Payments in Lieu of Notice & Settlement Agreements
A settlement agreement payment in lieu of notice means that your employer pays your salary, and perhaps also benefits, for your notice period. You do not have to work during that time.
For example, if an employee has a three month notice period, the employer might decide that they want today to be the last day of your employment – but they will be paying your wages in lieu of this notice for three months, even though you are not physically coming in to work any more.
‘In lieu’ means ‘in place of’ or ‘instead of’ in French, so you receive notice pay but don’t actually work your notice period.
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. When you are paid in lieu of wages, you do not remain employed.
What is PILON?
Pay in lieu of notice is also known as PILON for short. It may also be referred to as wages in lieu of notice. It is very common to find PILON in settlement agreements. This is because settlement agreements tend to occur after either a dispute or a redundancy and there is some reason why your employer prefers not to continue to interact with you on a day to day basis. Therefore they often do not want you to be in the office once the relationship has broken down. To find out whether or not you are getting a good deal overall, try our Settlement Agreement Calculator and our article about how much money you should get.
Top 3 TIPS
- ‘In lieu’ means ‘instead of’ in French, so you receive notice pay but don’t actually work your notice period;
- Pay in lieu of notice is very common when an employee leaves after redundancy or a dispute; and
- Notice pay can no longer be tax free but it is open to the parties to vary the notice period.
How can I get pay in lieu of notice?
It is a great thing if you can get it, because you get paid for time when you don’t have to work, but you are still free to take a new job. It is especially valuable if you have a long notice period.
Remember that if you have been employed for over 4 years, then your notice goes up by a week per year – up to 12 weeks maximum regardless of what your contract says. So even if your contract still says 4 weeks, you would legally be entitled to 12 weeks.
Pay in lieu of notice is available from many companies if there has been some kind of dispute or disagreement at work, because in such circumstances employers actually prefer that you are no longer in the office. Thus it is often just a case of asking your employer to pay you in lieu of notice – you may not need to negotiate with them at all to get it as it can benefit all parties. Of course if your employer offers you pay in lieu of notice then try to keep a poker face and just act as though you expected this as standard; then continue to negotiate the ‘ex gratia‘ element of the deal.
Is payment in lieu of notice taxable?
Previously, the general principle on tax on notice was as follows:
- If a contract of employment allowed the employer to pay in lieu of notice (PILON) this payment was taxable.
- If a contract of employment did not allow the employer to make a PILON payment, this could be tax-free if the payment (and any other associated compensation) was under £30,000.
From April 2018, the new legislation will require the employer to account for any basic pay that the employee would have received if they had worked their notice. This basic pay will be treated as earnings and as such will be subject to tax and national insurance contributions, even if the contract of employment made no provision for a PILON payment.
This will simplify the approach to the taxation of PILON payments and will remove any ‘grey area’ surrounding PILON payments. Whilst the simplification of the rules may be welcome news, there are occasions where a PILON payment will be pure compensation. For example, in a case of constructive dismissal where an employee has left employment immediately without working their notice and without receiving any pay. Or in cases of wrongful dismissal, where the employer has failed to give the appropriate notice on termination.
As you might expect, the guidance on the HMRC website is quite ambiguous and tricky to navigate. However, should you wish to read up further on this subject the HMRC website has further resources on this subject. Alternatively, if you would like to talk your case through with an experienced solicitor, contact our team to arrange a free consultation.