In the UK, employers are legally required to provide employees with a statutory minimum notice period before the termination of their employment. Likewise, employees must notify their employer of their intention to resign.
Notice periods play a vital role in facilitating a seamless transition when an employee departs, giving the employer sufficient time to recruit a successor and enabling the employee time to adequately prepare for their exit, thereby ensuring a respectful and professional conclusion to the employment relationship.
There are times, however, when an employer does not require the employee to work the notice set out in their employment contract. In such a situation, the employer may be able to offer them a payment in lieu of notice.
What is a Notice Period?
A notice period refers to the duration an employee is required to continue working following their dismissal, redundancy or resignation.
Employees with more than one month’s service are entitled to a minimum statutory notice period upon termination of their employment contract. Under the statutory rules Employment Rights Act 1996, an employee is entitled to receive at least one week’s notice for each complete year of service with their employer, with a maximum limit of 12 weeks. For those employed for less than one year, but more than four weeks, the entitlement is one week’s notice.
In many instances, employees may qualify for a longer notice period that exceeds the statutory minimum, where this is stipulated in their employment contract; this is known as ‘contractual’ or ‘enhanced’ notice.
Notice Pay
Throughout the notice period, employees are generally entitled to receive their normal pay and benefits as specified in their employment contract. This often includes basic salary, along with any bonuses, commissions or other payments they would typically earn.
What is a Payment in Lieu of Notice?
In certain situations, an employer may choose to end an employee’s contract without requiring them to fulfil their notice period. This decision may stem from concerns about the employee’s presence in the workplace, particularly regarding access to systems and information. Additionally, the employee may have requested to leave without serving their notice, or the employer might be worried that the employee could disrupt the rest of the team or fail to carry out their job effectively during the notice period.
A payment in lieu of notice (PILON) enables the immediate termination of an individual’s employment contract without the necessity of completing the notice period. Instead, the employer pays the departing employee a lump sum equivalent to their salary for the remaining notice period. If the employer opts to make a PILON on dismissal, they are required to provide written notification of this decision to the employee.
PILON and the Employment Contract
An employee’s contract of employment should clearly indicate if they are entitled to PILON. The contract must specify when the PILON becomes effective, in other words, whether it takes effect on the date the termination notice is issued, the date the PILON is actually paid, or at the end of the notice period that would have applied. Additionally, the contract should outline the payment terms, detailing what will be taken into account in calculating the payment. This will encompass basic pay but typically excludes benefits, bonuses or commissions accrued during the notice period.
It is important to note that holiday pay accrued during the notice period, i.e. beyond the date of termination, does not necessarily have to be included in the PILON unless the contract states otherwise.
If the employment contract does not provide for a PILON, the employer generally cannot terminate the contract immediately without adhering to the notice period. They may request the employee’s consent to a PILON, and if the employee agrees, the employer is obliged to provide full pay for the notice period. However, the employer cannot compel an employee to accept a PILON if it is not stipulated in the contract, and an employee may pursue a claim for breach of contract in the employment tribunal if they are dismissed before the notice period concludes.
In cases where the employee resigns and wishes to leave immediately without serving the notice period, they may request a payment in lieu of notice from their employer. Even if the employment contract does not provide for PILON, an employer may be willing to accommodate the request for immediate departure, but they are not required to do so. Depending on the situation, the employer may prefer that the employee fulfil their notice period to maintain adequate staffing levels and to facilitate the recruitment of a replacement.
PILON versus Garden Leave – What is the Difference?
PILON and garden leave are distinct concepts in employment law.
PILON allows for immediate termination of employment, with the employer compensating the employee for their notice period rather than making them work it. Since the employment contract concludes immediately, the employer is generally not obliged to provide other contractual benefits, and the terms of the contract are no longer binding. Consequently, the employee is free to pursue new job opportunities unless bound by any post-employment restrictions, such as confidentiality clauses.
In contrast, garden leave occurs when an employer tells an employee to refrain from attending work during their notice period, but the employee continues to be employed for the duration of the leave until the contract officially ends, typically at the end of garden leave. It is often also used to safeguard an employer’s business interests, restrict access to sensitive information or facilitate a seamless transition for the employee’s successor.
During garden leave, the employee must be available to answer questions, may need to assist with handover tasks, and continue to receive their regular salary. Additionally, contractual obligations, such as non-competition clauses, remain in effect until the notice period ends. An employee on gardening leave retains their employment status, allowing them to claim the same rights and pay even if they are not physically present at the workplace.
When is PILON Used?
An employer may opt to provide a payment in lieu of notice for various reasons, including the following:
- Where there is a breakdown in the working relationship or a dismissal due to misconduct or poor performance, and the employer is concerned about potential disruptions if the employee were to serve their notice period
- The need to safeguard sensitive information, necessitating immediate access restrictions to any company systems to prevent employees from accessing, downloading or sharing confidential data
- An employee might negotiate for PILON as part of their exit agreement, especially if they are unable or unwilling to fulfil the notice period
- An employee resignation may prompt the employer to prefer an immediate departure.
PILON During Redundancy
PILON is often applied in redundancy situations. Employers may have the option to terminate the contracts of employees facing redundancy immediately, allowing them to bypass the notice period. Legally, these employees are still entitled to payment for their notice period by law, which should be clearly communicated during the redundancy consultation.
Payments in lieu of notice are in addition to the employee’s statutory redundancy pay entitlement. Payments may be wrapped up with any redundancy or termination payments made by the employer to the employee. However, it is essential to distinguish PILON and other termination payments for tax purposes, ensuring clarity in what each payment entails.
Settlement Agreements and PILON
PILON is often incorporated into settlement agreements and negotiated exits. Such agreements typically arise from, or aim to prevent, workplace disputes or redundancies, making it advantageous for both parties to terminate the employment contract promptly and without the notice period being served.
It is important to remember that for a settlement to be legally binding, the employee must have obtained independent legal advice before signing the agreement and must consent to the settlement willingly.
Tax Implications
Both contractual and non-contractual PILON payments are fully taxable, as they are classified as earnings. Consequently, the employer must identify the amount of basic salary the employee would have received had they completed their notice period, from which national insurance and income tax must be deducted.
Any supplementary payments made in addition to the employee’s basic pay, such as bonuses, overtime payments, commissions or other benefits, will be categorised as termination payments, which carry different tax implications. Notably, the initial £30,000 of any termination payment is exempt from tax, and such payments are also not liable for employee national insurance contributions.
Other Considerations
Payment in lieu of notice needs to be handled carefully, and failure to do so can result in various complications:
- Potential breach of contract claims if the employee believes the payment doesn’t accurately reflect their earnings. Additionally, if the employment contract lacks a PILON clause, the act of making such a payment could also be interpreted as a breach of contract.
- Misunderstandings and disputes. Ambiguities in the terms of the PILON can lead to misunderstandings and disputes between the employer and employee.
- Legal issues. In the absence of a PILON clause in the contract, an employer cannot compel an employee to accept it and attempting to do so may constitute grounds for an unfair dismissal claim.
How To Manage Payments in Lieu of Notice
To effectively manage PILON, employers should take the following steps:
- Include a clear PILON clause in employee contracts that specifies the conditions under which a PILON payment may be issued, what it covers (for example, basic pay but excluding benefits, bonuses and commissions during the notice period) and the calculation method
- Provide employees with written notice regarding the decision to implement a PILON and ensure that they understand the terms of the PILON clause and how it applies to their employment
- Keep comprehensive records of all PILON calculations, including the rationale for the payment, any relevant employee information and any communications with the employee.
- Seek legal advice if there are any uncertainties about PILON, particularly when dealing with terminations
Expert Advice From Witan Solicitors
Here at Witan Solicitors, we offer specialised legal guidance and support on termination procedures and payments. Our services are designed to help employers navigate all aspects of employee dismissal and entitlements upon termination of an employment contract, including the correct use of payments in lieu of notice. If you have a question about PILON or any other employment-related issue, our dedicated team is here to assist. Contact us today to discuss your case or send us an email.
FAQ
What does PILON stand for?
PILON refers to Payment in Lieu of Notice. This payment is made to an employee who is dismissed or leaves their job, allowing them to receive compensation instead of serving out their notice period.
Do employees have to pay tax on a PILON?
Yes, PILON payments are typically subject to tax as earnings, which means that the employee will need to pay income tax and national insurance contributions on the amount received.
Can PILON be used in redundancy situations?
In cases of redundancy, a PILON can be used to pay the employee instead of them working their notice period. Payment should reflect their regular salary for the notice duration, along with any other payments owed.
