What is Payment in Lieu of Notice?
Payment in lieu of notice (often abbreviated as PILON) is a payment made by an employer to an employee instead of the employee working through their contractual or statutory notice period. Rather than requiring the employee to continue working during this period, the employer immediately terminates employment and pays the amount the employee would have earned during the notice period—covering salary, benefits and sometimes bonuses.
Why Payment in Lieu of Notice Matters in HR
This mechanism matters to HR because it allows organisations to manage transitions more cleanly and efficiently. By offering a payment in lieu of notice, employers can end employment relationships immediately, mitigate the risk of disruption from outgoing employees and uphold confidentiality or operational integrity during the notice period.
For employees, this payment ensures they receive what they would have earned during the notice period even though they are no longer required to work. However, because the employment relationship ends immediately, benefits, access to company systems or future employment restrictions may change. HR teams should ensure clarity in contracts and compliance with local labour laws to avoid claims of wrongful dismissal.
How to Calculate and Administer Payment in Lieu of Notice
To administer a payment in lieu of notice correctly, HR should follow these core steps:
- Check contract or statutory requirements: Ensure the employment agreement or relevant legislation allows for payment in lieu of notice or includes a PILON clause.
- Determine the notice period: Identify how long the employee would have worked under the notice clause—this could be days, weeks or months.
- Calculate the earnings equivalent: Multiply the employee’s normal pay (including salary, guaranteed bonuses and benefits) by the length of the notice period. For example, salary ÷ 52 weeks × number of weeks of notice.
- Make the payment and settle the contract: Once payment is made, the employment ends immediately and the terms of benefits, pension, vacation accrual and taxation should be addressed.
Proper implementation of a payment in lieu of notice safeguards both employer and employee rights. It prevents misunderstanding about employment termination dates, benefits continuation and protects employers from potential breach of contract claims. HR practitioners should also communicate clearly with departing employees about what the payment covers and how it affects post-employment obligations or entitlements.
