Payment in lieu of notice

Produced by Tolley in association with Hannah Freeman at Old Square Chambers

The following Employment Tax guidance note Produced by Tolley in association with Hannah Freeman at Old Square Chambers provides comprehensive and up to date tax information covering:

  • Payment in lieu of notice
  • Contractual PILONs
  • Protection of post-termination restrictions
  • Employer flexibility
  • Drafting PILON clauses
  • Calculating PILON payments: certainty
  • Mitigation
  • Non-contractual PILONs
  • Taxation of payments in lieu of notice
  • Payments in lieu of notice to directors

Payment in lieu of notice

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).

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 empl

Popular documents