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What is payment in lieu of notice (PILON)?

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Payment in lieu of notice (PILON) is a clause in an employment contract that allows an employer to terminate an employee’s employment immediately by paying the employee for the notice period that they would have been entitled to if they had been given notice of termination under the terms of their contract. This is typically used when an employer needs to let an employee go and wants to avoid any disruptions caused by the employee continuing to work during their notice period.

How does payment in lieu of notice work?

When an employment contract includes a PILON clause, the employer can invoke it and terminate the agreement immediately by paying the employee the equivalent of the wages they would have earned during the notice period.

How is payment in lieu of notice calculated?

PILON is calculated based on the employee’s salary and the notice period outlined in their contract. The notice period is the amount of time an employee is required to work after being given notice of termination by their employer or after they resign. It can range from a few days to several months.

To calculate PILON, the employee’s salary is multiplied by the number of days, weeks, or months in the notice period. For example, if an employee’s salary is $60,000 per year and their notice period is four weeks, the PILON would be calculated as $60,000 / 52 (weeks in a year) x 4 = $11,538.46.

Is tax applicable to PILON?

Yes, PILON is considered taxable income and is subject to income tax and National Insurance contributions (NICs) in the same way as regular salary or wages. The payment is treated as earnings for the tax year in which it is paid and is subject to the same tax rates and deductions as regular income. The employer is also required to deduct and pay the employee’s income tax and NICs on the PILON payment, just as they would with regular payroll payments.

What is the difference between PILON and garden leave?

While PILON and the practice of garden leave are sometimes lumped together, they are two different terms with different meanings and implications. Garden leave is a provision in an employment contract that allows an employer to place an employee on leave, typically with pay, for a specified period of time, after the employee has given their notice or been given notice of termination.

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