What does a ‘payment in lieu of notice’ actually mean?

We thought it would be helpful to explain the concept of payment in lieu of notice as we have recently come across cases where it is evident some people are confused about the different ways in which to treat notice.

Notice can be served at work, can run at home on garden leave, or be paid in lieu – which means paid up (which is a payment in lieu of notice (PILON)), instead of the first two options noted here.

When an employer properly exercises its contractual right to make a payment in lieu of notice, the contract of employment comes to an end when the employee ceases work i.e. the termination date. Then rather than the employee working their notice period, the employer pays the employee’s salary and perhaps also benefits in lieu of the notice period.

A period of garden leave is not defined as a payment in lieu of notice, although at times people get the two confused.

Here is a quick example: if an employee has a one month notice period in their contract and the employer wants to bring the employees employment to an end today, rather than have the employee come into the office and work their notice period, the employer can exercise its right to make a payment in lieu of notice and pay the employee the one months’ salary they would have earned if they had come in to work as a single lump sum instead.