PILON Clause in UK Contracts: What It Means & Example Wording

When to Include a PILON Clause

• In every employment contract to give the employer flexibility to end the employment immediately when needed — for example, when the departing employee is joining a competitor
• In contracts for senior employees where immediate departure may be necessary to protect sensitive information or client relationships
• When the employer wants to avoid the costs and risks associated with having a disengaged employee serving out a long notice period

Example Wording

This example wording is illustrative only. Customise it to your specific circumstances and consider seeking legal advice.

Is a PILON Clause Enforceable in the UK?

PILON clauses are enforceable in the UK. An express PILON clause means the employer can terminate employment immediately without breaching the contract — the payment replaces the notice obligation. Without an express clause, an employer who pays in lieu of notice is technically in breach of contract (albeit a breach that is compensated by the payment), which can have implications for restrictive covenants. The tax treatment was simplified in April 2018 — all PILONs are now subject to income tax and NICs on the 'post-employment notice pay' element, regardless of whether the PILON is contractual or not.

Common Mistakes

• Assuming that a PILON payment is tax-free — since April 2018, all PILONs are taxable and subject to NICs on the basic pay element
• Not specifying what the PILON includes — does it cover basic salary only, or also benefits, bonus, pension contributions, and commission? Without clarity, disputes arise
• Failing to link the PILON clause to restrictive covenants — it should be clear that restrictive covenants run from the termination date, not from the end of the theoretical notice period