Payment in lieu of notice (PILON)
This guide looks briefly at what a payment in lieu of notice (or 'PILON') is, how you can get one in your settlement agreement and the tax implications.
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 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 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 an employee has a three month notice period, the 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 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.
When you get PILON, you receive notice pay but don’t actually work your notice period;
PILON is very common when an employee leaves after redundancy or a dispute
The PILON pay is not tax-free but it is open to the parties to vary the notice period.
How can I get a payment in lieu of notice?
To work out the statutory minimum notice period that you are entitled to, figure out the amount of time 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 one week per year worked, up to a maximum of 12 weeks for 12 years or more 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.
Payment in lieu of notice is available from many companies if there has been some kind of dispute or disagreement between you and your employers.
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 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 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 in the employee’s 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.
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: email@example.com