Pilon: payments made in lieu of notice

What is PILON?

Payment in lieu of notice (PILON) is defined as a payment made to an employee for the period of their notice that requires the employee to cease work immediately.

How do organisations manage PILON effectively?

The contract of employment is central and should be referred to before making any decisions. Many contracts of employment include the right to PILON and this is often an effective way of managing someone leaving. This can be particularly useful when managing someone leaving in a redundancy situation. 

If the contract includes a PILON clause, it is an express contractual term and therefore:

  • any payment made under it is subject to the usual requirement to deduct tax and national insurance; 
  • the right to PILON affords protection to the contract, meaning that there is no breach if you pay in lieu of notice, and other clauses will remain in force; and
  • entitlement to benefits may cease at the termination date providing the contractual PILON clause states this.

When paying in lieu of notice, the employment relationship is being brought to a close immediately without providing proper notice. This means that an employee with a one month notice period may lose one month’s entitlement to holiday accrual, pension entitlement and other benefits. Unless the clause specifically states that no compensation for loss of benefit will be paid, employers could find this added in as a loss to any claim that was subsequently made.

If there is no PILON clause in the contract there is an option not to tax this payment however be cautious before doing this. The absence of a contractual term may mean that any payment may be deemed as being compensation for breach and may be paid to the employee tax free. 

This sounds beneficial, but employers should be aware that:

  • employers could be in breach of contract by paying in this way and not providing a notice period;
  • if the contract is breached, it may impact the right to enforce other important clauses in the contract; and
  • benefit entitlement for the duration of the notice period would likely be required to be honoured as well.

 For more information on this complex and changing area, please contact Steve Sweetlove or your usual RSM contact.