· ShiftFlow Editorial Team · Glossary · 9 min read
What Is Payment in Lieu of Notice? Definition, Examples & Guide
Learn what payment in lieu of notice means, when employers pay workers instead of requiring notice periods, how PILON is calculated, legal requirements, tax implications, and whether employees can refuse payment in lieu of notice.
What Is Payment in Lieu of Notice?
Payment in lieu of notice (PILON) is compensation paid to an employee when an employer terminates employment immediately instead of requiring the employee to work through a contractual or statutory notice period. If you’re facing a termination or wondering about your rights, PILON means the employer pays you for your notice period instead of having you work it—if your contract requires 2 weeks’ notice, PILON would be 2 weeks’ pay, allowing you to leave immediately.
According to the U.S. Department of Labor, while most U.S. employment is at-will with no statutory notice periods, PILON applies when employment contracts, union agreements, or company policy establish notice expectations. The payment equals the wages and benefits the employee would have earned during the notice period, allowing immediate separation while compensating for lost income.
PILON is distinct from severance pay, which is additional compensation beyond the notice period offered based on tenure, circumstances, or company policy. An employee may receive both PILON and severance.
When Is Payment in Lieu of Notice Used?
Employer-Initiated Termination
Immediate separation is needed when continued employment during a notice period would be disruptive or unproductive. Employers use PILON to prevent access to sensitive business information, client lists, or proprietary data after termination notification.
PILON is common during redundancy or layoffs where having the employee continue working serves no business purpose. It’s also used to end employment immediately after disciplinary situations where continued presence is inappropriate, or to remove employees who may join competitors, preventing knowledge transfer or client poaching during notice periods.
Contractual Provisions
PILON Clauses: Employment contracts that explicitly give employers the right to pay in lieu of notice instead of requiring work.
Notice Period Terms: Contracts specifying notice periods (1 week to 6 months depending on seniority) that can be replaced with payment.
Statutory Requirements: In some jurisdictions outside the U.S., minimum statutory notice periods exist that can be satisfied through PILON.
Business Circumstances
Restructuring or Reorganization: Rapid organizational changes where maintaining departing employees complicates transitions.
Project Completion: When projects end and continuing employment serves no purpose.
Office Closures: Shutting down locations where employees cannot productively work through notice periods.
How Is PILON Calculated?
PILON = (Regular Wages ÷ Pay Periods) × Notice Period
Example: Employee earns $52,000 annually with 2-week notice → Weekly wage = $52,000 ÷ 52 = $1,000 → PILON = $1,000 × 2 weeks = $2,000
Components Included
Base salary or wages, shift differentials (2nd shift, 3rd shift), regular overtime, commissions, regular bonuses, and allowances (car, tool).
Components Typically Excluded
Discretionary bonuses, unvested stock options or equity, expense reimbursements, and benefits premiums (handled separately via COBRA).
Calculation Examples
Salaried: $60,000 annual salary, 4-week notice → PILON = ($60,000 ÷ 52) × 4 = $4,615.38
Hourly: $22/hour, 40 hours/week, 2-week notice → PILON = ($22 × 40) × 2 = $1,760
Shift Worker: $18 base + $2 night shift differential, 40 hours/week, 1-week notice → PILON = ($20 × 40) × 1 = $800
Legal Requirements for PILON
United States
At-Will Employment: Most U.S. employment is at-will with no statutory notice periods. PILON applies when employment contracts, union agreements, or company policy establish notice expectations.
WARN Act: The Worker Adjustment and Retraining Notification Act requires 60 days’ notice for mass layoffs or plant closures (100+ employees). Employers can satisfy this through WARN pay.
Contractual Obligation: If contracts require notice periods, employers who terminate immediately without PILON may breach contract, creating liability for lost wages.
International Contexts
UK: Statutory notice periods (1–12 weeks based on tenure). PILON common with specific tax rules.
EU: Many countries mandate notice periods (2 weeks to 6 months). PILON can satisfy these if contractually permitted.
Canada: Notice periods vary by province (1–8 weeks). PILON widely used.
Australia: Fair Work Act establishes minimum notice. PILON permitted when contractually provided.
PILON vs Other Termination Payments
| Payment Type | Purpose | When Provided | Typical Amount |
|---|---|---|---|
| PILON | Replace notice period wages | Immediate termination with notice | Wages for notice period |
| Severance Pay | Additional compensation beyond notice | Layoffs, agreements, goodwill | Weeks to months of pay |
| Accrued PTO | Payment for earned unused time off | All terminations (required in many states) | Hours accrued × wage rate |
| WARN Pay | Compensation for inadequate notice | Mass layoffs without 60 days’ notice | Up to 60 days wages |
PILON specifically replaces the contractual or statutory notice period. Severance pay is additional compensation offered beyond PILON based on tenure, circumstances, or company generosity. An employee may receive both. Accrued PTO is earned compensation owed regardless of notice or PILON.
Tax Treatment of PILON
Taxable Wages: PILON is taxable income subject to federal income tax, Social Security (6.2%), Medicare (1.45%), and state/local taxes. Employers must withhold taxes as regular wages.
W-2 Reporting: PILON appears on W-2 as regular wages in the year paid.
Unemployment Impact: PILON may affect unemployment benefit eligibility and timing in some states.
Severance vs PILON: Severance is also taxable but may use supplemental wage rates (22% federal). PILON uses standard withholding tables. Both are subject to FICA taxes and reported on W-2.
Employee Rights and PILON
Can Employees Refuse PILON?
Generally no. If contracts or employer policy allow PILON, the employer can choose to pay instead of requiring work. Employees cannot typically force employers to let them work the notice period if the contract permits PILON. Employees can immediately seek new employment when receiving PILON.
When PILON May Be Required
If contracts require notice but the employer terminates immediately without offering PILON, this may constitute breach of contract. In jurisdictions with statutory notice periods, PILON or working notice must be provided unless termination is for serious misconduct.
Challenging PILON Calculations
Employees can challenge incorrect calculation, insufficient notice period, or missing benefits. Verify all regular compensation components are included and the correct notice period is used.
Best Practices for Employers
Include PILON Clauses in Contracts
Clearly state the employer’s right to pay in lieu of notice, specify calculation methods and components, and indicate payment timing (immediately, with final paycheck, within 30 days).
Document Decisions
Create termination letters specifying immediate separation with PILON and the notice period being replaced. Document calculation methods for transparency. Comply with state final paycheck timing laws.
Consider Business Needs
PILON is appropriate when protecting sensitive information outweighs continued employment value. Immediate separation may be preferable to having disengaged employees during notice periods. Balance separation with knowledge transfer needs using workforce management tools.
Best Practices for Employees
Review Employment Contracts
Know what notice period applies and whether PILON is permitted. Verify what components (base pay, bonuses, benefits) should be included. Note reciprocal terms—some contracts require employee notice but allow employer PILON.
Verify PILON Calculations
Request detailed breakdown of how PILON was calculated. Ensure shift differentials, regular overtime, commissions, or allowances are included. Confirm the correct notice period based on tenure and contract terms.
Understand Implications
Recognize that taxes will be withheld from PILON. Check whether PILON affects unemployment insurance eligibility or benefit timing. Unlike garden leave, PILON means you can immediately start new work (subject to non-compete agreements).
PILON in Different Industries
Corporate and Professional: Notice periods typically 2 weeks to 3 months based on seniority. PILON common when employees join competitors or have access to sensitive information. May include bonuses, stock vesting, or other complex compensation.
Healthcare: Notice periods often 4 weeks for clinical roles. PILON used when immediate separation needed for patient safety or facility reorganization. May include PRN or per diem shift differentials in calculation.
Manufacturing and Warehousing: Notice periods typically 1–2 weeks for hourly workers. PILON during facility closures, layoffs, or immediate terminations. Must include shift differentials and regular overtime in calculations.
Hospitality and Retail: Notice periods often 1–2 weeks. PILON during seasonal closures or position eliminations. May include tips, service charges, or variable compensation.
When Does PILON Make Sense?
✅ Great if:
- Employment contracts explicitly include PILON clauses
- You need to protect confidential information immediately
- Continued employment during notice would be disruptive
- Mass layoffs require coordinated, immediate separations
⚠️ Risky if:
- Contracts don’t permit PILON, creating potential breach liability
- Calculations exclude shift differentials or regular overtime
- State final paycheck laws aren’t followed for timing
- You confuse PILON with severance pay (they’re different)
The Bottom Line
Payment in lieu of notice (PILON) is compensation paid when employers terminate employment immediately instead of requiring employees to work through contractual or statutory notice periods. PILON equals the wages and regular compensation the employee would have earned during the notice period.
PILON is common in the U.S. when employment contracts specify notice periods, particularly for protecting confidential information, managing workplace morale during layoffs, or facilitating immediate separations. It is distinct from severance pay, which is additional compensation beyond the notice period.
PILON is taxable as regular wages, must include all regular compensation components (shift differentials, regular overtime, allowances), and should be clearly addressed in employment contracts with explicit calculation methods and employer rights. Proper documentation and compliance with state final paycheck laws are essential.
Try ShiftFlow’s workforce management platform featuring integrated time tracking and payroll tools to manage terminations, notice periods, and final pay calculations more easily.
Sources
- U.S. Department of Labor, Fair Labor Standards Act (FLSA) wage and hour guidance
- Worker Adjustment and Retraining Notification (WARN) Act regulations
- Society for Human Resource Management (SHRM), termination and notice period best practices
- State labor departments, final paycheck timing requirements
Further Reading
- Voluntary Time Off Policies – Flexible leave alternatives
- PRN Employee Guide – As-needed healthcare staffing
- 2nd Shift Guide – Evening shift operations
Frequently Asked Questions
What does payment in lieu of notice mean?
Payment in lieu of notice (PILON) is compensation paid to an employee when an employer terminates employment immediately instead of requiring the employee to work through a contractual or statutory notice period. The payment equals the wages and regular compensation the employee would have earned during the notice period, including shift differentials and regular overtime.
When is payment in lieu of notice required?
PILON is required when employment contracts or local laws mandate notice periods but the employer wants immediate termination. According to SHRM research, it is common when protecting confidential information, managing workplace disruption during layoffs, facilitating immediate separations after disciplinary issues, or removing employees joining competitors.
How is payment in lieu of notice calculated?
PILON equals the employee’s regular wages for the notice period. For salaried employees: (annual salary ÷ 52 weeks) × notice weeks. For hourly: (average weekly hours × hourly rate) × notice weeks. Include shift differentials, regular overtime, commissions, and guaranteed compensation.
Is payment in lieu of notice the same as severance pay?
No. PILON replaces the notice period the employee would have worked. Severance pay is additional compensation beyond PILON offered based on tenure, circumstances, or company policy. Employees may receive both PILON for the notice period and severance pay as additional compensation.
