PILON explained: when should employers use payment in lieu of notice?

Ending someone’s employment is rarely straightforward.

Even where the decision itself is clear, the next steps can quickly become complicated. Should the employee work their notice? Should they leave immediately? What needs to be paid? And are there any legal or contractual risks if you get it wrong?

That is where PILON comes in.

If you are dealing with redundancy, a difficult exit, or a breakdown in the working relationship, payment in lieu of notice can be a useful option. But it needs to be handled properly.

What is PILON?

PILON stands for payment in lieu of notice.

It means bringing employment to an end immediately, rather than asking the employee to work their notice period, and paying them instead.

So, if someone is entitled to four weeks’ notice, you may choose to end their employment straight away and make a payment covering that notice period instead of having them remain in the business.

In the right circumstances, that can be the cleanest option for everyone involved.

When might an employer use PILON?

There are plenty of situations where asking someone to work their notice period is not the best approach.

Common examples include:

Redundancy

If a role is ending and there is little practical reason for the employee to stay on, PILON can help bring matters to a clear and tidy close.

A breakdown in the relationship

If trust has broken down, keeping someone in the business for several more weeks may create tension for colleagues, managers and the employee themselves.

Commercial or confidentiality concerns

Where someone has access to sensitive client information, systems, pricing, or internal plans, an immediate exit may be the safer route.

Senior or specialist roles

For more senior employees, the business may decide it is better to make a payment and move on quickly rather than risk disruption during a notice period.

Restructures or business change

Sometimes a clean break helps the business move more quickly into a new structure, especially where handovers can be managed promptly.

Is PILON always allowed?

Not automatically. The first thing to check is the employee’s contract of employment. Ideally, there should be a clear PILON clause that allows the business to terminate employment immediately and make a payment instead of notice.

If that clause is in place, the position is usually much more straightforward.

If there is no PILON clause, the situation becomes more sensitive. In some cases, ending employment immediately without a contractual right to do so could amount to a breach of contract.

That does not always mean you cannot make a payment in lieu, but it does mean the wording, the sums involved and the wider exit process all need more careful thought.

This is especially important if you are relying on post-termination restrictions, such as non-solicitation or non-compete clauses.

What should a PILON payment include?

This depends on the contract and the employee’s terms.

In many cases, employers will need to consider:

• • basic salary for the notice period
  • any contractual benefits that would have continued
  • pension contributions where relevant
  • accrued but unused holiday
  • any other contractual sums due on termination

A common mistake is assuming PILON only means paying basic salary. In reality, the full position depends on what the employee would have received had they remained employed during notice.

4.Director and Fiduciary Exposure 

Employment risk is frequently siloed within HR, but patterns of grievances, dismissals, or settlements represent strategic governance risk. Directors and boards have a fiduciary duty to ensure that employment risk is identified, assessed, and mitigated. 

A lack of oversight or structured reporting can escalate people risk into strategic exposure. Leadership teams need visibility of cumulative trends to prevent small operational issues from becoming large-scale liabilities. 

PILON vs garden leave: what is the difference?

These terms often get used interchangeably, but they mean different things.

PILON

The employee leaves immediately and receives a payment instead of working their notice.

Garden leave

The employee remains employed during their notice period and continues to be paid as normal, but is not required to attend work or carry out their usual duties.

Garden leave can be useful where you want to keep the employee bound by their contractual duties for the duration of their notice period. PILON is more suitable where you want a clean and immediate end to employment.

When is PILON the right option?

PILON can be a sensible choice where:

• • there is no benefit in the employee remaining in the business
  • there are concerns about confidentiality or client relationships
  • the working relationship has broken down
  • the business wants a clean exit during redundancy or restructure
  • the role is senior and immediate separation is more practical

The key is to make the decision carefully, rather than treating PILON as a quick shortcut.

Common mistakes employers make with PILON

Not checking the contract first

Before confirming anything, make sure the contract supports the approach you want to take.

Underpaying notice

Employers sometimes focus only on salary and overlook benefits, holiday or other contractual entitlements.

Confusing PILON with redundancy pay

These are separate payments. In a redundancy situation, you may need to think about notice pay, holiday pay and redundancy pay separately.

Forgetting the wider exit process

Even where PILON is used, you still need to manage the termination properly, confirm the final date of employment, collect company property, and communicate next steps clearly.

Poor communication

A badly explained exit can create unnecessary tension. Employees should understand exactly:

• • when their employment ends
  • what they will be paid
  • when payment will be made
  • what happens next

PILON can be a useful way to manage employee exits, especially where the business needs a quick and controlled outcome.

But as with most employment matters, the detail matters. The contract wording, the reason for termination, the value of the payment, and the way the exit is communicated all play a part.

Handled well, payment in lieu of notice can reduce disruption and give both sides clarity. Handled badly, it can create avoidable risk.

If you are unsure whether PILON is the right option, getting advice early can make the process much easier.