Payment in Lieu: How PILON Works & What Employees Need to Know

Payment in lieu of notice, or “PILON”, is a common way that employers bring employment to an end. Sometimes, an employee may be required to work their notice period or be placed on garden leave before they exit. However, PILON allows employers to terminate employment immediately and pay the employee what they would have earned during notice.

Read on as we examine what notice periods include, how PILON works, and how it differs from other legal mechanisms such as garden leave. If you’ve been offered a payment in lieu of notice and want legal advice, contact us now. Redmans Solicitors are specialists in the employment sector and can help you achieve an optimal outcome.

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What is a “Notice Period”? 

A notice period is the time either party must give before ending employment. The minimum notice period is set by statute (legislation) and may be increased, but not reduced, by contract.

Section 86 of the Employment Rights Act 1996 sets the statutory minimum notice employers can provide. Employees with one month to two years’ service are entitled to one week. After two years, however, notice entitlement increases to one week per year, capped at 12 weeks.

Notably, there’s no minimum notice period for an employee who has been employed for less than one month. Moreover, the notice an employee must provide after a month’s service, as required by statute, remains at one week regardless of service length.

Contractual Notice Periods

Despite statutory minimums, notice periods can be increased via higher contractual requirements. For example, an employer may require an employee to give 3 months’ notice after two years’ service (or vice versa). If the contractual notice period is less than the minimum statutory requirement, though, the statutory notice period will prevail. Consequently, employers cannot rely on shorter contractual notice periods if they fall below statutory requirements. 

What’s more, notice periods can be different, depending on which party is terminating the contract. An employer may require an employee to give a longer period of notice if they are the one ending employment. This is permitted, provided the employer’s notice is no less than the statutory minimum.

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Importantly, an employer is not required to pay a notice period if they are dismissing an employee for gross misconduct.  

What is Payment in Lieu of Notice? 

An employer can choose to provide an employee with payment in lieu of their notice period. Here, employment ends immediately, and the employee is paid what they would’ve earned during notice. A PILON payment is taxable and subject to deductions for national insurance contributions as normal, as it represents earnings.  

Payment in Lieu of Notice “PILON” Clauses  

An employer has no automatic right to use PILON without a clear contractual clause permitting it. If there is a clause and it’s exercised correctly, with the correct sums paid, the employer may terminate employment immediately. However, if a PILON clause doesn’t exist and the employer nevertheless terminates employment this way, a breach of contract may arise. More specifically, a claim for “wrongful dismissal” could result.

Whilst the employee may suffer no financial loss, the existence of a contractual breach could give rise to legal consequences. In addition to a wrongful dismissal claim, the employee could be released from restrictive covenants, including non-compete clauses.

Benefits During Payment in Lieu of Notice 

Notably, if an employer terminates an employee’s employment and pays PILON, the employment relationship is brought to an immediate end. Consequently, the employee no longer accrues or has access to benefits which they may have had during the notice period. This includes holiday pay and other benefits like private medical insurance.

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Bonuses/commissions are often a contentious topic when it comes to PILON. This is because employers aren’t required to include bonuses or commissions in a PILON payment. Only a bonus or commission which would have been contractually guaranteed during the notice period must be included. Discretionary bonuses or commission based on performance are not usually payable when PILON is exercised.  

When is Payment in Lieu of Notice Used? 

Employers often elect to utilise PILON payments when they’re concerned about an employee accessing sensitive information during their notice period. This can be the case, for example, when an employee is disgruntled. Employers may wish to avoid workplace conflicts, particularly during contentious departures, or allow an employee to start work elsewhere without delay.

Several other situations could lead to its use, including enabling the quick recruitment of a new employee, during redundancies, and where settlement agreements are involved. In a situation where an employee is having their employment terminated via a settlement agreement, they should ensure that they are receiving the full value of their notice period. If the full notice is not paid and taxed as normal, this can have tax implications on any additional sums they are being paid via the agreement (i.e., a termination payment which would have otherwise been tax-free up to £30,000). If an employee is unclear about the tax position of any PILON payment, they should seek advice.  

What is the Difference Between “Garden Leave” and Payment in Lieu of Notice? 

An employer may also choose to place an employee on “garden leave”. This is a term which describes an employee carrying out their notice period whilst on a form of paid leave. An employee can be placed on garden leave for all or part of their notice period.

During garden leave, employees should remain contactable and available for work, but their employer isn’t required to provide any work. Furthermore, employee status and the duty of fidelity (loyalty) remain, meaning employees are generally unable to commence new employment until after such time. An employee is paid in the normal way during this period and receives notice pay in the same way that they would have if they were working this period.

Conversely, in a situation where an employee is paid PILON, their employment ends immediately, and they can commence new work (subject to any post-termination restrictions, i.e., a non-competition clause). 

If given the choice, an employee may prefer garden leave rather than payment in lieu of notice because: 

1. Their employment technically continues, meaning their length of service appears longer on their CV and job applications
   
2. Any post-termination restrictions are typically reduced by the length of time spent on garden leave
3. They continue to receive contractual benefits and entitlements during this period, such as holiday pay

What Should Employees Check if They Are Being Offered Payment in Lieu of Notice? 

Before agreeing to a payment in lieu of notice, it’s important for employees to make sure the payment fully reflects what they are entitled to and that no important benefits are overlooked. Employees should ensure they have checked whether there’s a clear PILON clause in their contract of employment, whether they are receiving their full basic salary for their notice period, and that any payments they would have been contractually entitled to during notice are included. 

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Payment in lieu of notice can be a useful tool for both employers and employees, allowing a contract to end quickly while ensuring the employee is compensated for their notice period. However, it’s important to understand how PILON works, what it includes, and whether the employment contract provides for it. By understanding these rights and reviewing the details of any PILON payment, employees can ensure they are treated fairly and receive the full value of what they are owed.

Get Help with Redmans

If you have been offered payment in lieu of notice and want specialist legal help, contact Redmans Solicitors without delay. Our team of employment specialists is here to help. Following a brief chat, we can assess your case, answer your queries, and discuss how you can proceed.

It only takes a moment to discover how we can help you, simply:

• Phone us on 020 3397 3603
• Complete our online form to request a callback