In the world of employment and your career journey, there may be unfortunate occasions where you are asked to leave and your contract is terminated. This may be when you come across the term 'payment in lieu of notice', and wonder what it could mean for you.
In this guide we’ll help you to understand what payment in lieu of notice (PILON) is in terms of employment law, when it applies, if it is tax free, and your rights surrounding it.
In this article, we’ll cover:
Whether PILON can be included in a settlement
Does PILON get taxed?
Can PILON count as a dismissal?
The difference between PILON and garden leave
How many payments is PILON paid in?
What is payment in lieu of notice (PILON)?
If you get payment in lieu of notice, your employer will pay you and you should receive your employment benefits, without having to work your notice period before your employment contract ends.
It can sometimes be known as wages in lieu of notice. Payment in lieu of notice includes the French phrase ‘in lieu’ which simply means ‘in place of’ or ‘instead of’. So, you receive payment instead of having to work the notice period in your contract.
Take this example: It’s the 1st of February and you have a 3 month notice period. Your employer could end your contract today and ask you to stop working, but pay you until May. In most cases, you could also get another job tomorrow!
Can you get a PILON in a settlement agreement?
Yes, payment in lieu of notice is a typical part of negotiating a settlement agreement and a negotiated exit from a contract of work.
This type of exit from a work contract is a tool employers often used to avoid redundancies and unfair dismissal disputes. As an employee, you and your employer might be keen to see out the contract without your notice period being worked. In essence, in payment in lieu of notice scenarios, your contract will be terminated by your employer.
When used as a settlement payment, payment in lieu of notice should take into account payment for unused holiday and redundancy payment.
In order for the payment in lieu of notice agreement to be legal binding, you need to have taken independent legal advice with an employment law specialist - that’s where we can help.
Is PILON taxable?
Payment in lieu of notice payments are taxable; you will pay income tax and national insurance when on payment in lieu of notice.
PILON payments can be made in two ways:
Following the terms of employment e.g. the final three months of a contract in one lump sum, instead of working a notice period
Payment is made following the terms of employment, but under the discretion of the employer
HRMC clarify that tax should be paid under the two scenarios above because the payments fall under the terms in the employee contract.
The tax you will pay is calculated from income tax and national insurance contributions. The calculation is based on the basic pay you would have got if you continued employment during your notice period.
This is known as PENP (post-employment notice pay). To calculate this, the notice period given to the employer needs to be considered if this is different to the period given to the employee.
However, even a situation in which the payment is made outside of the contract terms at the employers’ discretion tax is still payable.
This will be considered an advance of damages under the law in order to give recompense to the employee and avoid legal action being brought against an employer, as mentioned.
Any statutory redundancy payment is considered a termination payment. The first £30,000 of a termination payment is not taxable.
As an employer, you should remember that you need to consider the basic pay the employee would have received in line with their contract if they worked their full notice period when calculating payment in lieu of notice.
Is PILON paid as a lump sum?
Yes, payment in lieu of notice is paid as one lump sum. This is because it is not taxable.
Is PILON pensionable?
Payment in lieu of notice is not considered pensionable pay. This is because pensionable pay is payment that it in line with salary payments, bonuses and overtime.
You won’t have to contribute to your pension out of your payment in lieu of notice payment. The word 'payment' gives us a clue - PILON is a one-off payment and isn’t considered part of your usual salary.
How can you get payment in lieu of notice?
You can get payment in lieu of notice to negotiate an exit from your work contract, but it is usually paid as a way out of a dispute and isn’t something you should chase after unless the circumstances are right.
The amount of payment in lieu of notice you can get depends on how much notice you have to give your employer.
It all hinges on the amount of time that you have worked continuously for your employer.
If you have been employed:
for more than one month up to two years, you can get one month’s notice as payment in lieu of notice.
for more than two years’ service, you will get one week per year worked, up to a maximum of 12 weeks for 12 years worked.
If you’re being offered payment in lieu of notice, you will need to be clear that the notice period you’re being offered is fair. You may be entitled to a longer period than that included in your contract as the statutory minimum; this is referred to as ‘contractual’ or ‘enhanced’ notice. A shorter contractual notice period than your statutory entitlement is illegal.
Is payment in lieu of notice a dismissal?
Payment in lieu of notice is not a type of dismissal. If an employer uses PILON to terminate a contract before the end of an employee’s notice period, this isn’t classed as a dismissal in law.
It is often used as part of settlement agreements or negotiated exits. These agreements tend to happen when the employer is trying to avoid workplace disputes or redundancies. This is where it would be in both parties’ interests for the employment contract to be ended quickly and without the notice period being worked.
When a dismissal is made for misconduct, typically payment in lieu of notice will not be made.
It is important to note that if your employment contract does not provide for payment in lieu of notice, your employer would not be able to terminate your contract immediately without the notice period and they could be in breach of contract for dismissal with pay in lieu of notice. This also means any post-employment restrictive covenants would no longer be legally binding on you.
Simply put, if an employer verbalises that they are paying PILON without it being written down in a contract, you may have the right to insist you work your notice period, if you wanted to.
An employee can resign and request payment in lieu of notice from their employer. This may be accepted by the employer if they want the employee to leave as soon as possible, even if no mention to PILON is made in their contract. This would be at the employer's discretion and they have no obligation to agree to such a request.
If you need any help with HR disputes, we have the expertise to guide you.
Can I start a new job while on PILON?
Yes, the majority of people on payment in lieu of notice can get a new job straight away- this is one of the main reasons it can benefit an employee as well as an employer. Unless you have post termination restrictions in your contract or settlement period, you can start a new job immediately.
There’s no need to sit around when you’ve been paid payment in lieu of notice, as this is because it is a one-off payment, not a salary from the job you left. Win, win!
PILON vs garden leave
Payment in lieu of notice differs significantly from gardening leave and it is important to understand so you are clear on your rights.
When you’re on gardening leave, you can’t take a new position and you are still contractually employed until the agreed termination date.
Payment in lieu of notice in most cases permits you to get a new job immediately as your contract would cease straight away.
Gardening leave also states you cannot take a job with a competitor for a certain period of time after your employment has ceased. This may also be the case with payment in lieu of notice if you have restrictions in your contract. Be really clear on the terms of your contract and before you agree anything.
With gardening leave, you get paid at the end of each month left on your contract as you would your normal salary payments. You’ll also still be employed and so might be asked to do more work in exceptional circumstances.
With payment in lieu of notice, you get paid in one lump sum and your contract is terminated meaning you can’t be asked to do any more work for that employer.
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