This is especially helpful to those people who:
- you no longer wish to have ongoing access to sensitive company information; and /or
- display ongoing disruptive and unproductive behaviour.
What is payment in lieu of notice period (PILON)?
PILON is where you compensate an employee's immediate dismissal by paying their notice period instead. Payment in lieu of notice therefore protects your worker's rights for the money they would have earned during their notice period.
It's different from gardening leave whereby an employee remains employed by you and is paid during their notice period. Under gardening leave, they're still in the contract, so even though you ask them not to work, they cannot take up new employment during that time.
PILON is necessary for instances where you require an immediate end to the employment and can cut ties to override the previous contract.
If you’re dismissing an employee for gross misconduct, then PILON is not normally paid.
How can employers manage PILON smoothly?
1. Check your employment contract. Look at what your current PILON terms detail and consider updating conditions.
It’s an awful lot easier to pay PILON without breaching a contract of employment if the terms are carved into the contract in advance.
2. Include a PILON provision that covers how, when and what is paid in lieu.
Employers are well within their rights to include a condition to terminate employment immediately if PILON is paid at the basic salary that would have otherwise accrued.
3. Consider extra pay and benefits.
This is particularly useful for those who don't yet have PILON terms and conditions written into their employment contract. Technically, if it's not there, any termination of employment with PILON is likely to be a breach of contract.
So reassure your people and clear up ambiguity here and now. By specifying the employment extras and benefits that are inclusive of PILON, you can - in theory - manage your employee's exit pretty smoothly.
4. Walk a mile in their shoes and use PILON to fireproof any bridges.
Try to see this as an opportunity to demonstrate your level of care as an employer right up until unforeseen dissmals.
This is key for showing the rest of your people how you handle difficult situations and endings.
Remember, the stage for whistle blowing and exposing poor company culture is vast and far reaching in today's digital communities. Help them leave on a good note.
Extras to consider on top of salary and benefits for the notice period:
- Payment for annual leave that would've accrued during the notice period
- Further payment to compensate the employee as a way of full and final settlement.
- Continued access to employee apps and wellbeing programmes, such as medical, EAP, and any other benefits that could help the transition.
Complications can arise if your employee:
- has share options,
- could lose additional pay or benefits during the notice period that you don’t want to cover under the PILON,
- is having medical treatment under company health insurance; and / or
- can evidence that the conditions for the correct dismissal process were neglected.
In those cases, think about contacting an employment lawyer to check for breaches in your contractual obligations.
How do I calculate PILON?
If you have it written into the terms of employment, then it should be paid in that way and according to those conditions. It might stipulate that only basic pay will be paid, whilst other benefits will not.
Calculate the pay the employee would have earned during that period (Breathe HR can help with this).
Where you don’t have any provision for PILON you should pay all pay and benefits that would have accrued over the notice period. PILON should normally be made immediately on termination of employment.
Is tax applicable to PILON?
PILON payments may or may not be taxable depending on how they are handled and paid. There are three ways to make PILON payments:
- PILON payment made under terms of employment where employee is entitled to it
- PILON payment made under terms of employment at the employer’s discretion
- PILON payment made where there is no contractual right of payment or provision made
According to HMRC, tax will normally be paid on the first two situations because those payments come under normal terms of the employment contract.
Because the third situation normally results in a breach of contract it is therefore not payable under the terms of employment and not subject to normal tax – it is essentially an advance payment of damages to compensate an employee for loss and to avoid a costly legal claim for you.
This payment is tax free up to £30,000.