Payment in Lieu of Notice & Redundancy

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Opeyemi Ogundeji

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20 May 2021

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The redundancy process is one of the most important HR procedures to get right. Failure to do so may mean facing unfair dismissal claims and costly payouts.

In this article we’ll take a look at two key aspects of the redundancy process—pay and notice. More specifically, pay in lieu of notice (PILON) in redundancy.

You can still offer PILON to employees being made redundant, but you need to ensure it is compliant. If not, you can face constructive dismissal claims in an employment tribunal.

In this article, we’ll be answering the question of what does PILON mean in redundancy, and how you can stay compliant when going through the process.

What is PILON in redundancy?

Redundancy is when a role is no longer viable within your company and you need to cut back on staff.  There are multiple stages to the redundancy process, but the last thing to ensure you get right is the amount of notice provided to employees before they’re made redundant.

Once you have selected individuals for redundancy have held your consultation, finalised your choices and notified them, they’ll have a notice period to serve.

You may decide that instead of working that time, you may pay the employee what they would receive over that period immediately for them to stop working straight away.

This is what is known as PILON. In simple terms, this means you pay an employee’s salary for their notice period instead of them working that time.

What you need to know

Before you make this decision, there are a few things to consider.

First, you need to make sure what you are doing is legal. You cannot force an employee to accept PILON during redundancy. This means you should check your staff contracts, as you may have a clause where employees accept payment in lieu during redundancy.

If you do have this clause, you should still seek the employee’s agreement as good practice. If you don’t have this clause, it’s absolutely vital you get their agreement.

The next thing to consider is how long their notice period would be before pursuing PILON. This will have an impact on the payment you need to make (more on that later).

The way to figure out how long the notice period will be is to look at the length of employment. Here’s how it works:

  • Less than 1 month – no statutory notice
  • 1 month to 2 years – 1-week statutory notice
  • 2 to 12 years – statutory notice is 1 week for each complete year the employee has worked
  • 12 years or more – 12 weeks statutory notice

Bear in mind that this is the minimum legal requirement. You can provide more if you wish to do so.

PILON clause and redundancy

Having this type of clause in your employment contracts is another safeguard against unfair dismissal claims. It means that you have a contractual right to ask employees to accept pay in lieu of notice.

The clause should state when the final payment will be made and how. You should also make sure you don’t rely on it entirely. This means confirming how the process will work and how much the employee is entitled to in communications during the redundancy process.

One of the other major advantages of including a clause on PILON in your contracts is that it allows you to define how the payment will be calculated…

PILON payment and redundancy

Whenever you offer a redundancy payment in lieu of a notice period, you should have an idea of how this will work for your business.

For example, you may decide that it is best to provide a one-time payment that will cover the entire notice period. Or, you might settle on a staggered approach. You might want your PILON redundancy payments to include contractual benefits or exclude them.

All of the above is valid, so long as it is done correctly.

The other thing to consider is redundancy pay itself. You can find out more about how to calculate redundancy pay properly here.

Finally, you must factor tax into PILON payments and redundancy. You must consider the basic pay that an employee would have received if they had worked their notice in full.

This is regarded as normal earnings, which is why it’s liable to income tax and NI contributions.

Expert support on redundancy with Croner

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About the Author

Ope Ogundeji is a content coordinator and writer at Croner who specialises in employment law and HR matters. With a degree in law and growing commercial knowledge of the field, Ope regularly produces commentary and guidance for clients and advisers, as well as contributing to national publications on a weekly basis.

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