Payment in lieu of notice (PILON)

What is PILON or payment in lieu of notice?

If you get a payment in lieu of notice it means that your employer pays your salary, and perhaps also other benefits for your notice period, but you do not have to work during that time.

It’s also known as PILON for short and sometimes also called ‘wages in lieu of notice’. ‘In lieu’ means ‘in place of” or ‘instead of” in French, so you receive pay instead of working during that period.

For example, if you have has a three month notice period, your employer might decide that they want today to be the last day of your employment. In such a case, they will be paying your wages for three months, even though you aren’t working any longer.

Can I get payment in lieu of notice in my settlement agreement?

It is very common to find PILON in settlement agreements.

This is because such agreements tend to occur after either a dispute or redundancy and there is some reason why your employer prefers not to continue to interact with you on a day to day basis. They therefore often don’t want you to be in the office or using their communications networks once the relationship has broken down.

Difference between PILON and garden leave

This is slightly different from being put on garden leave which means that you are told not to work, but are also not permitted to take another job with a competitor for a certain length of time.

With garden leave, you would normally be paid at the end of each month as usual, and you still remain technically employed, so theoretically your employer could call on you to do more work.

However, when you are given payment in lieu of notice, you do not remain employed.

How can I get a payment in lieu of notice?

To calculate out the statutory minimum notice period that you, as an employee, are entitled to, figure out the amount of time you’ve worked continuously for your employer.

• If you have worked for between one month and 2 years, you are entitled to one week’s notice.  
• For anything above 2 years’ service, you are entitled to a minimum of one week per year worked, up to a maximum of 12 weeks for 12 or more years of continuous employment. So if you have worked for seven and a half years, you are entitled to 7 weeks’ notice.
• If you have been employed for 12 years or more, you would legally be entitled to 12 weeks. This minimum applies no matter what your contract says.

This is your starting point.  Then you should consider such other payments that could possibly be rolled up into a PILON, such as holiday pay that may have accrued during the notice period. If you are being made redundant, then PILON can be made in addition to your (tax-free) statutory redundancy pay.

Don’t assume however that you will always be able to negotiate a PILON as part of a settlement agreement.  In particular, if you have been dismissed for breach of contract, such as gross misconduct, it is unlikely that your employer will consider making any kind of PILON.

Payment in lieu of notice is available from many companies if there has been some kind of dispute or disagreement between you and your employer. This is because, in such circumstances, employers actually prefer to see the back of you rather than risk you carrying on and having an adverse effect on your colleagues.

So it can sometimes be just a case of asking your employer to pay you in lieu of notice – you may not need to negotiate this at all. Of course, if your employer offers you such an arrangement without you asking for it, then try not to appear too pleased but just give the impression that you expected this as standard.

Then continue to negotiate the ‘ex gratia‘ element of the deal.

Is PILON taxable?

All payments in lieu of notice are subject to income tax and national insurance contributions.

Employers have to factor into their PILON calculations the basic pay that an employee would have received if they had worked their notice in full. This basic pay is regarded as normal earnings and that is why it’s liable to income tax and Class 1 national insurance contributions, irrespective of any clause to the contrary in your contract.

Is PILON pensionable?

Pensionable pay is the pay that you usually pay pension contributions on, such as your salary, bonuses or overtime.

However, you do not have to pay pension contributions on a one-off payment such as a payment in lieu of notice.

Next steps

If you want more detail about how to determine the tax on PILON, the HMRC website has further resources on the subject.

You might also like to read our guide on the Tax implications of settlement agreements.

Alternatively, if you want help from an expert with any aspect of your settlement agreement – including PILON – Monaco Solicitors can help.

We are employment law solicitors who specialise in negotiating settlement agreements. You can reach us:

• Via this link
• By phone on 020 7717 5259
• Email: communications@monacosolicitors.co.uk