Why have a Pay in Lieu of Notice (PILON) clause in your contracts?

A payment in lieu of notice clause (often referred to as a PILON clause) allows you to make a payment to an employee rather than requiring them to work their notice period. This can be useful if you do not want an employee to work their notice period for any reason. This could be because you think they may be disruptive, a risk or you don’t have any work for them.

But how do PILON clauses operate and what are the benefits of having such a clause?

If you make a pay in lieu of notice (PILON) it means that you can ask an employee to leave immediately and not work their notice. You will simply pay them for the notice period they would have worked.

Importantly, their date of termination will be their last working day, not the end of the ‘notice period’ they would have worked.

You can make clear in any PILON clause that any property must be returned immediately (again not at the end of the notice period they would have worked), when any benefits will stop and what payments will be made.

Example / Case Study

Example 1: a client had a manager who was not performing, and the company had to give notice. They did not want him to work his notice so confirmed he would be made a payment in lieu of notice. He argued that he wanted to keep his car for the period that would have been his notice. His contract had a clear clause that said that they could make a payment in lieu of notice and that in this event any company property (including company cars) must be returned on the last day of work (the termination date).  He was therefore required to return the car immediately. The clause stopped any arguments about this situation escalating.

 Example 2: a client had an employee who handed in their notice and then became disruptive in the office. They started to argue and undermine management and they were heard talking about the company in a derogatory way to other employees. This caused a ‘atmosphere’ that impacted the whole office. The company therefore asked the employee to leave with immediate effect and paid them in lieu of the rest of their notice. Note: the company could have taken formal action against the employee, but as they had already resigned, it was less time-consuming and better overall for the office that the employee was simply asked to leave and paid the remainder of their notice period.


It’s worth looking at your contracts and making sure you have pay in lieu of notice clause and that it specifies what happens regarding property, benefits and payments if a PILON is made.

More information

For further information on contracts of employment and templates contracts and clauses, please visit www.yourhr.guide.

Natalie Rodda

If you feel that you need guidance or advice on this matter, please call Practical HR on 01702 216573



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