For many years payment in lieu of notice (PILON) clauses were the enemy of employers. In the absence of a PILON clause, any employee they wished to exit via settlement would be able to get up to £30k tax free and this could include the equivalent PILON payment. As the PILON was rolled into the termination payment, it was tax and NI free and immediately more attractive to the employee.

Then post-employment notice pay (PENP) was introduced last year. PENP is a formula to ensure that PILON, whether contractual or actual is taxed as notice to ensure HMRC receives its dues. Under PENP having a PILON clause is more beneficial for several reasons, including:

– The PILON clause can state PILON is paid at basic pay only. The absence of a clause usually means PILON must be paid at normal pay. In industries with large amounts of overtime, bonuses or commission this can be a substantial amount more;
– The employer can set how and when PILON will be paid. For senior employees with 12-month notice periods this could include paying notice in instalments to ease cashflow;
– The clause can stipulate that any annual leave accrual must be taken before termination. This saves paying accrued leave on top after the employment has been terminated; and
– Employers who do any of the above without having a PILON clause could be liable for breach of contract claims. For claims exceeding £25,000.00 this would be heard in the County Court and leave the losing party liable for costs as well as damages.

Anyone who is interested in having a PILON clause inserted or amended in their contract can can contact for a review or precedent.