Payment in lieu of notice and settlement agreements
What is PILON?
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.
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.
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 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?
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?
Before April 2018, if a contract of employment allowed the employer to pay in lieu of notice (PILON) this payment was taxable. If the 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 requires the employer to account for any basic pay that the employee would have received if they had worked their notice. This basic pay is treated as earnings and as such is subject to tax and national insurance contributions, even if the contract of employment made no provision for a PILON payment.
This latest amendment simplifies the approach to the taxation of PILON payments, but whilst the simplification of the rules may be welcome news, there are occastaions 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.
You might also like to read our article on Tax on settlement agreements. Alternatively, if you would like to talk your case through with an experienced solicitor, contact our team to arrange a free consultation.