Payment in lieu of notice is a contractual provision, according to which, an employer has to pay a specific amount to their employee instead of giving notice of termination.

This article will give you a detailed understanding of payment in lieu of notice. You will learn the purpose of PILON along with its difference with garden leave. In addition, you will go through the terms of the notice of employment. Let’s first go through the definition of payment in lieu of notice.

What is Payment in Lieu of Notice?

Let’s begin with the meaning of in lieu. In lieu means ‘instead or in place’. Therefore, payment in lieu of notice means payment instead of notice. 

Sometimes, instead of notice, employers pay employees an amount after dismissing them from their job. This amount is called payment in lieu of notice or PILON. This payment is usually more than their normal pay because they receive it on their termination. Typically, employers are not bound to pay their employees this amount. This only happens under an employment contract. If an employee is dismissed without serving their notice period, they are given a compensation payment known as wages in lieu of notice. 

The purpose of payment in lieu of notice is to dismiss the employee right away before having them serve the notice. This payment is meant to be a reimbursement to the employee for loss of wages. However, if an employee is fired due to misconduct, they are not entitled to payment in lieu of notice. 

In this arrangement, employers have to pay employees their payroll without them serving the notice. Sometimes, even after being terminated and receiving the payment in lieu of notice, the employees can get other benefits. These include health benefits, compensation, or holiday pay for instance.

Purpose of Payment in Lieu of Notice

Some reasons for paying an entitled employee in lieu of notice are:

Stopping Access to Company’s Information

Payment in lieu of notice is given to employees when the organization has to prevent an employee from reaching out to the sensitive information of the company. In this case, they are paid to not work their notice period. 

Effect on Other Employees

Sometimes, if an employer is concerned about the effect an employee may have on the other employees, they are dismissed without having to serve the notice period. 

Employee Contract

If payment in lieu of notice is mentioned on an employee contract, it is mandatory for the employers to pay these wages to their employees. This contract mentions that the employee will not be working their notice period hence the PILON.

Lack of Productivity

If an employer feels that an employee’s disruptive behavior isn’t going to improve, they can terminate them without keeping them for the notice period. In this case, too, payment in lieu of notice is given to the employee. 

Compensation for Benefits

In some cases, the purpose of wages in lieu of notice is to compensate for any loss of benefits that may have accrued during their continued employment. These include things like an accrued vacation, bonuses, or pension.

Covering Damages

One reason to pay the payment in lieu of notice is to simply cover any potential damages for breach of contract when terminating an employee immediately.


  • In New Jersey, employees who are receiving payment in lieu of notice are not eligible to get unemployment compensation. In case, their wages in lieu of notice are less than a week’s compensation and they can receive unemployment compensation.
  • If an employee is involved in misconduct that may include theft, harassment, and bad behavior, they are not entitled to getting payment in lieu of notice. Instead, they are fired immediately.

Payment in Lieu of Notice and Employee Contracts 

Some employment contracts clearly state that employees will receive payment in lieu of notice immediately after being terminated. Such a contract helps employers to prevent the violation of the contract between both parties. You should provide benefits including pension, holiday pay, or health care insurance to your employees if it is mandated in their employment contract. 

Take care of the following things in the contract:

Breach of Contract

Before making the payment in lieu of notice, make sure to check the employment contract carefully. Without the contractual clause, you can breach the contract by preventing the employee from working.

What and When to Pay In Lieu

Apart from mentioning the PILON, the contract should include what to pay your employee in lieu of their notice. It should also include the way you do it and when you do it.

The clause should state that their contract will be terminated even if the payment is made at a later date.

Be Specific About the Payment In Lieu of Notice

The contract should be as specific as possible.  A vague payment in lieu of a notice clause can be costly to the employers.

Communicate the Payment In Lieu of Notice Regardless

Even if you have an employment contract that mandates payment in lieu of notice, you should still communicate this to your employees. A lot of the time employees don’t read their employment contract carefully and they could be in the dark about this clause. 

Not following the terms mentioned in the contract can lead to conflicts with your employees. Any disputes that arise due to issues in payment in lieu of notice are resolved by employment lawyers.

What to Do If There is No PILON Clause in the Contract?

Sometimes you may have an employment contract that doesn’t talk about the payment in lieu of the notice clause. In this case, it is best to terminate the employee without paying them. Otherwise, you will breach the contract. However, if you can talk to your employees into giving them wages in lieu of notice, you can do that even if the PILON clause isn’t in the contract. In some cases, employees may not agree to these conditions. In that case, if you don’t want the employee to work their notice it’s best to seek advice from employment lawyers and then decide.

Payment in Lieu of Notice vs Garden Leave

Payment in lieu of notice and garden leave are two terms that are often used interchangeably. However, both these terms are different in the following ways:

Working the Notice Period

The wages in lieu of notice is given to the employees when they are to be terminated immediately, without serving the notice period. On the other hand, in garden leave even if employees are terminated, they must work through their notice period. However, during the garden leave it isn’t necessary for them to come to work.

Looking for Other Jobs

While being on PILON, employees can look for other jobs after being terminated. However, in the garden leave an employee has to work for their organization and cannot look for a new job while being on their notice period. This is done to stop the employees from working for competitors for a period of time.

Termination Process

The purpose of PILON is to terminate an employee’s employment immediately. Therefore, they don’t have to work their notice. On the other hand in garden leave, after being terminated, employees have to work their notice period before cutting ties with the organization completely.

How to Calculate the Payment in Lieu of Notice?

The amount to be paid to the employee is calculated in accordance with the terms mentioned on the employee contract. In case the payment is not mentioned on the employment contract, then pay the amount that the employee would have received if they worked their notice period. This method can however vary depending on if the employee is a non-exempt or exempt employee

Apart from this, they need to be paid for time off accrued and not taken and possibly compensated for lost bonuses. Keeping a track of all this will help you calculate the payment in lieu.

When Should the Payment in Lieu of Notice be Paid to the Employees?

Employers must pay them these wages as soon as they are terminated. If for some reason, the payment in lieu of notice is not mentioned in the employment contract, paying it can likely be a breach of this contract.

Terms of Notice of Employment

When an employee ends a job, they give or are given a certain amount of notice to their employer. This notice consists of details of the payment that an employee gets along with other rights and responsibilities.

The following are some terms of the notice of employment:

For Employees

If an employee has worked for you for over a month, they must give you a notice of a week. If the employment contract mentions a longer notice period, employees should comply with the contract. In the case it is not mentioned, employees should decide their notice period reasonably depending on their work duration or seniority. Failure to give notice will result in a breach of the contract and you can even sue your employee for this violation.

For Employers 

Regardless of the employment contract, you must give your employees a statutory minimum notice period depending on the duration that an employee has worked for you. According to the UK government:

  • You must give your employees notice of one week if they’ve worked a minimum of one month up to 2 years. 
  • Give notice of one week to your employee for each year if they’ve worked for more than 2 years to up to 12 years.
  • In case they have worked for more than 12 years, a notice of 12 weeks is mandatory.

In the US, according to the WARN act, employers with 100 or more employees, must give notice of 60 calendar days in advance to the employees.

Garden Leave

In garden leave, you give your employees a notice to stop them from working for you. In this leave, they have to serve their notice but during this, they can not look for other jobs. During this notice, employees are entitled to other pay, including basic pay and company benefits. If the need arises, employees can be brought back to work from garden leave.

Shorter Notice Period

Employees have the right to agree to a shorter notice period if they wish. In this case, they will only be paid for the agreed period. 

Failure to Give Notice

 If you or your employee fail to give notice, this will be a breach of contract. The contract of employment is breached if:

  • The contract mentions the provision of notice in the written form but was given verbally.
  • If no notice is given at all or is not detailed enough. 

Work at Will

According to the at-will employment, an employer has the right to terminate an employee for any reason, unless they are firing an employee for an illegal reason. This includes firing them either because of their religion, race, or sexuality. Similarly, an employee has all the right to leave a job whenever they want with no adverse legal consequences. 

Although it isn’t a legal requirement for an employee to give you notice, most employers expect at least two weeks’ notice prior to the termination. This gives them time to look for a new hire in the meanwhile. Having a contract with your employees is important in the terms that it states what will be the aftermath of termination.

The Takeaway on Payment In Lieu of Notice

Payment in lieu of notice is something that needs to be decided carefully. Make sure you study employee rights before and include a PILON clause in the employment contract.