Payment in Lieu of Notice & PILON Payments FAQ For Employers

According to ONS data, estimates for payrolled employees in the UK decreased by 32,000 (0.1%) between October and November 2024.

This may not feel relevant to your business right now, but many businesses don’t predict any issues until a threat emerges. It makes good business sense to have a fallback plan for protecting your business assets if the worst is to happen while also releasing employees to ensure overall morale remains high. 

Payment in lieu of notice as a concept can be raised as part of the redundancy discussions and forms an exit strategy for your employees with benefits for them including a lump sum of money and the flexibility to work immediately.

However, can be less of a shock if the option is always there in their employee contract for you to give payment in lieu of notice or as it’s often referred to, to ‘invoke PILON’.

Should you Get Payment in Lieu of Notice (PILON) Integrated Into your Contract?

Another good reason to get PILON integrated into your contract now is to get ahead of claims. According to Gov.uk data, in Q1 2024/25, there were 27,000 employment tribunals, so it pays to have peace of mind that your approach to PILON is above board.

PILON is integrated into employment contracts in order to offer the chance for an employee’s contract to end instantly. Unlike garden leave, which would mean an employee remains employed until their contractual notice period ends, a PILON clause terminates the employee’s contract instantly. 

However, unless carefully drawn up, PILON can impact other business clauses, such as non-compete agreements, with implications for both employer and employee. Here’s how to get it right. 

PILON Clause: Key Components and Legal Implications

A PILON clause has to be included in an employee contract (or a settlement agreement)  in order to be enforceable. It’s not enough to add it within an employee handbook.

This was shown in the case, Geys v Société Générale when an employer did just this, the employee argued it was a breach of employment rights and he was able to receive a considerable sum in damages. It pays to get PILON and adjacent clauses watertight. 

But the contract shouldn’t just state that PILON is available for the employer to opt for.  It’s important to also include more details around the payment itself. 

Typically, the employee will receive just salary (with holiday accrual calculated and paid separately), and while it’s rare, your business may want to add in payments that the employee would have gotten had they worked their notice period, such as bonuses, and other perks. 

It’s also subject to tax and national insurance, which you may want to add into the contract for clarity. Later, we’ll discuss how these payments can be confused with termination payments. 

What is Pay in Lieu of Notice When it Comes to a Notice Period?

A notice period is set by law at present in the UK for a week’s notice per every year worked (up to 12 weeks) and these specific periods must be adhered to. 

Employers may wish to invoke PILON before employees have worked for two-years and a day or more, which is when the statutory notice period rises to a week for every year of service. 

Note that when talking about notice periods, the longer notice period is always the one employees will receive if there are contractual periods within the business.

There are many legal aspects of PILON that must be considered, and understanding employment law and the rights of both parties matters.  

Pay in lieu of notice meaning becomes very important indeed when you’re faced with a situation where an employee is raising concerns that your contract is unfair or unjust, and it’s important to approach the situation with balance. Employees should feel free to take independent legal advice around any aspect of PILON at any time.

It’s up to you whether to approach PILON during a situation that requires it, when you’ll need to get written employee confirmation, but a contractual change might help pre-empt issues before they arrive.

You may decide to brush up your contract in other areas, ensuring areas such as TOIL Policy to ensure they’re also serving your business as they should. 

It’s worth noting that in any redundancy situation, it is important to get relevant legal advice (our HR experts are here and available to help.)

Employment Law: PILON and Contractual Rights

As already mentioned in regard to notice periods, employment law still governs PILON since the Employee Rights Act, and the contractual rights involved in termination scenarios must be legal.

HR employment law services are complex, but the takeaway is It’s important to have a PILON clause that is clear and enforceable.

For example, you should state: 

• When PILON could be invoked, and when garden leave would be invoked 
• When should PILON be paid, and if this is inclusive of bonus and benefits or if a bonus is conditional against not being on notice or in receipt of PILON
• When payment will be made (you could be liable for a fine if the employee gets a late payment) 
• That restrictive covenants are still enforceable when PILON has been invoked. 

If you don’t have a PILON clause, that doesn’t mean PILON isn’t an option for an employee to request. If an employee requests it, you have the option to accept, if you get a written confirmation.  However, the flip side isn’t true, and without a legally sound document seen by the employee prior to doing so,  you can’t enforce PILON.

Restrictive Covenants and PILON

This is an important part to consider…How PILON will affect any restrictive covenants in your employment agreements. What does PILON mean for any restrictions on poaching, working with competitor businesses or even in the same sector?

As mentioned, an employee on garden leave can be monitored with a little more ease when it comes to poaching employees or working with a competitor, because they are clearly still a contracted employee. Invoking PILON, even with a written agreement can muddy the waters slightly. 

That being said. It’s really important for you to protect your business assets. After all, one of the main benefits of using PILON clauses is to ensure that employees don’t have ongoing access to sensitive information.

Your clause should state that the same non-compete and non-solicitation agreements remain in place after PILON has been invoked (Just remember that these have to be seen as fair or they are unlikely to be held up in court. A set of clauses that are too harsh, such as a non-compete that lasts for many years can be hard to enforce.).

So what are the practical steps to make taking PILON easy for employees to understand and simple for you as an employer to invoke?

As with any business move, it’s about strategy and communication. Speak to employees about PILON, share the positives, and ensure that you’ve had sound legal advice to back you up.

Creating a Termination Payment: Calculating PILON 

If you’d like to terminate an employment contract, you should calculate PILON in advance to present to the employee. The employee needs to know not only what is payment in lieu of notice, but the benefits.

 This PILON calculation should include:

• Their payment made up of salary for what would have been the full duration of the notice period 
• Holiday accrual details 
• Commission accrual 
• A confirmation of any additional payments (bonuses or benefits) 
• A reminder that tax and national insurance will be taken from the PILON payment.

Ensure that the calculation includes the correct tax weeks in the year.

If PILON is being used in a redundancy situation, the redundancy payment (or ‘termination payment’) is separate to PILON. While many businesses may recall the earlier methods of rolling PILON and redundancy payouts into one, these are now, for taxation purposes, distinct and there’s no tax benefit. 

(Termination payments are up to £30,000 tax and National Insurance free, but don’t include PILON since April 2018 when the Post-Employment Notice Pay (PENP) rules came into effect. You make the payment as one sum, but the PILON is taxable and subject to National Insurance contributions too. It’s a small detail, but one that employees may calculate incorrectly, so it’s important to present the facts if asked.) 

Employer-Employee Dynamics: Putting PILON into Practice

The contractual agreement to enforce PILON is one step of the process to get PILON ready., but putting it into practice means thinking like an employer.

With a minor grievance, it’s important not to get drawn into muddy waters between a dismissal and PILON for a smooth and simple departure.

At Avensure, our friendly team of HR experts are here to help you get the very best advice so you can feel confident invoking PILON at any point.