What Is Payment in Lieu of Notice?

What Is Payment in Lieu of Notice?

Payment in lieu of notice (PILON), is when an employer chooses to pay an employee's notice period rather than keep them in employment. The decision to make the payment ends employment immediately.

Essentially, your employer is buying you out of your notice period.

The amount paid will differ depending on your length of service and the notice period stated on your contract.

According to UK law, the notice period for PILON follows either statutory or contractual notice periods.

For employment lasting:

  • Less than one month, no statutory notice period is applicable
  • One month to two years, there is a one-week notice period
  • Two years to 12 years, there is a one-week notice period for every year worked
  • 12 years or more, there is a 12-week notice period

However, if your contracted notice period is more than this, you go by the terms in the contract. If statutory is more, you use that.

For example, if you have worked at the company for five years and eight months, you are entitled to at least five weeks' notice according to statutory periods. But if your contract notice period is eight weeks, then payment will be made according to that.

Basically, you use whichever notice period is of greater benefit to the employee.

You must check the terms of your contract before accepting any PILON payments.

Payment in lieu of notice should be in your employment contract as a termination clause. If an employer demands you take PILON, and it is not contractual, they are in breach of the contract by preventing you from working.

The clause should also detail the exact payment – basic pay only or basic pay plus commission/benefits/incentives/annual leave.

In cases of gross misconduct, PILON does not apply.

Payment in lieu of notice should be paid immediately after termination.

If this clause is absent from your contract, you may accept the payment at your discretion.

Why Would an Employer Give Payment in Lieu of Notice?

The three main reasons an employer would give payment in lieu of notice are:

  • The employer wants to revoke access to the company software or sensitive information
  • The employee is unruly or disruptive
  • The employee has been made redundant

The latter is the most common reason for PILON.

How Does PILON Differ From Garden Leave?

Under the terms of PILON, an employee may start other employment during the notice period. For garden leave, the employee has to wait out the notice period before starting another job.

You also do not receive a lump sum with garden leave, but rather a monthly payment as you would your salary. Under garden leave, you are technically still employed by that company. If they choose to, your employer could ask you to work again.

Garden leave is applicable in both terminations and resignations. It may be necessary if your current company:

  • Does not want you to have access to client or company information
  • Believes that you will take client details to your new company (if competitors)
  • Does not want you speaking to the media

The notice period for garden leave is contractual, not statutory.

What Should I Do if Offered PILON?

Payment in lieu of notice is incredibly complex as the payment is dependent on several factors. It is not something that employers offer lightly. It becomes even more complicated if the employee has shares in the company or is currently receiving medical treatment through company-provided healthcare.

If PILON is given because of redundancy, you will usually be presented with a full redundancy package. While leaving the company may be upsetting and sudden, it is sometimes better to leave straight away, rather than building up to it.

You also have more time to find new employment or take time off before starting a new position.

While redundancies are not pleasant, they are usually necessary. The UK saw a record high of redundancies in September 2020, with 314,000 made due to the COVID-19 pandemic.

Legally, not much can be done to reverse a redundancy as they are vital to a company's survival. But knowing your rights and entitlements can lead to a better settlement.

There needs to be a strong case for offering PILON. No company will suggest it without good reason. The legal implications of unfair dismissal can be catastrophic for a company.

Should you believe the reason for you not serving your notice period is unjust, seek legal advice and speak to your HR coordinator.

Before signing your agreement, read through your employment contract and the terms of your termination/resignation thoroughly.

Raise any questions or queries you may have and seek legal advice if you feel the payment is not fair compensation.

What Is Payment in Lieu of Notice?
What Is Payment in Lieu of Notice?

The final sum should reflect what you would have earned had you served your entire notice period. This includes:

  • Bonuses
  • Commission
  • Employee benefits and incentives
  • Medical benefits
  • Outstanding leave

The exception is if PILON terms are already agreed in your contract.

Do not accept their figures before calculating your own. Your company needs to provide you with reasonable time to read through the terms before finalizing the leave formalities.

If you are presented with PILON and it is not in a clause in your contract, you have the option to negotiate a better package.

Remember a company is subject to legal repercussions if they demand you take PILON without it being part of your contract. You have the legal right to work whatever is stated in your employee contract. This gives you the upper hand in deciding your final pay.

Accepting Payment in Lieu of Notice

You will receive your dismissal either face-to-face, via email, or less commonly, with a letter.

If it is a face-to-face conversation, politely and calmly request the rest of the day to review the terms. This allows you time to make your calculations and begin any negotiations.

While the terms of payment in lieu of notice result in immediate termination, most companies want to show their caring side. Social media and company review websites such as Glassdoor allow anyone to share their opinions. Any bad reviews or details of poor employee treatment can damage a company's image.

As a result, your company may give you a one or two-day grace period for you to read and acknowledge your notice.

If you do have a face-to-face meeting, the company also has to provide a written document stating your final day of employment.

How Do I Calculate PILON, and Is It Taxed?

As of April 2018, all payments in lieu of notice are taxable and subject to Class 1 National Insurance (NI) contributions.

If PILON is noted in the contract with details of what is to be paid, then tax and NI is applicable as normal.

For situations where PILON was not agreed in advance, you are legally entitled to all pay and benefits that you would have received, had you served your notice.

This compensation should not be subject to tax unless:

  • The amount exceeds £30,000
  • The company's policy is to make payments in lieu of notice automatically

For more details, contact HMRC as the technicalities can get confusing, and it does vary from case to case.

Calculating your final pay, especially when it comes with compensation, can be tricky for all parties. The generic formula for working out your post-employment notice pay (PENP) is:

(BP x D/P – T), where:

  • BP = Basic pay for the final pay period before the final working day (week or month)
  • D = Number of days or months in the notice period
  • P = Number of days in the final pay period
  • T = Amount of taxable earnings

But again, the figures are circumstantial depending on your overall package.

Final Thoughts

Terminations that involve PILON and redundancies are unpleasant for both employer and employee.

When presented with your agreement, ask for some time to sit with your HR coordinator and work through the figures together.

If there was no previous agreement, negotiate a package that is reasonable but also suits you.

If at any time you are in doubt about the final figure, terms of the PILON, or reason for dismissal, seek legal advice and involve your union (if you have one).

Whether your departure is amicable or somewhat hostile, remember that your final impression matters.

This company may be one of your references. It would be best if you showed you can remain professional and composed, regardless of the circumstance.

Should you be invited to an exit interview, use that opportunity to air any dismissal grievances calmly and professionally.

Constructive feedback may help others in the future, and it will encourage your employer to provide a positive reference.

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