Payment in lieu of notice (PILON)

What is PILON?

A payment in lieu of notice in your settlement agreement 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.

Pay in lieu of notice is also known as PILON for short. Sometimes it’s also referred to as wages in lieu of notice. ‘In lieu’ means ‘in place of” or ‘instead of” in French, so you receive notice pay instead of working your notice 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 – 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.

 

It is very common to find PILON in settlement agreements. This is because such 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.

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.

Top Tips

Alex Monaco
  • 1
    ‘In lieu’ means ‘instead of’ in French, so you receive notice pay but don’t actually work your notice period;
  • 2
    Pay in lieu of notice is very common when an employee leaves after redundancy or a dispute; and
  • 3
    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?

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 one month or more, your notice period must be at least a week. If it’s 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.

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 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 pay in lieu of notice then try not to smile too much, and just make out that you expected this as standard; then continue to negotiate the ‘ex gratia‘ element of the deal.    

Is payment in lieu of notice taxable?

Depending on the wording of an employee’s contract of employment, payments in lieu of notice under £30,000 could be made free of income tax prior to April 2018.

From April 2018, however, significant changes in tax legislation were implemented.  These changes are quite complex, but suffice it to say here that the main impact on employees is that all payments in lieu of notice are now 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 (so the argument goes) it’s liable to income tax and Class 1 national insurance contributions, irrespective of any clause in the employee’s contract.

These changes resulted from government consultations on how to simplify the tax treatment of PILON.  However, whilst the goal of simplifying anything to do with tax in employment law is to be welcomed, in practice the rules are complex and there are going to be some cases resulting from it where a PILON will represent no more than a compensation payment made to an employee.  Consider for example, a constructive dismissal case, where an employee left their employment immediately, didn’t work their notice period and also didn’t receive any pay.  Or a case of wrongful dismissal, where an employer didn’t give the correct amount of notice when an employee left.

Further sources of help on PILON tax and related topics

The guidance offered by HMRC on this subject can be a bit tricky to navigate.  However, if you are happy reading about tax matters, and want more detail about the calculations that have to be used to determine tax on PILON, the HMRC website has further resources on the subject which you might like to follow up.

You might also like to read our blog: Tax updates for settlement agreements including PILON and our more detailed article: Tax calculations on settlement agreements.

Alternatively, if you would like to find out how one of our experienced solicitors might be able to help you with your case, contact our team.

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