What is a payment in lieu of notice (PILON)? - Advice for employers

In the situation that you wish to terminate an employee’s employment immediately and have them not work their notice period, this can be done using a payment in lieu of notice (PILON). This would pay them for their contractually agreed notice period. In this article, our Employment Law team explains why you might want use a PILON, what can happen if you don’t include the option to use it in all employee contracts, and the difference between a PILON and garden leave.

What does a PILON do and why might I use it?

All employees with more than four weeks’ service are entitled to a minimum statutory notice period on termination of their employment contract. For every full year you have employed them, an employee must receive a minimum of one week’s notice up to a maximum of 12 weeks. Employees employed for less than one year, but more than four weeks, are entitled to one week’s notice.

A PILON allows an individual’s employment to be terminated immediately without them needing to work their notice period. Instead, you pay the employee the amount they would have earned had they worked for their full notice period. The payment in lieu is owed to the employee as a debt under their employment contract.

In the case of dismissal due to gross misconduct however, a PILON is not normally paid. There are several reasons you might wish to make a payment in lieu of notice, for example:

• It removes the individual from the workplace therefore preventing their access to sensitive company information;
• Their continued employment could negatively effect the company and other team members;
• It is part of a negotiated agreement between the employer and employee if they choose to resign.

Should I include a PILON clause in the employment contract?

Before you terminate an employee’s employment in this way, you should ensure that the option to make a payment in lieu of their notice is included in their employment contract. If you make a PILON without first having a contractual clause, you will be in breach of contract by preventing the employee from working. The PILON clause must:

• State that a dismissal can be made immediately by making a payment in lieu of basic salary for the notice period;
• Confirm what payments will be made in this situation and what additional benefits and other payments, such as commission payments and accrued holiday pay, may be specifically excluded;
• Detail how, when and what will be paid to the individual in the instance that you choose to use it.

If the contract does not allow you to terminate by payment in lieu of notice, but you dismiss an employee in this way, then this payment represents the compensation that the employee would recover for wrongful dismissal. If this approach is taken, it is important that your payment includes other benefits that would have been accrued during the notice period, such as pension rights and holiday pay, to ensure that the employee has no outstanding claim for wrongful dismissal. If the employee were to bring a wrongful dismissal claim, they would be obliged to try and mitigate their loss of earnings during the proper notice period by looking for another means of employment. If they then find comparable employment, their losses would cease at that point and they would only be able to claim for the time up until the new job began.

The technical breach of terminating without notice and paying money in lieu where there is no contractual right to do so would also have the effect of releasing the employee from restrictive covenants in the contract of employment, as you would no longer be able to rely on the contract.

Further, there is the risk that an employee will not "accept" your breach in terminating the contract without notice, which leaves the contract to continue. It is important that you exercise your right to make a PILON in accordance with the contract and that you make it clear to the employee that this is what you are doing. If the employee is able to treat the contract as still in force, then this means that they would be able to claim lost income/compensation for the time they were not at work (during the time the contract was still technically ongoing), and claim damages in addition to the money received as a result of the PILON clause.

It is therefore important that employees receive their PILON with a notification from you, in clear and unambiguous terms, that the payment has been made and that it was made in accordance with the contractual right to terminate the employment with immediate effect. You should also ensure that this notice is given to the employee in writing.

Is a PILON different to garden leave?

Where a PILON is used the employee’s employment is terminated immediately, and the employee is paid the amount they would have earned had they worked their notice period. This means the employment relationship between the two parties has ended and the employment contract terms are no longer binding and the employee is free, for example, to find other employment.

When an employee is placed on garden leave, their employment contract remains effective for the duration of the period of garden leave until the date the contract is terminated. The employee is still employed by you for the garden leave period but they are not required to go into their place of work. They will continue to be paid and accrue their rights and benefits during the garden leave period and you could technically request them to do some work. You could also place restrictions on the employee regarding contacting clients or other business contacts, or ban the employee from making statements about your business to the media.

If you wish to place your employee on garden leave you should ensure that there is a contractual right to do so. If you do not, you may be in breach of the employment contract if you send your employee home with no work, even if they receive full pay. The Courts have increasingly been finding that employees have a “right to work” in cases such as this.

You can use a garden leave provision rather than payment in lieu of notice if you wish to remove an employee from your workplace but also prevent them from working for a competitor or soliciting your customers or employees for a period of time.

The decision to a make a PILON is one that shouldn’t be made without fully considering all of the ramifications and seeking appropriate legal advice, particularly if there is no provision for it in the employment contract. If you are considering dismissing an employee in this way, or you would like to discuss the clauses in your employment contracts, you can contact our Employment team by calling 023 8071 7717 or emailing employment@warnergoodman.co.uk.

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ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.