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Payment in Lieu of Notice (PILON)

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Last editedOct 20212 min read

Your workforce is what makes your business great. And as hard as you may try to reduce employee turnover, it’s important to part ways with employees correctly. Most of the time, employees will have to work for a contracted notice period prior to leaving. This is usually a month, although a notice period can range from one week to several months. In some cases, however, businesses may offer their employees Payment in Lieu of Notice (PILON). 

Here, we’ll look at how PILON works, what it means for employers and employees, and why you may want to offer it to your employees. 

What is Payment In Lieu of Notice?

Payment in lieu of notice means that an employer pays their employee a lump sum rather than allowing them to work their contractual or statutory notice period. This payment is designed to compensate the employee for any earnings that will be lost as a result of them being unable to work their notice period.

What is included in PILON?

PILON usually includes basic pay for the employee’s notice period. It may also include commissions and bonuses and compensation for lost benefits (e.g. use of a company vehicle). Any holiday pay that has been accrued but not taken will also be included in this payment. 

Since 2018, all payments in lieu of notice have been subject to both income tax and national insurance payments, even if there is no mention of PILON in the employee’s contract. However, employees do not have to pay pension contributions as these are one-off payments. 

PILON clauses and contracts

It’s recommended that businesses include a PILON clause in their employees’ contracts. If you don’t have such a clause, you can still encourage employees to accept PILON. However, you will technically be in breach of contract. This may not be a problem, as employees tend to be amenable to accepting PILON. It enables them to start looking for a new job straight away without needing to worry about how they’ll pay their bills. 

Problems may arise, however, if the employee feels that the PILON offered does not reflect their earnings had they been allowed to complete their notice period. In this case, the employee may make a breach of contract claim. You will need to consult with an HR professional in such an instance. 

When would I want to issue an employee with PILON?

There are a number of reasons why your organisation may choose to offer payment in lieu of notice. Common reasons include:

  • The individual’s continued employment would adversely affect employee morale or the productivity of the team

  • The company wants to limit the employee’s access to sensitive information

  • The employee has resigned, and PILON has been negotiated as a part of their resignation agreement

What’s the difference between PILON and gardening leave?

On the face of it, payment in lieu of notice may seem indistinguishable from gardening leave. Both ensure that the employee is paid their regular salary while also preventing them from carrying out their normal duties.

The key difference, however, is that when PILON is paid, the employee is dismissed immediately and can start looking for employment straight away. When an employee is on gardening leave, however, they are still employed by the business for the entirety of their notice period. As such, they cannot seek employment elsewhere until their gardening leave has come to an end. 

We Can Help

If you’re interested in finding out more about payment in lieu of notice, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.

Over 85,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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