Payment in lieu of notice 




An employer can opt to make a payment in lieu of notice (PILON) instead of making the employee work their whole notice if the contract allows this. It is generally up to the employer to decide whether to exercise this contractual right. The employee is not entitled to demand this (Cerberus Software v Rowley [2001] IRLR 160). 




An employer with a contractual right to make a PILON also has the implied contractual duty to tell the employee clearly that the right is being exercised, and when the contract will end (Societe Generale v Geys [2012] UKSC 63).




If there is no contractual right to make a PILON, ending the contract early without the employee’s agreement will be a breach of contract and can sometimes lead to an unfair dismissal (see, for example, Missirilis v Queen Mary University [2016 UKEAT/0038/15/LA, page 396, Chapter 11).



PILONs are taxable earnings, so they are paid net of tax and National Insurance. The law changed on 6 April 2018. In the past, the tax treatment of notice pay depended on whether the employment contract contained a term permitting the employer to make a PILON. From 6 April 2018, all employees must pay tax and Class 1 National Insurance Contributions on the basic pay they would have received had they worked their notice in full, whether or not their contract includes a PILON clause.