down relationship or face the employee causing any issues in the workplace.

How should PILON be paid?

There are no strict rules on how PILON should be paid. Depending on the length of the employee’s notice period, you could make a one-off payment or pay in monthly instalments.

The important thing is that you are clear with your employee about how the payment will be made. This is why it’s extremely helpful to have a PILON clause in all your employees’ contracts. You should also make this clear in writing when you notify the employee of the PILON. Being upfront and clear ensures you won’t face claims arising from a failure of payment.

PILON & redundancy

A PILON can also be used where redundancy has taken place, where the employer no longer requires the employee to work for them and once they have completed the official statutory redundancy period.

However, you cannot force an individual to accept a PILON during redundancy unless you have a clause for it in their contract. Although it is recommended that you seek the employee’s agreement for a PILON for good practice, whether it’s in their contract or not.

It’s important to understand the difference between a PILON payment and redundancy payment, or termination payment, as there are different tax implications for each type of payment.

PILON & settlement agreements

PILON is commonly negotiated for settlement agreements. As these agreements often come about from workplace disputes and commonly result in the involved parties wishing to end the relationship, PILONs can be a useful tool here.

However, you should also be well aware of the differences between a settlement payment and a PILON. While they are often used in conjunction with each other. These are different concepts that should be treated separately.

How much statutory minimum notice is an employee entitled to?

You should also include an employee’s notice period in their contract. Therefore, you should refer to this when you make a PILON payment.

However, there are minimum statutory notice periods you are required to grant each employee. This minimum period applies even if the contract states less.

Every employee who has served 4 weeks with you is entitled to a minimum statutory notice period on termination of their employment contract. If an employee has worked for you for between one month and two years, they will be entitled to one week’s notice.

After an employee has worked for you for 2 years, they are entitled to one week per each full year’s service.

For employees who have served more than 12 years of continuous employment, there is a maximum of 12-weeks’ notice. So an employee who has worked continuously with you for 14 years will be entitled to 14-week notice period.

For example, if an employee has worked for eight and a half years, they will be entitled to an 8-week notice period.

However, while these minimum notice periods are in place, it’s common for employees to serve a longer notice time.

Is PILON taxable?

The tax to be paid on PILON is quite complex. New regulations that came into force in 2018 set out that PILON payments are taxable, as they are treated as normal pay. Thus National Insurance and Income Tax should be deducted as normal from the employee’s basic pay. This pay is known as post-employment notice pay or PENP.

Suppose any additional payment is made on top of the employee’s basic pay, such as a bonus payment, overtime payment, commission payment or any benefits. In that case, it will be classed as termination pay, which has different tax implications.

The first £30,000 of a termination payment is not taxable or subject to the employee’s National Insurance Contributions.

However, employees do not pay pension contributions on PILON payments.

It’s also important to note that there are different tax implications when an employee has been made redundant, so it’s important that you are familiar with each payment and its differing tax implications. You should consult an HR professional, lawyer or HMCR if you’re unsure about what is taxable.

PILON FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.