When the employer does decide to PILON, this can be for all of or part of the notice period.

The key point to remember is that employment will come to an end immediately and the employer must pay the employee in lieu of the balance of their notice period.

PILON and settlement agreements

Where the employee is entering into a settlement agreement and receiving both a PILON and ex gratia termination award, the employer must ensure it complies with the Post Employment Notice Pay (PENP) rules.

HMRC introduced a complex set of rules in April 2018 which put an end to, in some cases, being able to pay PILON tax free under a settlement agreement.

The PENP rules operate so that, essentially, unless the employee has worked/remained employed for and been paid in respect of their full notice period, the employer must carry out a specific calculation to ensure that the correct amount of tax is being deducted before any amounts can be paid tax free.

In some cases, this can result in a portion of the termination payment being treated as PENP and subject to PAYE deductions. The rules are overly complicated in terms of what counts as pay and there are two different formulas depending on the circumstances. You should always take specialist advice if you are paying PILON under a settlement agreement.

PILON and dismissal

PILON can be used tactically by employers in a number of ways, for example, where an employee has a long contractual notice period that takes them beyond their 2-year service anniversary.

In most cases, as long as the employer allows for statutory notice, they will be able to terminate employment using PILON to avoid reaching the 2 year mark (at which point the employee will gain unfair dismissal rights). There can be pitfalls though so you should always take specialist advice

How is PILON different from garden leave?

Both PILON and garden leave are tools an employer can use once notice to terminate employment has been issued or received.

The key difference is that with garden leave the employee remains employed for their notice period and receives their pay as normal throughout that time. In contrast, with PILON, the employment ends immediately and the employee is paid in a lump sum for the balance of their notice.

They each have their advantages, and disadvantages, for both parties.

Advantages of pay in lieu of notice

The advantages of using PILON are that the employee can be released from employment immediately – allowing them to start a new role with a new employer, and ensuring they’re kept away from the employer’s confidential information, clients and other valuable relationships.

With a carefully drafted PILON clause, where only basic pay is due, it can also be a way for an employer to potentially save some costs.

What to watch out for with pay in lieu of notice

Employers should ensure that they have the contractual right to PILON before doing so, to avoid breach of contract claims. You should also check the wording of the clause carefully to see what payments are due – is it basic pay only? Or are benefits payable too?

There has been a string of cases examining whether an employer invoking PILON changes the nature of the termination where the employee has resigned. In other words, changing it from a resignation by the employee, to a termination by the employer (for unfair dismissal purposes). The current position is that it doesn’t, but in any potentially contentious situation we’d always suggest its worth an employer taking specialist advice.