Payment in lieu of notice, or PILON, means ending employment immediately and paying out what the person would have earned during their notice period. Whether you can do it usually depends on one thing: a PILON clause in the contract.
Without that clause, terminating immediately and paying out is technically a breach of contract, even though the employee receives the same money. That distinction matters more than it sounds. Last updated September 2026.
| Question | Short answer |
|---|---|
| Can we pay in lieu? | Usually only if the contract allows it |
| What does it cover? | Salary, and often benefits, for the notice period |
| Is it taxable? | Generally yes, though treatment varies by country |
| Does it replace severance? | No. Statutory severance is usually separate |
| Can we use it for gross misconduct? | Not normally, since no notice is owed |
What is payment in lieu of notice?
Instead of the employee working their notice, employment ends immediately and you pay them what they would have earned during that period.
The employee leaves on the day. The money follows.
When is it used?
Redundancy. Where there is no work to hand over and keeping someone on serves no purpose.
Sensitive roles. Where someone joining a competitor or holding confidential information makes a working notice period undesirable.
Broken-down relationships. Where the working relationship has deteriorated and a clean break serves both sides better than a difficult month.
Speed. Where the employee has another role waiting and both parties would rather move on.
It is generally not used for gross misconduct, because summary dismissal means no notice is owed and therefore nothing to pay in lieu of.
Do you need a PILON clause?
In most cases, yes, and this is the part employers most often miss.
Without a contractual right to pay in lieu, ending employment immediately breaches the contract, even where you pay the full amount. In practice most employees accept the money and move on. The exposure arises when they do not.
A breach can release the employee from post-termination obligations, including restrictive covenants. If you rely on non-compete or non-solicitation clauses, paying in lieu without the contractual right can quietly destroy them at exactly the moment they matter most.
Include a PILON clause in contracts where you might want the option. It costs nothing to have and a great deal not to.
What does the payment cover?
At minimum, basic salary for the notice period.
Whether it also covers benefits, bonuses, pension contributions and accrued holiday depends on the contract and on local law. Some jurisdictions require the full value of the package rather than salary alone.
Get this right in the calculation. Underpaying converts a clean exit into a dispute.
How is it taxed?
Generally as employment income, though treatment varies by country and has changed in several.
The UK, for example, removed the previous distinction between contractual and non-contractual PILON, so payments in lieu are now taxed as earnings rather than falling within a termination payment exemption.
Do not assume a treatment that applied a few years ago still applies, and do not assume one country's rules transfer to another. Confirm with local advice before agreeing a figure, since the employee will be comparing net amounts.
Does it replace severance?
No, and conflating the two is an expensive mistake.
In many countries statutory severance is a separate entitlement triggered by dismissal, calculated on length of service, and payable regardless of whether notice was worked or paid out. Notice pay does not discharge it.
When modelling the cost of ending an employment relationship abroad, count both.
What are the trade-offs?
For the employer. A clean break, immediate removal of access, no wind-down period with a disengaged employee. Against that, you pay for time not worked, lose any handover, and the knowledge in that person's head leaves with them on the day.
For the employee. A lump sum and freedom to start elsewhere immediately. Against that, benefits usually stop at the termination date rather than the end of the notional notice period, and any outplacement support tied to employment may not apply.
How does this work across several countries?
Differently in each, which is the recurring theme of international employment.
Whether payment in lieu is permitted, what it must cover, how it is taxed and whether severance sits alongside it all vary. A termination process designed for one jurisdiction will not transfer cleanly.
An Employer of Record handles the mechanics as the legal employer: contracts include the right clauses, payments are calculated to local requirements, and tax is applied correctly. The decision to end employment stays with you.
Country-level requirements are in CountryPedia. See also what is a notice period.
Work with Global Expansion
We employ people on your behalf across 214 countries and territories, from onboarding through to exit, with payroll and compliance handled in each jurisdiction.
Talk to our team about the countries you employ in.
Frequently asked questions
What does PILON stand for?
Payment in lieu of notice. It means ending employment immediately and paying the employee what they would have earned during their notice period.
Can an employer always pay in lieu of notice?
Usually only where the contract provides for it. Without a PILON clause, terminating immediately is a breach of contract even if you pay the full amount, and that breach can release the employee from post-termination restrictions.
Is payment in lieu of notice taxable?
Generally yes, as employment income, though the treatment varies by country and has changed in several jurisdictions in recent years. Confirm the current position locally rather than relying on older guidance.
Does PILON include benefits?
It depends on the contract and local law. Some jurisdictions require the full value of the package, including benefits and pension contributions, rather than basic salary alone.
Can you pay in lieu of notice for gross misconduct?
Normally not, because summary dismissal for gross misconduct means no notice is owed and therefore there is nothing to pay in lieu of. The threshold for gross misconduct is high and worth confirming before relying on it.
Is PILON the same as severance?
No. Notice pay compensates for the notice period. Statutory severance is a separate entitlement in many countries, based on length of service and payable in addition. Budget for both.
