A Guide to Pilon (Pay in Lieu of Notice)

Posted on Monday, 3rd Jul '23

Duane Jackson by Duane Jackson

PILON is a payment made to an employee by their employer. It covers the notice period after an employee’s contract has been terminated. This period does not need to be worked by the employee.

PILON is part of UK Employment Law and covers many different scenarios including redundancy or dismissal for gross misconduct.

It is important that employers follow the rules around PILON correctly when cases of contract termination arise. When employers fail to meet their legal obligations, an employee could launch a tribunal claim.

This guide will take you through the process of PILON to help employers ensure they are following the rules correctly regarding contract termination.

What is Payment In Lieu Of Notice?

PILON allows an individual’s employment to be terminated immediately and without notice, so they are not required to complete or work their notice period. The individual is paid what they would have earned had they worked their full notice period without breaching the terms of their employment contract.

Anyone legally classed as an employee in the UK could be entitled to payment in lieu of notice. There are clearly defined rules around statutory notice periods for redundancy under UK Employment Law. These constitute the minimum notice period an employer must provide. These include:

  • At least one week’s notice for anyone employed between one month and two years.
  • One week’s notice for each year of employment between two and 12 years.
  • Twelve weeks’ notice for anyone employed for 12 years or more.

Employees may be entitled to a longer notice period than the minimum statutory requirement under the terms of their employment contract, otherwise known as ‘contractual’ or ‘enhanced’ notice. In this instance, contractual notice cannot be shorter than an employee’s statutory entitlement.

Some employers may also decide to offer longer notice periods than the statutory requirement or the relevant contractual notice to give an employee more time to find alternative employment while allowing themselves more time to find a suitable hire.

How Does PILON Work?

Employers should always consult relevant employment laws, contracts, and seek legal advice to ensure compliance with PILON requirements and any additional obligations relating to termination and notice periods. Similarly, employees can review their contracts and consult with legal professionals to understand their rights and entitlements in case of termination.

Here are some important steps to follow:

1. Check terms covered in a contract

An employee’s contract should clearly state if they are entitled to PILON and when it takes effect. This could be the date when notice of termination is given, the date when PILON is made, or when a notice period would have normally ended.

2. Provide written notice of termination

An employer must provide an employee with written notice when a PILON is made. This point marks the termination of employment and their contract, and they are free to seek work elsewhere. However, even though the employment contract has ended, the employee may still be bound by certain contractual obligations around confidentiality. These could include working for rival companies, taking other colleagues with them, or exploiting client contacts.

An employee may request a PILON from their employer if they resign and prefer to leave immediately without serving their notice period. An employer may also agree to a request for a PILON even if it isn’t included in the employment contract, although there is no obligation to grant this request if, for example, it would leave an employer short-staffed.

What Does PILON Include?

Every employment contract should include details of PILON, although many contracts do not. Where it does, the contract should clarify the terms of payment including what has been considered when calculating PILON. For example, this could cover an employee’s basic pay but exclude benefits in kind, pension or private health care contributions, bonuses, or commission payments accrued during the notice period.

PILON does not have to include annual leave that would have been accrued during the notice period unless this has been specifically stated in the contract.

What if PILON isn’t included in a contract?

Where an employer offers PILON when it hasn’t been included in an employee’s contract, and the employee accepts, they should receive full pay plus any additional contributions they would normally receive, such as pension contributions and holiday pay.

Importantly, where an employment contract does not include PILON, it is unlikely the employer will be able to terminate the contract with immediate effect without a notice period, and they may be in breach of contract for attempting to do so.

Similarly, it is unlikely a PILON will be made in cases where an employee is dismissed for gross misconduct.

When is PILON right?

There are many reasons why an employer may terminate an employee’s contract without them working their notice period. For example, the employer may want to deny the employee access to company systems and sensitive data; the employer is concerned the employee could be a disruptive influence on colleagues, or the employee has requested to leave immediately without working their notice.

PILON may be justified in certain situations, such as:

1. Contractual obligations

If an employment contract explicitly includes PILON, it is possible to make such a payment, An employee can agree to a PILON clause which gives their employer the right to follow the process through in lieu of providing notice of termination.

2. Immediate termination

In cases where an employee has committed a serious breach of contract, such as theft or gross misconduct, an employer may be justified in making a PILON payment and immediately terminate a contract. This can avoid further disruption or damage to the business.

3. Constructive Dismissal

Where an employer has breached an employment contract or engaged in conduct that has undermined an employee’s trust and confidence in their employment, the employee may have the right to resign and claim constructive dismissal. In situations like this, the employer may offer a PILON payment to the employee in order to avoid a claim for unfair dismissal and limit the possibility of reputational damage.

4. Business restructure

When a business enters a restructure or is downsizing, it may offer a PILON payment to avoid redundancy procedures or to provide financial compensation to employees who would be affected by the changes both in their working and personal lives.

5. Mutual agreement

It is not uncommon for employers and employees to mutually agree to a PILON as a way to terminate the employment contract. This can be beneficial to both parties as it avoids the need for expensive legal action or a lengthy notice period.

Is PILON the Same as Gardening Leave?

No, PILON is different to gardening leave. With PILON, employment is terminated immediately, and the employee receives payment for what they would have earned during their notice period. It also means the relationship between employer and employee has ended and the terms of an employment contract are no longer binding, allowing the employee to find alternative employment.

When an employee is placed on gardening leave their employment contract remains effective throughout the notice period until the contract is terminated. In other words, they are still employed by their employer for the duration of gardening leave but are not required to go to work. During gardening leave the employee will continue to be paid, including benefits, in the usual way. They may even be required to complete pieces of work by their employee during gardening leave, though cases of this happening are rare.

Is PILON Pensionable?

PILON allows employees to receive additional payments including pension contributions or private health care insurance if these are written into the employment contract. These payments are on top of the basic pay they would’ve received during their notice period.

Pensionable pay is the pay that an employee would normally pay pension contributions on. A salary, bonuses, or overtime are examples of pensionable pay. However, employees are not required to make pension contributions themselves on a one-off payment, such as PILON.

Is PILON Subject to Tax?

Yes, PILON is taxable, although calculations can be complex.

An employee is required to pay income tax and Class 1 National Insurance Contributions on the amount of basic pay they would have been paid were they still employed during their notice period. This is referred to as PENP (Post-Employment Notice Pay). Any additional payment to PENP is classed as termination pay and taxed accordingly.

Basic pay includes any amount an employee would be deducted through a salary sacrifice scheme. It does not include benefits in kind, overtime payments, commission, nor statutory redundancy payment, or even contractual redundancy payments, which are classed as termination payments.

Importantly, the first £30,000 of any termination payment is not taxable and not subject to employee National Insurance Contributions.

As PILON payments and taxes can be complicated, many businesses take advantage of payroll software to help them through the process.

Staffology Payroll software makes PILON calculations easy

Our cloud-based payroll software is the perfect tool for calculating PILON. Request a demo today.

Duane Jackson, July 3rd, 2023

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