There are times when an employee has resigned from their position, or the employee has been dismissed by the company and the business does not require the employee to work their notice. When this happens, there are two options that are available to employers to enable the employee to not work their notice period, these are:
- Garden leave
- Pay in Lieu of Notice (PILON)
In this guide we will focus on one of these – payment in lieu of notice – and look at how small and medium sized businesses can utilise it effectively.
What is pay in lieu of notice (PILON)?
Pay in lieu of notice (PILON) is a payment made to an employee when employment is terminated without notice, instead of the employee working through a notice period and receiving pay in the normal way. It is different from ‘gardening leave’, in which the employee is still in employment during the notice period and is paid during that period, even though he or she is not present at work.
In short, payment in lieu is owed to an employee as a debt under their contract of employment if they are dismissed or made redundant but are not required to work their notice period.
Can I get PILON if I am dismissed for gross misconduct?
Why might an employer offer pay in lieu of notice?
The reasons an employer may wish to offer PILON to its employees include:
- To remove an employee from the workplace immediately and prevent them having access to sensitive information.
- To prevent the employee negatively affecting other team members or the company in general.
What criteria needs to be followed for pay in lieu of notice to be eligible?
For an employee to be eligible for pay in lieu of notice, there must be a PILON clause in their contract of employment. If a payment is made without a clause existing, the employer will be in breach of contract by preventing the employee from working their notice and may face further compensation costs at a tribunal.
What needs to be included in a pay in lieu of notice contract clause?
If a PILON clause is to be inserted within a contract of employment, it needs to be worded and set out correctly:
- It must state that dismissal can be made immediately with pay in lieu of notice to be paid for the duration of the notice period.
- It must confirm what payments will be made, and whether things like bonuses and holiday pay are to be included.
- It must state how and when payment will be made.
Can PILON be offered in a redundancy situation?
The short answer is, yes. In a redundancy situation, an employee may not be required to work their notice. If this is the case, they will be entitled to receive pay in lieu of notice. This payment would usually be included in their redundancy calculation.
How is pay in lieu of notice calculated?
Pay in lieu of notice is calculated using the employee’s standard pay rates and will reflect what they would have earned if they had physically worked their notice period. For example, one week or one months’ notice should be the same as one week or one month’s pay.
How are pay in lieu of notice and garden leave different?
Garden leave is similar to PILON and is often used when an employee is required to serve their notice period at home, rather than attending the workplace.
Garden Leave is usually used as a protective measure to prevent an employee who is leaving from having access to information or sensitive data that would be useful to a competitor or could assist that employee in setting up their own business in competition with their previous employer.
The main difference between PILON and garden leave is that an employee who is put on garden leave still in employment with the company and must be available to work during their normal working hours if requested. They are obliged to perform any duties requested by the employer which could include being asked to return to work or answer queries.
This is in contrast to employees who are given payment in lieu of notice who are no longer an employee with immediate effect. This means that an employee on garden leave cannot search for a new job, unlike an employee who is paid PILON. While on garden leave, the employee will receive their normal salary and have their normal contractual rights.
Is pay in lieu of notice subject to tax?
Yes, PILON is subject to income tax and national insurance deductions as it is considered normal pay.
Does PILON include bonuses and commissions?
Not normally. Pay in lieu of notice is often worded in employment contracts to cover basic pay only. This means that no payment in respect of non-cash benefits, bonuses or commissions during the notice period will be made.
However, if the PILON clause does not deal with such benefits and remains silent on the issue, the default position is that the employee should be compensated for the loss of any benefit under the contract for the duration of the notice that should have been given.
This is why it is important to be clear in employment contracts and state exactly how the PILON payment is to be calculated.
When an employee is dismissed, there can be a lot of confusion surrounding pay, notice and termination of employment. Mistakes cand be costly and it’s important to have clearly worded contracts of employment to ensure a mutually respectful parting of ways and avoid having to engage in costly tribunal processes.