As a business owner or human resources manager, you may come across the term 'PILON' in discussions about employee terminations. PILON stands for 'Payment in Lieu of Notice,' a practice where an employer ends an employee's contract immediately and compensates them for the notice period they would have worked. This approach is often used when it's impractical or undesirable for the employee to serve their notice, such as in cases of gross misconduct or when immediate departure is necessary to protect company interests. Understanding PILON is important because it helps ensure compliance with employment laws, prevents potential legal disputes, and allows for a smoother transition when ending an employment relationship.
For example, if an employee's contract requires a one-month notice period, and the employer decides to terminate the contract immediately, the employer would pay the employee an amount equivalent to one month's salary. This payment compensates the employee for the notice period they won't be working and allows the employer to end the employment relationship without delay. It's essential to have a PILON clause in the employment contract to outline the terms and conditions under which such a payment can be made.
What Is The Difference Between PILON And Severance?
The key difference between PILON and severance lies in the nature and purpose of the payments. Here are the key differences between PILON and severance:
What Is The Difference Between PILON And Garden Leave ?
When Is PILON Used?
PILON is used when an employer wants to terminate an employee's contract immediately without requiring them to work through their notice period. Common situations include:
- Immediate termination for business or operational reasons.
- The employee is moving to a competitor, avoiding conflicts of interest.
- To prevent workplace disruptions that could occur by having the employee work through their notice period.
- When both the employer and employee mutually agree to a quick termination.
- If an employee is not dismissed for gross misconduct but for other reasons, the employer may choose to provide payment in lieu of notice to ensure that contractual obligations are met.
How Is PILON Calculated?
PILON (Payment in Lieu of Notice) is typically calculated based on the employee’s salary and any contractual benefits they would have received during their notice period. Here's a breakdown of how it's calculated:
- Basic Salary: Start by determining the employee’s regular salary for the duration of the notice period. If the employee has a one-month notice period, they will receive a payment equivalent to one month's salary.
- Bonuses and Commissions: Depending on the terms of the employment contract, PILON may also include bonuses or commissions that the employee would have been entitled to during the notice period.
- Benefits and Allowances: If the employment contracts include additional benefits such as car allowances, health insurance, or pension contributions during the notice period, these may also need to be included in the PILON calculation.
- Holiday Pay: Any accrued but unused holiday pay is typically added to the PILON. This ensures the employee is compensated for vacation days they would have been entitled to during their notice period.
- Tax and Deductions: PILON is considered taxable income, and normal deductions like income tax, social security contributions, and other statutory payments are applied as they would with regular earnings.
For example, an employee is entitled to a one-month notice period, and their employer decides to terminate the employment immediately using PILON. If the employee’s monthly salary is $ 3000 and the employee is also entitled to a $200 car allowance (which is added to the monthly salary) the total PILON payment would be the monthly salary ($3,000) plus the car allowance ($200). Therefore, the PILON payment to the employee would be $3,200 before any applicable taxes and deductions.
What Are The Pros And Cons Of PILON For Employers?
While PILON may offer employers benefits such as flexibility and quick resolution during terminations, it comes with costs and potential challenges in smoothly managing the employee’s exit. We have compiled a list of the potential pros and cons of PILON for employers:
The Importance Of PILON
The PILON process is important for both employers and employees. For employers, it allows for immediate termination without breach of contract, avoiding potential risks of having a disgruntled employee serve out their notice period. For employees, it ensures they receive fair compensation for the time they would have worked, providing financial security even in abrupt termination situations.
Payment In Lieu Of Notice FAQs

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This depends on the employee's contract. In some cases, PILON payments may include bonuses or commissions, but this is not guaranteed unless stated in the employment contract.

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In most cases, if an employment contract includes a PILON clause, the employee cannot refuse the payment. If there is no such clause, refusal may lead to disputes over contractual obligations.

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Yes, PILON is subject to income tax and National Insurance contributions. Since PILON is considered part of an employee's earnings, it is treated like regular salary. Employers are required to process PILON through the payroll system, ensuring that the correct tax and deductions are applied before the employee receives the final payment.