Payment in lieu of notice clause (PILON): UK sample and effects

Sample clause

Written for an employment contract between Castlegate Studios, a fictional York design agency, and a senior designer on three months' notice.

Payment in Lieu of Notice. (a) The Company may, at its sole discretion, terminate the Employee's employment with immediate effect at any time by giving written notice and paying the Employee a sum equal to the basic salary the Employee would have received during the notice period required by clause 18, or any part of that period that remains (the PILON). (b) The PILON will not include any bonus, commission, holiday that would have accrued, or benefits, except as required by law. (c) The Company may pay the PILON in one sum within 28 days of termination, or in equal monthly instalments over the unexpired notice period, in which case each instalment is reduced by any earnings the Employee receives from new work during that month, and the Employee must report such earnings promptly. (d) The PILON is subject to deductions for tax and National Insurance.

Sample wording, not legal advice.

Variants

What to negotiate

• Tax since April 2018

  From 6 April 2018, all post employment notice pay has been taxable as earnings, whether or not the contract has a PILON clause. Before then, a payment made where there was no PILON clause could sometimes be paid free of tax as damages up to £30,000. The tax advantage of leaving PILON out has largely gone, which removes one of the main reasons employees used to resist the clause.

• Whether restrictive covenants survive

  If an employer ends employment without notice and without a contractual right to pay in lieu, it is in repudiatory breach, and an employee who accepts that breach may be released from post termination restrictions such as non solicitation covenants. Exercising a PILON clause is not a breach, so the covenants stay in force. For employers who rely on covenants, that is often the most valuable part of the clause.

• Bonus and holiday during notice

  Employees often want the PILON to cover bonus or commission they would have earned over the notice period, and holiday that would have accrued. Employers usually limit it to basic salary. The contract should say clearly, because if it is silent, arguments follow about whether a bonus was earned. Accrued but untaken holiday up to termination must be paid anyway.

The risk of leaving it out

Without a PILON clause, an employer that wants someone out immediately either keeps paying them to stay home on garden leave, or dismisses them without notice and pays a sum as damages. The second route is a breach of contract, which can release the employee from restrictive covenants and invite a claim if the payment falls short of what they would have earned.

PILON against no PILON

With a PILON clause, the employer ends employment lawfully, the payment is a contractual debt, it is taxed as earnings, and restrictive covenants remain enforceable. Without one, paying in lieu is a breach, the payment is damages for that breach, the tax treatment is the same since 2018 under the post employment notice pay rules, but the employee may argue that the breach freed them from their covenants, and can claim the shortfall if the payment does not match what the notice period was worth. The clause therefore matters most where covenants matter. Law checked on 21 October 2026. This page explains how the clause works and is not legal advice.

Statutory notice and contractual notice

Section 86 of the Employment Rights Act 1996 sets minimum notice: one week after a month's service, then one week for each complete year up to twelve weeks. A contract can give more, and senior roles often carry three or six months. The PILON should refer to the notice in the contract, which can never be less than the statutory minimum. ACAS guidance explains that an employee can agree to take pay instead of working notice even without a clause, but agreement is not guaranteed.

Garden leave as the alternative

Garden leave keeps the person employed but at home for the notice period, so they cannot start with a competitor during it and remain bound by the duties of an employee. PILON ends the employment immediately. Employers wanting to keep someone off the market often prefer garden leave; those wanting a clean break prefer PILON. A contract can contain both and let the employer choose when notice is given.

Using the clause in practice

When exercising a PILON clause, the termination letter should say the employer is using its right under the clause, give the termination date and set out the payment and how it will be made. In a contract drafted with the AI document generator, ask for the clause next to the notice clause so the two refer to each other, and include whether the payment is basic salary only.

Documents that carry this clause

Employment contractA full time ongoing contract for an operations coordinator on $86,000 plus $10,320 of superannuation. Eleven numbered clauses, a leave table drawn from the National Employment Standards, and a notice table that scales with service.Termination letter template that shows the final payA termination letter is read twice, once by the employee in the meeting and once by a lawyer or a tribunal months later, and both need the same facts. This one states the reason and the process in dates, shows the final pay as a table with each component, and says what happens next, so there is nothing to ask afterwards.Redundancy letter template with the pay calculated line by lineA redundancy letter has to prove three things at once: that the job has gone, that the employee was consulted before the decision, and that the money is right. This one names the volume fall, dates the consultation, sets four weeks notice, and shows the $24,168.75 worked out line by line.

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