Payment in lieu of notice (PILON) is a term in an employment contract allowing employers to end an employee's job right away by paying them for the notice period they would usually work. This is often used when employers need to dismiss an employee quickly and wish to avoid any issues during the typical notice period.
How does PILON work?
When an employment contract has a PILON clause, the employer can end the contract immediately. They do this by paying the employee what they would have earned during the notice period.
To calculate PILON, consider the employee's annual salary and the contract's notice period. For example, if an employee has a yearly salary of $50,000 and a notice period of one month, the PILON would be calculated as follows: $50,000 divided by 12 months, giving $4,166.67. This amount represents the pay for the one-month notice period.
Tax on PILON
PILON is taxed like regular income. It's subject to income tax and National Insurance contributions (NICs). Employers must deduct these taxes from the PILON payment, just like they would with a regular paycheck.
Difference between PILON and Garden Leave
PILON is often confused with garden leave, but they're different. Garden leave is when an employer asks an employee to stay away from work during their notice period, but they still pay them and treat them as an employee. This is different from PILON, where the employment ends immediately with a final payment.