Perhaps, like many employers, you have nightmares around compliance. Or maybe you’ve suffered too many sleepless nights worrying about the implications of employment law. You might even have been tortured by thoughts about how to protect your business in the event that you need to terminate staff.
If that’s the case, then you may have heard of payment in lieu of notice, or its rather catchy acronym, PILON. In this post, we’ll break down how PILON works, including when it may be applicable, how it’s calculated, and the legal considerations that SMEs should keep in mind. By the end, we hope that you’ll have a better understanding of what PILON is and when it might be appropriate for your business.
What is payment in lieu of notice (PILON)?
PILON is a payment that an employer makes to an employee when the employer wants to terminate the employee with immediate effect (or make them redundant), instead of them working their notice period. It’s important to understand PILON and its implications, as it can have significant financial and legal consequences for both employers and employees.
Is payment in lieu of notice mandatory?
PILON isn’t necessarily mandatory – it really depends on the circumstances, and the employment contract of course. However, it is mandatory to abide by the terms of the employment contract. As an employer, you must always give full pay for your employee’s notice period. Employees with more than one month’s service are entitled to a minimum statutory notice period upon termination of their employment.
But if there’s a PILON clause in the employee’s contract, then you may be able to provide your employee with payment instead of them working their notice. But be aware, if there is no PILON clause, then if you terminate the contract with immediate effect with no notice period and no payment, then you’re very likely to be in breach of contract.
When could employers provide payment in lieu of notice?
There are a few scenarios where an employer might choose to offer PILON instead of providing the full notice period required by the employment contract. Let’s take a look at the most common ones.
Dismissal or redundancy
If an employer terminates an employee’s contract and wishes it to have effect immediately, they may offer PILON as a way of compensating the employee for the loss of their notice period.
Gardening leave
Employers may put employees on gardening leave, which means that they are asked to stay away from the workplace during their notice period. In this situation, an employer may choose to offer PILON while the employee is not required to come to work.
By agreement
Some employment contracts may include a PILON clause, which specifies that the employer has the option to offer PILON instead of requiring the employee to work their notice period. Even without such a clause, the employee may request this. In this situation, the employer may choose to provide PILON.
In some cases, PILON may not be appropriate, such as when an employee is dismissed for gross misconduct. As a small or medium-sized business owner, it’s important to review employment contracts carefully and seek legal advice if you’re unsure about the appropriateness of offering PILON in a particular situation.
Can an employee decline payment in lieu of notice and request to serve a notice period?
It’s well within the employee’s rights to insist on working their notice period, and there may be valid reasons for them to decline PILON. The right to work the notice period is typically considered the default option as this is what is required to lawfully terminate an employment contract, unless the employer and employee mutually agree otherwise or specific circumstances dictate otherwise.
If an employee wishes to serve their notice period rather than accepting payment in lieu, they should communicate their preference to their employer in writing. The employee must clearly state their desire to work the notice period and provide a proposed end date. The employer can then review the request and decide whether or not to accept it.
How to decide between payment in lieu and notice period
The decision to offer PILON or give an employee notice will depend entirely on the circumstances. From the employer’s perspective, you should consider whether the employee needs time to wrap up and hand over any important tasks or projects. You might also want to consider the impact that the decision would have on the wider team, and if it would impact staff morale for a member of the team to leave with immediate effect. Allowing the employee to work their notice period also gives you time to find a suitable replacement and have enough time for a handover.
However, in the case of misconduct, or where it’s not in the company’s interest or the employee’s interest to keep working their notice period, then payment in lieu might be more appropriate.
To make the decision, you’ll need to weigh up what’s best for your company and for the employee who will be leaving.
Are there any tax implications for payment in lieu of notice?
Payments in lieu are taxable as earnings under UK tax law. This means that the employee will be required to pay income tax and National Insurance contributions on the amount received as PILON.
How is payment in lieu of notice calculated?
Calculating payment in lieu of notice can be a complex process and the exact method will depend on the terms of the employee’s employment contract. In general, the amount of PILON that an employer is required to pay an employee will depend on the length of the notice period that the employee is entitled to receive.
For example, if an employee is entitled to four weeks’ notice under their contract and the employer terminates their employment without providing this notice period, the employer would need to pay the employee the equivalent of four weeks’ pay as PILON. The amount of pay would be based on the employee’s normal rate of pay, which is their basic salary, and may also include other amounts owed such as any unused leave entitlement, bonuses, and other benefits.
The wrap-up
So, there you have it – a rundown of payment in lieu of notice (PILON) for SMEs in the UK. We know that navigating offboarding can be tricky, but with the right understanding of the legal requirements and potential risks involved when it comes to payments in lieu, you’ll be well-equipped to make informed decisions.
But let’s be real – managing offboarding on your own can be a bit of a headache. That’s where HR information systems (HRIS) or employment software can come in handy.
How can Employment Hero help you manage employees better?
With Employment Hero, you can go beyond managing contracts digitally – you can easily track employee notice periods, calculate final pay, and generate the necessary documentation to offboard your employee with ease, all while helping you keep compliant.
Not only can this save you time and effort, but it can also reduce the risk of errors or omissions that could lead to costly legal disputes. So, if you’re looking to streamline your HR processes and manage compliance, it might be worth considering employment software as a helpful tool.
Making the switch to digital HR not only helps you create an impressive candidate experience, it also helps create a standout employee experience, all while saving your HR team valuable admin time. Find out more about the digital transformation revolution in HR and how it can help your business. Speak to one of our experts today.