Contractual basis and employer obligations

PILON clauses in employment contracts

Many employment contracts contain a “PILON clause”, which expressly allows the employer to terminate employment immediately by paying the employee a sum equivalent to their notice pay. This clause will normally state whether the PILON is comprised of basic salary only, or whether it also includes benefits for the notice period that would have been served.

Such clauses provide clarity and flexibility for both parties. They typically state how the payment will be calculated, what it includes, and when it will be paid. The existence of a PILON clause also helps prevent disputes about breach of contract, as the right to terminate immediately is agreed in advance.

What if there is no PILON clause?

If the employment contract does not contain a PILON clause, the employer does not automatically have the right to make payment in lieu instead of providing notice.

In that case, terminating employment without notice may amount to wrongful dismissal, even if the employer pays the equivalent of notice pay. While the employee will still receive money, the lack of a contractual right means their termination is technically a breach of contract.

This can have practical consequences. For example, restrictive covenants (such as non-competition clauses) may become unenforceable if the dismissal was in breach of contract.

Calculation and scope of PILON

What payments are typically included?

The scope of a PILON depends on the contract wording. In some cases, it covers basic salary only, excluding benefits, bonuses, and commissions. In others, it may include the full remuneration package that would have been earned during the notice period.

Employers must calculate the payment carefully to ensure compliance with both contractual and statutory rights. Miscalculations may lead to claims for unpaid wages or breach of contract.

Taxation and NICs on PILON

Since April 2018, most payments in lieu of notice are treated as taxable earnings. HMRC requires that the portion of a termination payment that represents notice pay be subject to income tax and National Insurance contributions (NICs).

This applies even if there is no express PILON clause in the contract. The tax rules aim to ensure that all employees who receive payment instead of notice are taxed consistently with those who work their notice period.

Comparing PILON with other notice options

PILON vs working notice period

Under a working notice period, the employee continues to work until the end of their notice, receiving salary and benefits as normal. In contrast, a PILON ends employment immediately, with payment made instead of work.

From an employee’s perspective, working notice provides continued access to company benefits and accrues further service, which may affect pension rights or redundancy calculations. PILON offers immediate release from work obligations but can remove those ongoing benefits/payments.

PILON vs garden leave

Garden leave and PILON both prevent the employee from working, but the distinction lies in their employment status.

During garden leave, the employee remains employed and continues to receive pay and benefits, but is instructed not to attend work. By contrast, PILON ends employment immediately, with the employee compensated for notice pay.

Employers often choose garden leave to maintain control over the employee’s conduct during notice, while PILON provides a faster clean break.

Employee rights when offered or required to accept PILON

Right to refuse and serve notice instead

If the contract includes a PILON clause, the employer can generally enforce it, and the employee has limited scope to refuse. However, if there is no contractual right, the employee may be entitled to insist on working their notice (note, however, that the employer has the practical right to terminate the employee’s employment summarily and simply pay them what they are due for their notice period).

In practice, many employees prefer to accept PILON, as it provides an immediate financial settlement and allows them to begin a new role sooner. Employees should still ensure they receive the full amount due.

Consequences of immediate termination without PILON

Where an employer terminates employment immediately without giving notice or making a proper PILON, this may constitute wrongful dismissal.

The employee can claim for the pay and benefits they would have received during the notice period. Additionally, any post-termination restrictions may not be enforceable, as the dismissal was in breach of contract.

Using PILON in exit agreements and redundancy

PILON as part of settlement agreements

PILON is often included in settlement agreements, particularly where employment is ending on agreed terms. The agreement will confirm whether the payment includes notice pay and clarify its tax treatment.

Settlement agreements provide legal certainty for both parties, as the employee waives potential claims in exchange for a financial package that may include PILON and other compensation elements.

Redundancy and immediate termination via PILON

When an employee is made redundant, the employer may still choose to terminate immediately and pay in lieu of notice. In such cases, the employee will receive their redundancy pay (whether statutory redundancy or enhanced redundancy pay) alongside PILON. Ex-gratia payments (including enhanced redundancy payments) can be paid free of tax, whereas any contractual emoluments needed to be paid subject to usual deductions.

This ensures compliance with statutory entitlements while allowing the business to implement changes efficiently. Employers must continue to follow fair redundancy procedures, even if PILON is paid.

Practical steps for employees

Reviewing your contract and entitlement

Employees should review their employment contract to determine whether a PILON clause exists and what it covers. Understanding the contractual terms helps ensure they receive their full entitlement and avoid misunderstandings about benefits or bonuses.

Asking questions and seeking legal advice

Before signing any documents or accepting payment, employees should clarify how the PILON is calculated, whether it includes benefits, and what tax will be deducted.

If there is uncertainty about the legality or fairness of the termination, or how it affects restrictive covenants, seeking legal advice from an employment lawyer can help protect rights and identify any potential claims.