PILON In Redundancy: What UK Employers Need To Know

Redundancy is one of those business decisions you never want to rush - but in a small business, you sometimes need to move quickly to protect cashflow, restructure, or keep the business afloat.

That’s where questions about payment in lieu of notice in redundancy often come up. If you’re making redundancies, can you simply pay an employee their notice instead of keeping them working it? If yes, what needs to be in place, what should be paid, and what are the legal risks if you get it wrong?

Below, we break down what Payment in Lieu of Notice (PILON) means in a redundancy situation, when it’s typically used, and how to handle it in a way that’s fair, compliant, and practical for a busy UK employer.

What Is Payment In Lieu Of Notice (PILON) In A Redundancy?

Payment in Lieu of Notice (PILON) is where you end an employee’s employment straight away, and instead of having them work their notice period, you pay them what they would have earned during that notice.

In a redundancy context, PILON often comes up when:

• you need a role to end immediately (for example, because of an urgent restructure);
• there’s no meaningful work to do during the notice period;
• you’re concerned about access to confidential information, client relationships, systems, or stock;
• you want a clean exit date so the business can move forward.

It’s important to note that PILON isn’t “extra money” as a reward for redundancy - it’s a mechanism for dealing with the notice period.

Redundancy pay (statutory or enhanced) and notice pay (worked notice or PILON) are separate entitlements, and you usually need to consider both.

If you’re unsure how PILON should be handled contractually, it’s worth reviewing what your contract says and whether your policies support it. Often, this links back to how your Employment Contract is drafted.

Is PILON Always Allowed In Redundancy?

Not automatically. Whether you can use PILON depends on:

• what the employment contract says (for example, whether there’s a PILON clause);
• how you implement it (including whether you follow a fair redundancy process); and
• what you pay (and whether you include everything that should be included).

In practice, many employers do use PILON during redundancies. Having a clear contractual PILON clause is usually the safest route, but even where a contract is silent, PILON may still be possible if it’s agreed and handled properly - otherwise an immediate termination can create wrongful dismissal/breach of contract risk.

When Should You Use PILON Vs Asking The Employee To Work Notice?

There’s no one-size-fits-all answer here. For small businesses, the right choice is usually the one that balances:

• business continuity;
• cost and cashflow;
• risk (including confidentiality and client relationships);
• fairness and employee relations.

Here are common scenarios where using payment in lieu of notice during redundancy can be a sensible option.

1) There’s No Work (Or It’s Not Useful Work)

If the role is genuinely redundant, you may not have meaningful work to offer during the notice period. Keeping someone “busy” just to run down notice can be inefficient and awkward - for both sides.

2) You Need A Clean Break For Operational Reasons

Sometimes you need a clear cut-off date so you can:

• change systems and processes;
• reallocate duties;
• implement a restructure;
• stop further costs building up.

PILON can help you move to the next phase without having a long notice period hanging over the business.

3) There Are Sensitivities Around Confidentiality Or Client Relationships

If the employee has access to pricing, supplier terms, customer lists, or commercial strategy, you may decide it’s safer for them not to remain in the business during notice.

That’s especially true if redundancies are contentious, or if you suspect the employee is likely to disengage.

(If you’re worried about confidentiality issues generally, it’s also a good time to check your workplace rules and expectations are clear - for example through Workplace Confidentiality Policies.)

4) The Employee Requests An Immediate Exit

In some redundancy situations, the employee may prefer to leave right away - for example, to start a new role. PILON can be a practical solution that avoids prolonged uncertainty.

Just keep in mind: you still need to handle the redundancy fairly, even if the person is open to leaving. A “quick exit” shouldn’t replace consultation or proper decision-making.

How Do You Calculate PILON In Redundancy (And What Should It Include)?

This is where employers can accidentally underpay, or pay the right “headline” figure but miss important components.

In simple terms, PILON is usually based on what the employee would have earned if they had worked their notice period.

That often includes:

• basic salary for the notice period;
• contractual benefits that would have continued through notice (for example, car allowance, private medical, or other fixed allowances);
• holiday accrued but not taken up to termination (this is separate, but often paid at the same time);
• pension contributions if your scheme and contract require contributions to continue during notice.

Whether you need to include things like commission, bonuses, overtime, or tips depends on:

• what the contract says;
• how the payments work in practice (for example, whether they’re guaranteed or genuinely discretionary); and
• whether the employee would realistically have received them during notice.

If you operate variable pay structures, it’s worth being careful - disputes often arise when an employee believes they’ve lost out on commission or bonus payments because their employment ended immediately.

Don’t Confuse PILON With Redundancy Pay

In a redundancy dismissal, you may need to pay multiple amounts at once. Common payments include:

• notice pay (either worked notice or PILON);
• statutory redundancy pay (if eligible);
• enhanced redundancy pay (if you offer it, or if it’s contractual);
• holiday pay for accrued untaken leave;
• any outstanding wages up to the termination date.

From a process standpoint, you’ll also want to ensure your timeline is consistent with redundancy consultation and notice requirements. Many employers find it helpful to align with a clear internal checklist, especially around Redundancy Notice Periods.

What Are The Legal Risks If You Get PILON Wrong?

PILON can be a perfectly lawful and sensible option - but only if you handle it properly.

Common employer risks include:

1) Breach Of Contract / Wrongful Dismissal Risk

If you terminate immediately without a contractual right to pay in lieu (and without the employee agreeing), you may be breaching the employment contract. This can expose you to claims, particularly where the employee says they lost benefits or other rights tied to notice.

Many businesses reduce this risk by ensuring the contract includes a clearly drafted PILON clause from day one. If yours doesn’t, it may be time for a refresh of your Employment Contract template(s) so you’re not trying to solve it mid-redundancy.

2) Unfair Dismissal Risk (If The Redundancy Process Is Unfair)

PILON doesn’t replace the need for a fair redundancy process.

Even if you pay notice, you still need to show that:

• redundancy was the genuine reason for dismissal;
• you consulted appropriately (including considering alternatives);
• you used a fair selection process where relevant; and
• you considered suitable alternative roles (if available).

In other words, paying someone to leave immediately doesn’t “buy out” the process requirements.

3) Underpayment Claims (Wages, Holiday, Benefits)

Disputes often happen because the employer pays “salary only” and forgets:

• allowances;
• contractual benefits;
• holiday accrued but untaken;
• commission structures that are contractually earned.

These issues can become unlawful deduction from wages claims, breach of contract claims, or simply expensive employee relations problems.

4) Tax Treatment Confusion

The tax position can be confusing. Broadly speaking (and without getting too technical):

• PILON is usually treated as earnings and taxed like normal salary (PAYE and National Insurance typically apply).
• some termination payments (in certain circumstances) can have different tax treatment - but that doesn’t automatically apply to PILON.

Tax treatment can depend on how payments are structured and described, so it’s sensible to check the position with your accountant or payroll provider. (Sprintlaw can help with the legal documentation and process, but we don’t provide tax or accounting advice.)

How Should You Document PILON In A Redundancy Process?

When you’re navigating redundancies, clarity and consistency matter. Most small business disputes come from confusion - not bad intentions.

Here are practical ways to document PILON properly.

1) Check The Contract First

Before you propose PILON, check:

• what the notice period is (statutory and contractual);
• whether there is a PILON clause and what it allows you to include/exclude;
• whether there are post-termination restrictions (and whether they rely on a lawful termination).

If the contract is outdated, inconsistent across staff, or silent on key points, you can still proceed - but you’ll want tailored legal advice to reduce risk.

2) Keep Redundancy Consultation And Notice Concepts Separate

It’s easy to merge everything together when you’re busy, but legally they’re not the same thing.

• Consultation is about discussing the redundancy situation, exploring alternatives, and ensuring fair selection.
• Notice is what happens once a dismissal decision is made (and when the employment ends).

If you’re unsure whether you’ve met consultation expectations, it helps to map your process against typical Redundancy Consultation Periods timelines and what should happen in practice.

3) Confirm PILON In Writing

Your dismissal letter (or redundancy outcome letter) should clearly set out:

• the termination date;
• the notice period you’re paying in lieu;
• a breakdown of what will be paid (salary, benefits, holiday, redundancy pay if applicable);
• the payment date (and whether it will be processed through payroll);
• what happens with company property (laptops, phones, keys, uniform, access cards).

If your situation is complex (for example, you’re also agreeing a wider set of exit terms), you may need a settlement-style document - but don’t assume you can “template” this without risk. Exit documentation should be tailored to what you’re actually trying to achieve.

4) Be Consistent Across Employees (Where Possible)

If multiple roles are redundant, inconsistency can create friction quickly. You don’t need every employee to receive identical outcomes, but you should be able to explain differences objectively (for example, different notice periods, different contracts, different benefits).

This is also where having strong internal HR foundations pays off. If your business is growing, consider whether your policies (and contract suite) are protecting you properly from day one.

Key Takeaways

• Payment in lieu of notice in redundancy is where you end employment immediately and pay the employee their notice pay instead of having them work it.
• PILON is separate from redundancy pay - you may need to pay notice (worked or PILON), redundancy pay (if eligible), holiday pay, and outstanding wages.
• A clear contractual PILON clause is usually the safest approach and helps reduce breach of contract risk, but PILON can sometimes be agreed and implemented lawfully even if the contract is silent.
• PILON doesn’t replace the need for a fair redundancy process - you still need genuine redundancy reasons, consultation, and fair selection (where relevant).
• When calculating PILON, check whether you need to include benefits, allowances, pension contributions, and variable pay like commission depending on the contract and how pay works in practice.
• Document the outcome clearly in writing, including termination date, payment breakdown, and practical return-of-property steps, to reduce misunderstandings and disputes.

If you’d like help navigating a redundancy process or getting your contracts and documents right before you make changes, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.