How Does Payment in Lieu of Notice Work in the UK? (2026)

When an employee leaves, notice periods often become messy fast. Employers commonly make three mistakes here: they assume they can simply tell someone to leave immediately, they calculate payment in lieu of notice using basic salary only, or they forget to check what the employment contract actually says. Those mistakes can turn a routine exit into a wrongful dismissal claim, a wage dispute, or an expensive disagreement about bonus, holiday pay, benefits, and restrictive covenants.

Payment in lieu of notice, often called PILON, can be a practical way to end employment quickly without keeping someone at work during their notice period. But it only works cleanly if you understand when it is allowed, how to calculate it, and what contractual wording supports it. This guide explains how payment in lieu of notice works in the UK, when businesses usually use it, the main legal risks, and the practical steps to take before you sign off on a termination decision.

Overview

Payment in lieu of notice means ending employment immediately and paying the employee instead of requiring them to work some or all of their notice period. For UK businesses, the key issue is usually not whether PILON exists as a concept, but whether the contract allows it, what exactly must be paid, and how the termination should be documented.

• Check whether the employment contract contains a clear PILON clause.
• Confirm the employee's contractual notice period and compare it with statutory minimum notice.
• Work out what the payment must include, such as salary, contractual benefits, commission, bonus elements, and accrued holiday where relevant.
• Consider whether ending employment immediately affects post-termination restrictions, confidentiality obligations, and return of company property.
• Make sure the dismissal process is still fair, especially where misconduct, performance, redundancy, or discrimination risks exist.
• Record the arrangement clearly in a dismissal letter, settlement agreement, or other termination documents.

What How Does Payment in Lieu of Notice Work Means For UK Businesses

For a UK employer, PILON is mainly a contractual termination tool. It lets you bring employment to an end straight away, while paying the employee for notice they would otherwise have worked.

This often matters when you do not want an employee to remain in the business during their notice period. That may be because they have access to sensitive client information, team members, pricing, product plans, or confidential data. It can also matter where trust has broken down, or where keeping the person at work would be disruptive.

What is payment in lieu of notice?

Payment in lieu of notice is a payment made when an employer ends employment immediately but compensates the employee for the notice period they are entitled to. Instead of working four weeks, two months, or whatever the notice period is, the employee leaves at once and receives a payment representing that period.

In practice, PILON may cover all notice or only part of it. For example, an employer might ask someone to work two weeks and then make a payment for the remaining six weeks.

Where does the right to notice come from?

Notice can come from two places: statute and contract. Employees are entitled to at least the statutory minimum notice after one month of service, but many employment contracts provide longer notice periods. If the contract says three months, that is usually the starting point unless the contract is unenforceable or another legal issue applies.

The contract is especially important because a properly drafted PILON clause can give the employer an express right to terminate immediately and make payment instead.

Why the contract matters so much

A clear PILON clause gives the employer more certainty. Without one, dismissing someone immediately and paying them anyway may still be possible in practical terms, but it can amount to a breach of contract. That matters because a wrongful dismissal claim is usually about notice rights, not whether the broader dismissal was fair.

This is where founders often get caught. They assume paying the person something is enough, but the legal question is whether the contract let them end employment in that way.

What should a PILON clause usually cover?

A well-drafted clause often addresses:

• whether the employer can terminate immediately by making a payment in lieu
• whether the payment covers base salary only or wider contractual benefits
• whether the employer can make a partial PILON
• what happens to bonus, commission, car allowance, pension contributions, or private medical cover
• whether the employee must mitigate their loss, if the clause is structured that way
• when the payment will be made

The wording matters because vague clauses often create arguments later.

PILON is not the same as garden leave

Garden leave means the employee remains employed during the notice period but does not attend work, or works only in a limited way. PILON ends employment immediately. That difference affects benefits, duties, and the timing of restrictive covenants.

If you need someone out of the business but still bound as an employee for a period, garden leave may be more suitable. If you want a clean and immediate exit, PILON may be the better option, but only if your documents support it.

Does PILON make a dismissal fair?

No. Payment in lieu of notice deals with notice entitlement, not the overall fairness of the dismissal. If you dismiss an employee for performance, misconduct, redundancy, or some other reason, you still need a fair process where the law requires one.

A business can pay notice correctly and still face claims for unfair dismissal, discrimination, whistleblowing detriment, or failure to consult in a redundancy process. PILON solves one part of the exit, not the whole legal picture.

When This Issue Comes Up

PILON usually comes up when a business needs a fast exit but wants to avoid a notice period being worked in real time. The legal risk tends to be highest where emotions are high, the employee has access to sensitive information, or the contract is unclear.

Resignations to a competitor

If a senior employee resigns to join a competitor, you may not want them staying in the business for another one or three months. A PILON clause can help you end employment immediately, especially where there are concerns about client relationships, confidential know-how, or internal strategy.

Before you act, check whether garden leave would better protect the business. In some cases, keeping the employee employed during notice can support restrictive covenants more effectively.

Breakdown in working relationships

Small businesses often use PILON when trust has gone. That may happen after a grievance, a clash between founders and a senior hire, or a difficult performance process. If it is unrealistic for the employee to remain in the workplace, PILON can reduce disruption.

Even then, you still need to think about fairness, discrimination risk, and whether there has been a proper disciplinary or capability process.

Redundancy situations

PILON is common in redundancies, especially where a business is restructuring quickly or closing a team. The employee may be told their role is ending and then paid in lieu rather than asked to work out notice.

That does not remove the need for a fair redundancy process. Selection, consultation, and consideration of alternatives still matter.

Misconduct cases

Employers sometimes assume PILON can be used as a shortcut where misconduct is suspected. That is risky. If the conduct amounts to gross misconduct, the employer may seek summary dismissal without notice. If the conduct does not justify that, notice may still be owed.

Using PILON in a misconduct case can be sensible where the employer wants the person to leave immediately but does not want to argue about gross misconduct. Still, the disciplinary process should be handled carefully.

Settlement discussions

PILON often appears in settlement agreements. A business may want certainty on the termination date, notice payment, holiday pay, confidentiality, post-termination obligations, and waiver of claims. In that context, the PILON figure should line up with the contract and the wider termination terms.

If the numbers are wrong, the settlement discussion can stall, or the employee may argue they are being underpaid.

Practical Steps And Common Mistakes

The safest way to handle PILON is to treat it as a contract and process question, not just a payroll decision. Employers who move too fast often miss a drafting problem, a benefits issue, or a procedural risk that becomes expensive later.

1. Read the employment contract first

Before you sign a dismissal letter or speak to the employee, review the contract carefully. Look for the notice clause, any PILON wording, any garden leave clause, bonus and commission terms, benefits provisions, and restrictive covenants.

Check:

• the length of contractual notice
• whether the employer has discretion to make a payment in lieu
• what the payment includes
• whether there are separate rules for probation, fixed-term contracts, or summary dismissal
• whether there are enhanced notice rights for senior staff

A common mistake is relying on a template contract that does not match how the employee was actually paid or promoted over time.

2. Work out the correct payment

PILON is often more than basic salary. The exact calculation depends on the contract and the employee's entitlements. If the contract says the payment covers salary only, that may narrow the amount due. If the contract is broader, the payment may need to include other contractual elements.

Possible items to consider include:

• basic salary
• car allowance
• contractual commission
• contractual bonus elements
• employer pension contributions where required by contract
• private health or other benefits with an identifiable value
• accrued but untaken holiday pay

This is one of the most common dispute points. Businesses sometimes assume discretionary bonus never counts, but the answer depends on the wording and the facts.

3. Keep tax and payroll treatment straight

PILON has payroll consequences, and employers should make sure the payment is processed correctly through payroll where required. The tax treatment is not just an administrative afterthought, because the figures in the termination letter, payslip, and settlement documents should all align.

You should take payroll advice where needed, but do not let payroll assumptions drive the legal position. The contract still comes first when deciding what is owed.

4. Do not ignore the dismissal process

A fair process still matters. If the employee has enough service to bring unfair dismissal claims, or if discrimination or whistleblowing issues may be in play, the business should not treat PILON as a replacement for procedure.

For example, before ending employment for poor performance, think about:

• whether expectations were set clearly
• whether warnings were given
• whether support or training was offered
• whether the employee had a chance to respond
• whether there may be disability, pregnancy, family leave, or other protected factors involved

The main risk is paying notice correctly but still getting the underlying dismissal wrong.

5. Consider post-termination restrictions

If the employee has non-compete, non-solicit, or confidentiality obligations, the termination mechanics matter. In some cases, a wrongful dismissal can weaken reliance on restrictive covenants. A contractual PILON clause can help reduce that risk because the employer is acting within the contract.

Before you spend money on setup for a replacement hire or client handover, make sure the existing employee's exit is being handled in a way that supports any restrictions you may want to enforce later.

6. Document the termination clearly

The exit should be recorded properly. That usually means a dismissal letter, redundancy outcome letter, resignation acceptance letter, or settlement agreement, depending on the situation.

The document should usually cover:

• the termination date
• whether employment ends immediately
• the amount of any PILON
• when payment will be made
• holiday pay arrangements
• return of company property
• confidentiality and data protection obligations
• any continuing restrictive covenants

Vague wording creates room for argument about whether employment ended immediately or after the notice period expired.

7. Avoid inconsistent treatment across employees

Different roles may justify different approaches, but businesses should be careful about arbitrary inconsistency. If two similar employees are dismissed in similar circumstances and only one receives a wider PILON calculation or a chance to work notice, that can fuel grievances or claims.

Consistency matters most where protected characteristics, family leave, part-time status, or whistleblowing concerns may be present.

Common mistakes employers make

These are the errors that most often cause trouble:

• dismissing immediately without checking if there is a PILON clause
• calculating the payment on salary only when the contract suggests more is due
• assuming PILON removes the need for a fair dismissal process
• forgetting about accrued holiday pay
• failing to preserve confidentiality and return of property obligations in writing
• using PILON when garden leave would better protect the business
• issuing unclear or contradictory termination documents

For startups and SMEs, these mistakes often happen because the founder is moving quickly, there is no in-house HR team, and the contract used at hiring stage was never updated.

FAQs

Can an employer use payment in lieu of notice if the contract does not mention it?

Sometimes an employer may still choose to pay the employee and end employment immediately, but without a contractual PILON clause that can amount to breach of contract and create wrongful dismissal risk. The contract should be checked before taking that step.

Does PILON include bonuses and benefits?

It can. The answer depends on the contract and the nature of the entitlement. Some PILON clauses are limited to basic salary, while others require a broader payment that reflects contractual benefits or commission.

Is payment in lieu of notice the same as garden leave?

No. Garden leave keeps the employee employed during notice, usually away from the workplace. PILON ends employment immediately and replaces the notice period with a payment.

Can you dismiss someone immediately for gross misconduct instead of paying PILON?

Possibly, but only where the facts genuinely justify summary dismissal. If gross misconduct is not made out, notice may still be owed, and a rushed decision can create claims.

Does paying PILON stop an unfair dismissal claim?

No. PILON deals with notice entitlement. It does not by itself make the dismissal fair or prevent claims relating to process, discrimination, whistleblowing, or redundancy failures.

Key Takeaways

• Payment in lieu of notice allows employment to end immediately while the employee is paid for notice they would otherwise have worked.
• A clear contractual PILON clause gives employers much stronger footing and helps avoid wrongful dismissal issues.
• The right amount is not always basic salary only, because commission, benefits, bonus terms and holiday pay may also matter.
• PILON does not replace the need for a fair dismissal process, especially in misconduct, performance, redundancy, or discrimination-sensitive situations.
• Termination documents should clearly record the last day of employment, the PILON figure, ongoing obligations, and practical handover points.

If your business is dealing with how does payment in lieu of notice work and wants help with employment contracts, dismissal documents, settlement agreements, restrictive covenants, or a contract review, you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.