Payment in lieu of notice

By Tolley in association with Sarah Bradford

The following Employment Tax guidance note by Tolley in association with Sarah Bradford provides comprehensive and up to date tax information covering:

Payment in lieu of notice
Contractual PILONs
Non-contractual PILONs
Taxation of payments in lieu of notice
Payments in lieu of notice to directors

The right to notice means the right for the employee to remain in employment for the period of notice, not simply to be paid for it. An employer will therefore often include in the contract an express right to make a payment in lieu of notice (PILON) as an alternative to giving notice, to ensure they have the option of terminating the employee's employment with immediate effect and removing the employee from the workplace at any time.

See the Contractual terms guidance note.

However, even in the absence of such an express right, an employee may be willing to bring their employment to an early end and accept a 'non-contractual' payment in lieu of the notice to which they are properly entitled (or, more likely, the employer might simply terminate the employment and make such a payment, which in many cases will effectively extinguish the employee’s wrongful dismissal claim).

Note that the case references given in this guidance note are all subscription sensitive.

Contractual PILONs

Protection of post-termination restrictions

The primary reason for an employer to include a PILON clause in the contract of employment is to preserve post-termination restrictive covenants that would otherwise fall away if the employer terminated the contract without the required notice or on short notice, ie in breach of contract. The inclusion of the PILON clause enables the employer to remove the employee from the workplace immediately without being in breach of contract and therefore protects the restrictive covenants.

Employer flexibility

The inclusion of a PILON clause enables an employer to retain the maximum flexibility for themselves. This means they can accelerate the employee's departure by means of a PILON, or to make the employee work out their notice (eg to ensure a smooth handover to their replacement) or to put the employee on garden leave