Payment In Lieu Of Notice

employee payment, contract termination

Do you feel your job security is uncertain or that your employer could terminate you at any time? It can be terrifying to think about the possibility of suddenly being out of a job.

But as it turns out, labor law provides workers more protection than you may have initially thought. If an employer chooses to fire an employee without cause, they must provide a notice period and payment in lieu of notice (PILON).

This article will discuss PILON, who qualifies to receive payment upon termination, and how much money employees are entitled to under the law. So if you feel uneasy about your employment situation or want to prepare yourself for all possible scenarios, read on!

What is Payment In Lieu Of Notice (PILON)?

Payment in lieu of notice (PILON) is a payment that the employer pays to the employee if the employer terminates their employment. Payment in lieu of notice is a form of compensation that helps the employee financially stabilize during the transition period.

PILON is usually equal to the wages that would have been earned if the employee had worked their full notice period. It is a date notice and can be negotiated. Make sure to print the negotiated agreement.

Rules Of PILON

  • Worked for more than a Month: Employees who have served for more than one month are legally entitled to a minimum statutory notification period in the case of termination of their employment contract.
  • Must Notify: Employers must provide necessary notifications to personnel, either through mandated legislation or contractual agreements.
  • One Week's Notification: Employees who have been employed for under a year, but at least four weeks, are eligible to receive one week's notice.
  • Written Consent: For employers who choose to make a PILON, written consent must be granted to the employee.
  • In the Case of Misconduct: In most circumstances of instant dismissal due to gross misconduct, it is unlikely that any PILON will be provided.

How does PILON differ from garden leave?

While PILON and garden leave are often confused, it is essential to keep in mind that some fundamental distinctions exist between the two.

  1. PILON: PILON is an instantaneous termination for any employee-employer relationship. Garden leave permits employees to not work through their allotted notice period without completely severing ties with the company.
  2. Garden leave: Garden leave is usually put in place when an employee has already accepted a job with a rival, whereas the employer uses PILON to terminate employment immediately.

Benefits of PILON to employers

  • Easy and quick dismissal process: PILON provides employers with a practical solution to end employment without going through lengthy and expensive legal proceedings.
  • All the dues to employees are cleared: PILON also enables employers to settle any outstanding payments to the employee as soon as possible, ensuring that the employee will not be owed any further paychecks.
  • Positive reputation: PILON also allows employers to keep a more positive reputation among present and potential employees.
  • Eliminates the risk of bad influence: By taking them away from their workplace, you can avoid any untoward behavior that could put a damper on the morale of your other staff members.

How to calculate the amount of PILON?

The Payment in Lieu of Notice is usually calculated either:

  • Based on either the length of service, or
  • It may be equivalent to the employee's accrued wages and salaries until the end of their notice period.

PILON is typically equal to the same amount that would have been earned had the employee worked through the notice period.

Is PILON taxable?

Payouts for notice periods are subject to income tax and national insurance contributions. When calculating PILON payments, employers must cover basic pay an employee would have earned if they had worked out their full notice period. This standard salary is considered 'normal earnings' and thus taxed, regardless of any clause in their contract.

However,

A PILON payment may be made in the absence of an employment contract, but it is still considered to be a breach of contract. As such, these payments are not subject to standard taxation rules and regulations as specified under normal terms of employment.

A PILON clause in employment contracts

It is essential for every employment contract to incorporate a clause addressing what would happen if an employee receives PILON, yet surprisingly, many contracts lack one.

If your contract includes a pay in lieu of notice clause, you must ensure that the employee consents to be paid instead of working out their notice. According to the Labour Relations Agency, this is essential.

You must include:
  • Who can initiate PILON
  • What should the payment include
  • How long will PILON last
  • PILON is taxable
  • PILON must be initiated with the employee's agreement.

Benefits
  • PILON clauses can help to avoid costly legal proceedings.
  • It provides employers with clarity on the employment contract terms and conditions of PILON.
  • It helps to prevent misunderstandings by identifying exactly who, what and how PILON will occur.
  • PILON clauses can also help ensure consistency in how PILON is handled.
  • It prevents unnecessary delays in Payment In Lieu of Notice pay.

What if you don't have a clause?

If Payment In Lieu of Notice is not mentioned in the employment contract, various legal provisions provide that Payment In Lieu of Notice must be made.

PILON will still be payable, and the employee is legally entitled to receive it, even if there is no PILON clause in the employee's contract. In such a case:

  • Payment In Lieu of Notice cannot be paid out before the notice period has been completed or the employee has been released from their role.

  • Payment In Lieu of Notice must be agreed upon by both the employer and employee before any Payment In Lieu of Notice can be made.

Conclusion

So, there you have everything you need to know about Payment In Lieu Of Notice (PILON). This type of notice can be beneficial for employers, as it allows them to save on salary payments and potentially bring the employment relationship to an end sooner.

However, it is important to ensure that any PILON clause in an employment contract is drafted correctly, as this will make calculating the amount payable much simpler. And finally, don't forget that PILON is taxable - so factor this into your calculations!

Frequently Asked Questions

  • Payment In Lieu of Notice payments are subject to income tax and national insurance contributions. Employers must consider the basic pay an employee would have earned if they had worked out their full notice period when calculating Payment In Lieu of Notice payments.

  • It is essential for every employee's employment contract to incorporate a Payment In Lieu of Notice clause.

Employee Regulations