Why PILON Matters in Recruitment

A candidate who resigns expecting three months' garden leave and receives payment in lieu of notice instead has just had their employment terminated immediately, their income accelerated, and their ability to start a new role moved forward by twelve weeks. That is often a significant advantage for all parties, but only if the recruiter understood PILON was a realistic outcome and briefed both sides accordingly. Candidates who are caught off guard by a PILON feel managed poorly. Clients who wanted to use the notice period for handover are left scrambling. Mishandling the expectation on either side is entirely avoidable.

For staffing agencies placing permanent candidates at senior or commercially sensitive levels, the interaction between PILON clauses, garden leave provisions, and post-termination restrictions is a regular feature of the offer and acceptance phase. Understanding when PILON is likely to be triggered, what it means financially for the candidate, and how it interacts with any restrictive covenants in the departing employment contract is applied knowledge that separates experienced senior recruiters from those working purely on instinct.

Payroll teams at agencies handling direct employment also encounter PILON when terminating their own employees or ending contractor assignments early. The tax treatment of PILON payments changed materially with the Finance Act 2018, and errors in applying the post-employment notice pay rules create HMRC exposure.

How PILON Works

Pay in lieu of notice is a payment made by an employer to an employee to end the employment immediately rather than requiring the employee to work through their notice period. Instead of working four weeks, eight weeks, or six months notice, the employee receives a sum equivalent to the gross pay they would have earned during that period, and the employment ends on the day the payment is made or shortly afterward.

Historically, PILON payments were sometimes treated as non-taxable termination payments if the right to make a PILON payment wasn't specifically written into the employment contract. The Finance Act 2018 closed this distinction. Under the post-employment notice pay rules, a defined sum representing the basic pay the employee would have received during the notice period is now always subject to income tax and National Insurance, regardless of whether a contractual PILON clause exists. Any amount paid above this calculation for other termination reasons may still attract the £30,000 tax-free exemption, but the PILON element itself does not.

For candidates, the practical effect of receiving PILON depends on their specific contract. If the contract contains a PILON clause, the employer can invoke it as a matter of right. Without a clause, triggering PILON technically puts the employer in breach of contract (since they're not providing the notice they're contractually required to work), though in practice most employees accept the payment rather than litigate.

The interaction with post-termination restrictions is a specific area of complexity. Restrictive covenants, such as non-solicitation or non-compete clauses, generally begin running from the last day of employment. If an employer makes a PILON and terminates employment immediately, the restriction clock starts that day. If the employer had instead put the employee on garden leave for the notice period, employment would continue through the leave, and the restrictions would not begin until the end of that period. A long-term non-compete is therefore more commercially protective in a garden leave scenario than a PILON scenario, which clients competing for senior hires should factor into their offer design.

Consider a commercial director at an energy firm with a six-month notice period and a twelve-month non-solicitation clause. Her current employer invokes the contractual PILON clause, paying six months' salary in one lump sum and terminating her employment that day. Her new employer benefits because she can start in two weeks rather than six months. Her current employer accepts losing the handover period in exchange for immediate disengagement from clients. The non-solicitation clock, however, starts the day she leaves, not six months from now as it would have under garden leave.

PILON vs Garden Leave

Garden leave keeps the employment relationship active for the duration of the notice period. The employee stays employed, often with continued access to benefits and accruing pension contributions, but is not required to attend work or perform duties. PILON ends employment immediately in exchange for a cash payment. From the employer's perspective, garden leave provides better protection of IP, client relationships, and the running of restrictive covenant clocks. PILON provides a cleaner, faster severance at the cost of those protections.

PILON in Practice

A senior consultant at an executive search firm places a CFO candidate with a professional services firm. The candidate's current contract contains a six-month notice period with a contractual PILON clause. During the resignation preparation conversation, the recruiter briefs the candidate that a PILON is likely given the employer's typical practice, confirms that the PILON payment will be fully taxed, and advises the candidate to prepare for an immediate exit rather than a gradual handover. When the PILON is invoked, the candidate has already secured access to their personal files, agreed a reference text with their line manager, and negotiated a start date with the new employer. The placement completes three weeks after the offer acceptance.