PILON: What is it and how is it calculated in the UK?

One day he’s standing at the coffee machine, making idle chitchat while he waits for his latte, the next he’s gone, disappeared without a trace. ‘Where did Gary go?’ you ask, to shrugging shoulders and bemused looks. Was he abducted by aliens? An MI5 plant? A figment of your imagination?

We all love a bit of office drama, and the vanishing colleague is a fan favourite, able to keep us guessing for weeks while HR stays tight-lipped. What did they do? How did it happen? Fun as the conspiracy theories are, it was probably something a bit more mundane – PILON.

No, we’re not talking about electricity infrastructure (thrilling though that is), but Payment in Lieu of Notice. It’s going on all the time, in lots of companies across various industries, and it’s not as brutal as it might look to an outsider who sees only the sudden Gary-shaped hole in their new office view.

Though it doesn’t involve any cables, it’s easy to get a bit tangled up when trying to understand and use PILON. In this article, we’ll give you the lowdown on this commonly used exit strategy so that you don’t get caught in a legal knot when you want to part ways with someone easily, amicably – and quickly.

What is PILON?

Payment in Lieu of Notice (PILON) is where, instead of serving out their notice period (which can be anywhere from a few weeks to a few months) when leaving a job, the employee is paid a lump sum and is straight off on their merry way. It rapidly speeds up the exit process, which means the employer can crack on with finding a replacement (if needed) and the ex-employee can dodge all those awkward farewells with people whose name they were never 100% sure of. Plus they’ll have enough cash to plan their next move without undue financial pressure. Win-win.

You know those buyouts that mobile phone and internet providers always seem happy to stump up to persuade you to switch contacts before your term is up? PILON is not a million miles away from that. You’re effectively buying someone out of a contract – in this case, their employment contract. Like the opposite of a ‘golden handshake’, more of a… ‘silver goodbye’?!

For whatever reason, they’re not going to work their notice period, instead opting for a ‘hard out’, but they’re still entitled to be paid for it. It’s not a bonus, or an incentive, it’s just settling the account so that you can both move on with your lives. If only our ex-partners would be so generous.

It's important to note that PILON is not the same as garden leave, though the underlying motivation – for the (ex-)employee to leave the workplace immediately – is the same. With garden leave, the person remains employed for their entire notice period, receiving their salary and benefits as normal over that time, but is not required to work (leaving them free to play tennis, go shopping or tend to their garden – hence the term). That’s more like a paid holiday that you never come back from, except you can’t post envy-inducing beach pics on Insta and should probably be looking for a new job.

By contrast, PILON is an immediate buy-out, a single lump sum equal to what the person would have earned working their notice. From an employer perspective, garden leave is a good alternative to PILON if cash flow is a bigger issue than leave management or people management. For example, if the person is leaving on good terms and the process of replacing them is likely to be costly, you might prefer to spread the cost of their exit out over the notice period so you can more easily fund the recruitment and training of a new team member.

When and why would you use it?

So when might you want to use PILON? Basically, in any scenario where there is a need for someone to get out of the workplace or employment contract, pronto. This desire might come from the employer or the employee.

Maybe there’s been a relationship breakdown in the workplace and it’s no longer possible for two people to work productively alongside each other. In extreme cases, you might be concerned about damage being done (literal or professional) if someone remains at work when a relationship or situation has deteriorated beyond repair.

Perhaps there’s been an incident that means someone no longer feels safe, or is themselves not a safe person to be in the work environment. It could be that a life event drastically and suddenly changes someone’s priorities and commitments, for example a death or diagnosis. In these kinds of circumstances, as well as a swift exit PILON also offers discretion and privacy, saving people from difficult conversations or awkward questions.

PILON does not always suggest a bad or a sad thing. Something exciting but time-sensitive could come up that requires a person to leave immediately. A new job with an urgent start. A once in a lifetime travel opportunity. A chance to tour the world with a rock band, leaving next week. There are various personal and professional reasons someone might want to make a quick exit, not all of them dramatic, and many of them none of our business.

From the employer’s perspective, often it’s just a case of streamlining the departure process when there’s a need or desire to swiftly remove someone from the workplace. It can also help in restructuring situations, downsizing or mergers, where some roles may not be needed. SMEs might also prefer a PILON approach, as it can make them more agile in responding to market changes. Companies in the dynamic and fast-paced tech industry might use it for similar reasons, often needing to pivot quickly.

Importantly, PILON should not and cannot be used in place of misconduct or disciplinary procedures, or redundancies, which have their own specific processes and payment calculations, so tread carefully.

The legal stuff

It should be pretty clear by now that PILON offers a fairly neat solution for employers and employees alike when the relationship reaches an end. But it’s important to note that it isn’t a free-for-all, and there are rules to abide by.

The notice period is a key feature of any employment contract for a reason, providing a mutually beneficial transition period, and so in most cases you should expect it to stand. Often, the job will still need to be done and the role filled, which can’t always be resolved quickly. The notice period means an employee can’t just up and go, leaving the company high and dry, and the employer can’t cast someone out without warning.

Some contracts might include a PILON clause, stating that the employer has the right to terminate a contract in this way. If it doesn’t, then while you can ask, you cannot force an employee to accept PILON unless specific conditions apply (eg gross misconduct or summary dismissal). There must be a mutual agreement If the employer tries to enforce PILON without consent, this would be a breach of contract or unfair dismissal. Not something you want to risk.

So if you want to use PILON, it’s critical that you keep all communication about it open, transparent and – most importantly – documented. You need a clear paper trail recording the offer of PILON, and of the person’s acceptance of that offer, to avoid any misunderstandings down the line. Unlike other areas of business, this is one situation where you can never have too much paperwork.

From the employee’s point of view, it also ensures they get what they are entitled to under their contract and employment law. And depending on their situation, it may or may not be an appealing offer. There is tax to consider, for example, as well as optics with a future employer.

How do you calculate a PILON payment?

PILON is not a financial incentive to push someone out the door; it’s payment of what is legally due, and it’s got to add up.

Calculating a PILON payment is thankfully pretty easy. It’s basically whatever they would have been paid, in salary and benefits, had they worked their full notice period. You take their basic salary, multiply it by the number of weeks or months stated as the notice period in their contract, and voila – that’s your PILON payment.

For high paid employees or those with a long notice period, this figure might be pretty eye-watering, so the desire to get someone out (and someone else in) quickly should be weighed against the cost of doing so. If there’s a potential it could be more expensive to keep them around (eg someone making costly mistakes, or who is sabotaging/damaging the business), this might be worth it.

Impact on leave management

When considering a PILON offer, don’t neglect to consider the leave management angle. A sudden departure will require quick adjustments to workloads, task allocation and redistribution of responsibilities to ensure continuity in the absence of the department staff member.

Depending on the size of the organisation or team, this could throw employee leave calendars into disarray. So when weighing up your options it’s a good idea to look ahead to see what impact a sudden absence will have. If it comes ahead of a busy period or there is lots of leave booked, you might want to keep the person around to avoid a wider business impact.

Key takeaways

While PILON might sound as complex as pylons, replacing webs of cables with webs of legalese and loopholes, it’s actually pretty straightforward. And it’s worth getting your head around, as its flexibility and efficiency make it a valuable tool for employers.

As long as you can distinguish between the different types of exit scenario and know when to turn to redundancy or misconduct processes instead, if the contract allows for PILON it’s just a simple cost–benefit analysis.

As ever, the biggest tip is to keep communication lines open and talk to your people. In the right circumstances, PILON might be the best choice for all involved. And if not, you get to enjoy each other’s company for a few more weeks – win-win!