Understanding Payment in Lieu of Notice (PILON)

When considering the termination of employment both employers and employees must understand the concept and implications of “Payment in Lieu of Notice” (PILON) to ensure fair treatment and compliance with legal obligations.

Skip to the relevant section:

• What is the meaning of Payment in Lieu of Notice?
• What is the difference between Payment in lieu of notice and working notice period?
• When is Payment in Lieu of Notice Appropriate?
• How do you calculate Payment in Lieu of Notice?
• What are common mistakes in calculating PILON?
• What are the Advantages and Disadvantages of Payment in Lieu of Notice?
• PILON: Legal Considerations and Best Practices
• Implication of Payment in Lieu of Notice for the Termination Date

What is the meaning of Payment in Lieu of Notice?

PILON is a payment an employer makes to an employee instead of providing the employee with a notice period before their termination. This means that rather than working through their notice period, the employee leaves employment early and receives a lump sum payment equivalent to the wages they would have earned during what would have been their notice period, or the rest of their notice period. This can be set out in their contract or otherwise agreed on termination of employment, to avoid a breach of the employment contract.

What is the difference between Payment in lieu of notice and working notice period?

The handling of PILON largely depends on the terms outlined in the employment contract. It’s crucial for both parties to have a clear understanding of their contractual obligations and rights regarding notice periods and termination payments.

When is Payment in Lieu of Notice Appropriate?

PILON can be applied in various situations, including:

• Redundancies: When an employer needs to reduce their workforce;
• Dismissals: Whether for misconduct or poor performance, where immediate termination is necessary, but it is not sufficiently severe to remove the employee’s notice entitlement; or
• Mutual Agreements: When both employer and employee agree on an immediate termination without a notice period.

From an employer’s viewpoint, PILON is often preferable in situations where:

• Immediate termination is required to avoid potential disruptions;
• The presence of the employee is no longer beneficial or could be detrimental; and / or
• There is a need to maintain confidentiality or protect business interests.

In some circumstances the employee would prefer to leave employment early and be paid a lump sum instead of their pay during what would have been their notice period for similar reasons.

How do you calculate Payment in Lieu of Notice?

Basic PILON Calculation: The calculation of PILON can include several components depending on the terms of the employment contract.

In many cases, the employment contract gives the employer the right to pay only Base Salary in lieu of notice.

If the employment contract does not stipulate this the employee is entitled to be put in the financial position, they would have been in had they remained in employment throughout their notice period. in that case, and to ensure the employee receives the equivalent of what they would have earned during the notice period the following types of payment should be included.

Example of a PILON Calculation:

Suppose an employee with a monthly salary of £3,000 is entitled to a 3-month notice period. Their PILON might be calculated as:

• Base Salary: £3,000 x 3 = £9,000
• Benefits: £200 per month x 3 = £600
• Total PILON: £9,600

What are common mistakes in calculating PILON?

Employers and employees must avoid common mistakes in calculating PILON, such as:

• Overlooking non-salary benefits.
• Incorrectly assuming tax-free status for PILON.
• Failing to pro-rate bonuses or commissions.

What are the Advantages and Disadvantages of Payment in Lieu of Notice?

Advantages of PILON for employers:

• Immediate Termination: Enables employers to end the employment relationship immediately without waiting for the notice period to lapse.
• Cost Savings: Potentially reduces costs related to maintaining employment, such as benefits and workplace resources.
• Workplace Harmony: Helps avoid potential disruption or negative influence an outgoing employee might cause during the notice period.

Disadvantages of PILON for employers:

• Upfront Costs: Requires a lump sum payment which might be financially challenging, especially for small businesses.
• Legal Risks: Incorrect calculation or handling of PILON can lead to legal disputes and potential compensation claims.

Advantages of PILON for employees:

• Immediate Financial Compensation: Employees receive a lump sum payment that can help financially during the transition to new employment.
• Freedom to Seek New Opportunities: Without the obligation to work through the notice period, employees can focus on finding new jobs.

Disadvantages of PILON for employees

• Loss of Benefits: Employees might lose out on benefits that would have accrued during the notice period.
• Tax Implications: Depending on the contractual terms, employees might face higher tax liabilities.

PILON: Legal Considerations and Best Practices

Contractual Clauses:

To avoid disputes, it’s critical to have clear clauses regarding PILON in employment contracts. These clauses should specify:

• The exact circumstances under which PILON will be paid.
• The components included in the PILON payment.
• How the PILON amount will be calculated.

Dispute Resolution:

Common disputes regarding PILON often arise due to misunderstandings or ambiguities in the employment contract. Best practices for resolving such disputes include:

• Clear Communication: Ensure all parties understand the terms of the employment contract.
• Mediation: Consider mediation as a first step to resolve disputes amicably.
• Legal Advice: Seek legal advice from employment law specialists to navigate complex situations.

Best Practices:

• For Employers:
  • Regularly review and update employment contracts to ensure they are clear and compliant with current laws.
  • Communicate termination terms transparently and in writing.
• For Employees:
  • Understand your employment contract thoroughly, particularly the termination clauses.
  • Seek legal advice if unclear about your rights regarding PILON.

Implication of Payment in Lieu of Notice for the Termination Date

It is crucial to understand that where a payment is made in lieu of notice the employment ends when stated or agreed that it ends and not at the end of what would have been the notice period. This is of vital importance in knowing when the last day of employment is for the purposes of calculating time limits for bringing and qualifying service for bringing an employment tribunal.

Conclusion

Understanding Payment in Lieu of Notice is crucial for both employers and employees to ensure fair and lawful termination procedures. By familiarising yourself with the legal framework, calculation methods, and best practices, you can navigate PILON effectively. If you find yourself needing assistance, Anthony Gold Solicitors is here to help with expert advice and comprehensive legal support.

For personalised advice and support on PILON or any employment law matters, contact Anthony Gold today. Our experienced team is ready to assist you with all your legal needs.