Payments in lieu of notice

Payments in lieu of notice (PILONs) raise legal and tax issues that you need to understand before making one to an employee.

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What is a PILON and when should I make one?

A PILON is a payment that you make to an employee, instead of giving them their notice period, to bring an end to their employment.

When you make a PILON, employment ends immediately and the payment compensates the employee for what they would have earned during the notice period. From April 2018, income tax and national insurance contributions must be paid on PILONs. 

You should consider making a PILON if you are dismissing an employee and do not want them to attend work during their notice period, perhaps because of concerns about ongoing access to confidential information or business contacts or fears about disruptive behaviour.

You might also decide to make a PILON at the employee’s request (if it suits you too) or as part of negotiated terms over departure, possibly as part of a settlement agreement. For more information read Settlement agreements.

You should make the PILON on a date in the notice period when the employee will become entitled to something that you wish to avoid providing (like a bonus or share options). This only works if you have the contractual right to make the PILON without paying for the lost rights.

You must make sure either that the employee’s contract of employment gives you the specific right to make a PILON or the employee agrees in advance, preferably in writing.

What if there is no agreement allowing a PILON?

Without advance agreement to a PILON, making one is technically a breach of contract which can result in you losing the right to rely on any other parts of the contract yourself, such as post-termination restrictions or confidentiality protections.

Furthermore, the employee will have legal rights to claim against you.

In many cases, breaching the contract will not cause a big problem and will be fixed by the PILON. However, sometimes it can cause serious problems including if the employee:

  • has share options or other valuable benefits in kind
  • is receiving medical treatment on your insurance or has any insurance claim in process
  • will lose pay or benefits due in the notice period that you do not intend to compensate in the PILON
  • has the right to a contractual dismissal process that has not been followed

Consider whether putting the employee on garden leave is a better option. For more information read Garden leave.

We recommend that you Ask a lawyer before making a PILON if there is no agreement for one, to assess what the consequences of breaching the employment contract will be and how to deal with them. 

How do I calculate and make the PILON?

If there is an advance agreement about making a PILON, it should be calculated and paid as agreed. The employment contract will often say that only base salary - not benefits - due over the notice period needs to be paid. Tax and national insurance should be deducted as normal.

If there is no agreement to PILON or the agreement doesn’t say what to pay then you must compensate all pay and benefits that would have fallen due over the notice period.

Where there is no agreement to PILON tax generally does not need to be deducted unless it is the employer’s automatic practice to make PILONs or the PILON exceeds £30,000 when combined with any other compensation payment.

PILONs should normally be made immediately on termination of employment.

If in doubt Ask a lawyer about this tricky area.

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