When an employment relationship ends, both the employee and the employer must navigate several contractual obligations. One of these, depending on the circumstances of the departure, is PILON or Payment in Lieu of Notice. In this blog we will break down what PILON is and the various implications surrounding it.
What is PILON?
Payment in Lieu of Notice (PILON) is a payment made to a departing employee by their employer, instead of them serving their contractual notice period. This means the employee doesn’t work during the notice period but still receives the payment they would have earned had they worked.
Who gets PILON?
PILON is primarily provided to employees who have a specific PILON clause in their employment contract. However, in the absence of this clause, both the employer and the employee can still negotiate for a PILON agreement, especially if it’s mutually beneficial.
Under what circumstances do you get PILON?
An employer might offer PILON when they want the employee to leave immediately, often due to reasons like company restructuring, redundancy, or if there are concerns about the employee’s conduct. On the other hand, an employee might request PILON if they wish to exit without serving notice. This allows them to immediately sever obligations, perhaps to start a new job sooner.
How does PILON work?
What are the tax implications of PILON?
PILON payments, before 2018 were regarded as non-taxable, but this changed with the introduction of the Post-Employment Notice Pay (PENP). Now, a portion of the PILON, known as PENP, is subject to tax and National Insurance Contributions. Employers must keep an eye on the tax status of PILON, and should be encouraged to consult a lawyer if there is any ambiguity.
What are the legal implications?
Even if there’s no specific PILON clause in the contract, providing PILON without the employee’s agreement can breach the contract, potentially leading to legal claims. For employers, it’s essential to ensure any agreement for PILON is legally sound.
If the employment contract states that benefits and commissions are part of the notice pay, they should be included in the PILON. However, typically, only the basic salary is paid.
What are the holiday implications of PILON?
If the employment ends immediately due to PILON, the employee is entitled to a payout for any accrued but unused holiday days. However, the employee cannot accrue holiday, and therefore a payout, during their contractual, but unused, notice period.
When does PILON start?
The commencement of PILON is typically immediate upon the decision to terminate the employment without the need for the employee to serve their notice period. Essentially, once the employer decides that they want to end the employment relationship swiftly without waiting for the notice period to elapse, they would initiate the PILON process. The start date of PILON therefore is determined by the employer, yet it is essential for both parties to be clear on the date, as it impacts other elements such as final salary payments, benefits calculations, and potential start dates for future employment.
PILON versus Garden Leave
While both PILON and garden leave involve the employee not working during the notice period, they are different. Garden leave requires the employee to stay away from work but remain under the employment contract, meaning they can’t start a new job until the notice period ends. With PILON, the employment relationship ends immediately, freeing the employee from any obligations.
PILON versus TOIL (Time off in Lieu)
TOIL and PILON are entirely different concepts. While PILON compensates for an unworked notice period, TOIL compensates for extra hours an employee has worked, which instead of being paid as overtime, is given as additional time off. Essentially, TOIL is a ‘give and take’ of work hours, while PILON is compensation for an early termination of the employment contract.
PILON is a crucial concept in employment law and is beneficial when the employer and employee want a swift end to the employment relationship. However, it’s vital to understand the legal, tax, and other implications surrounding it to ensure a smooth transition for both parties. If in doubt, seeking legal counsel is always a prudent step.
FaQ
What is PILON?
PILON or payment in lieu of notice, is money given to an employee, instead of serving a notice period as normal.
When do you use PILON?
PILON is used when an employer wants to terminate an employment immediately without having the employee serve their notice period. This may be to stop tensions rising post termination, or perhaps to allow that employee to immediately move on to a new endeavour.
Is PILON taxable?
Yes, since 2018 PILON is taxable, as it is income.
Is PILON pensionable?
No, PILON is not typically pensionable. However, in rare instances, payment in lieu of notice can be pensionable if the initial employment contract has made provisions for this.