What is payment in lieu of notice period?

Payment in lieu of notice (also known as PILON) can help to manage a person's exit if a situation arises when an employee needs to have their contract terminated sooner than expected. 

This is especially helpful to those people who:

• you no longer wish to have ongoing access to sensitive company information; and /or
• display ongoing disruptive and unproductive behaviour.

What is payment in lieu of notice? 

In the UK, payment in lieu of notice, (also known as PILON), is where you compensate an employee's immediate dismissal by paying them for their notice period (instead of them working out their notice period).

Payment in lieu of notice therefore protects your worker's rights for the money they would have earned during their notice period.

It's different from gardening leave, which is where an employee remains employed by you and is paid during their notice period. Under gardening leave, they're still bound by their employment contract - so even though you ask them not to work, the employee can't take up new employment during that time.

PILON is necessary for instances where you require an immediate end to the employment and can cut ties to override the previous contract. 

If you’re dismissing an employee for gross misconduct, then PILON is not normally paid.

How can employers manage payment in lieu of notice?

• Check employment contracts

  Look at what your current payment in lieu of notice terms detail and consider updating conditions.

  It’s an awful lot easier to pay PILON without breaching a contract of employment if the terms are carved into the contract in advance.

• Include a PILON provision that covers how, when & what is paid in lieu

  Employers are well within their rights to include a condition to terminate employment immediately if PILON is paid at the basic salary that would have otherwise accrued.

   

• Consider extra pay and benefits

  This is particularly useful for those who don't yet have PILON terms and conditions written into their employment contract. Technically, if it's not there, any termination of employment with PILON is likely to be a breach of contract.

  So reassure your people and clear up ambiguity. By specifying the employment extras and benefits that are inclusive of PILON, you can - in theory - manage your employee's exit pretty smoothly.

• Walk a mile in their shoes 

  Try to see this as an opportunity to demonstrate your level of care as an employer right up until unforeseen dismissals.  

  This is key for showing the rest of your people how you handle difficult situations.

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Extras to consider on top of salary and benefits for the notice period:

• Payment for annual leave that would've accrued during the notice period
• Further payment to compensate the employee as a way of full and final settlement.
• Continued access to employee apps and wellbeing programmes, such as medical, EAP, and any other benefits that could help the transition. 
  

Complications can arise if your employee:

• has share options,
• could lose additional pay or benefits during the notice period that you don’t want to cover under the PILON,
• is having medical treatment under company health insurance; and / or 
• can evidence that the conditions for the correct dismissal process were neglected. 

In those cases, think about contacting an employment lawyer to check for breaches in your contractual obligations. 

 

How is payment in lieu of notice calculated?

Usually, employees are paid the amount they would normally earn during their notice period.

If you have payment in lieu of notice written into contracts, then it should be paid in that way and according to those conditions. It might stipulate that only basic pay will be paid, whilst other benefits will not.

Where you don’t have any contractual provision for PILON, you should usually pay all pay and benefits that would have accrued over the notice period. PILON should normally be made immediately on termination of employment.

 

Is tax applicable to payment in lieu of notice?

PILON payments may or may not be taxable depending on how they are handled and paid. There are three ways to make PILON (payment in lieu of notice) payments: 

• PILON payment made under terms of employment where employee is entitled to it
• PILON payment made under terms of employment at the employer’s discretion
• PILON payment made where there is no contractual right of payment or provision made

According to HMRC, tax will normally be paid on the first two situations because those payments come under normal terms of the employment contract.

Because the third situation normally results in a breach of contract it is therefore not payable under the terms of employment and not subject to normal tax – it is essentially an advance payment of damages to compensate an employee for loss and to avoid a costly legal claim for you.

This payment is tax free up to £30,000.

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