Payment in lieu of notice (PILON) is compensation paid to an employee upon termination, which allows the terminated employee to receive pay in place of working through their notice period.
Imagine that you need to let someone go, but the last thing you want is them hanging around the office for two weeks while everyone knows they’re leaving. Maybe it’s a sensitive situation, or maybe you’re concerned about them having access to confidential information during a transition period.
That’s where PILON comes in. Instead of requiring the employee to work through their notice period, you pay them what they would have earned during that time, and they leave immediately. It’s a clean break that protects both parties.
Most countries require employers to give employees advance notice before termination—anywhere from a few days to several months, depending on local laws and the employee’s length of service. But working through a notice period isn’t always practical or advisable, especially in situations involving departing executives, access to sensitive data, or team dynamics.
PILON gives you the flexibility to handle terminations professionally while meeting your legal obligations. The employee gets the compensation they’re entitled to, and you get to manage the transition on your terms.
If you’re managing international employees, understanding how PILON works in different countries becomes crucial for handling terminations properly and avoiding compliance issues.
When do employers use PILON?
Employers typically choose payment in lieu of notice when having the employee stick around would create more problems than solutions. Sometimes it’s better for everyone if the departure happens quickly and cleanly.
Here are the most common situations where PILON makes sense:
- You don’t want them accessing sensitive company information, client data, or business systems during their final weeks.
- The employee has asked to leave immediately rather than work through their notice period.
- You’re concerned their presence might hurt team morale or create workplace drama.
- You suspect they won’t be productive or might even sabotage projects during their remaining time.
How does payment in lieu of notice work?
Where applicable, domestic or international employment contracts must include a clause for payment in lieu of notice. With a payment in lieu provision in place that states the terms of the payment in lieu of notice, an employer is not in violation of breaching the employment contract.
Upon an employee’s dismissal or departure, the employer can terminate the agreement immediately by paying the exiting employee the equivalent wages they would have earned during their notice period. The employee does not complete or work their notice period.
How is pay in lieu of notice calculated?
Payment in lieu of notice is calculated based on the employee’s salary and the notice period outlined in their contract. Notice periods range from several days to several months, depending on the country and local employment regulations.
To calculate the pay in lieu amount, multiply the employee’s salary by the number of days, weeks, or months of the notice period.
For example, if the employee’s annual salary is $70,000 and their notice period is two weeks, the payment in lieu of notice is calculated as:
($70,000 / 52 weeks in a year) x 2 weeks = $2,692
This calculation is the baseline payment in lieu based on the employee’s wages; employers must also consider all forms of compensation, including employee benefits, when calculating pay in lieu of notice payments.
Is pay in lieu the same thing as severance?
Pay in lieu and severance aren’t the same thing, though they’re often confused. PILON covers exactly what the employee would have earned during their notice period—their regular wages and benefits, nothing more. Severance pay is extra compensation on top of that, usually based on how long they worked for you.
For example, if your marketing manager had a two-week notice period, PILON would cover those two weeks of salary. But if your local laws require one week of severance pay for every year of employment, and they worked for you for three years, that’s an additional three weeks of pay beyond the PILON.
Severance requirements vary dramatically by country. Some places mandate generous severance packages based on tenure, while others don’t require any severance at all. Even where it’s not legally required, many employers offer severance to maintain their reputation and show departing employees they’re valued.
The key is understanding what’s legally required versus what you choose to provide in each country where you have employees.
Is PILON subject to income tax?
Payment in lieu of notice is considered taxable and subject to the same income tax rates and deductions as regular income. Payment in lieu is treated as earnings for the tax year in which it is paid, and the employer must deduct and pay the employee’s income tax on the pay-in-lieu payment— the same as with regular payroll payments to ensure payroll compliance.
How does pay in lieu of notice compare to garden leave?
With PILON, it’s over immediately. The employment relationship ends, they get paid for what they would have earned during their notice period, and they’re free to start a new job right away. Clean break, done deal.
Garden leave is different. The employee technically stays employed during their notice period—they just can’t come to work. They might work from home, or they might not work at all, but either way, they’re still getting their regular pay and benefits. More importantly, they’re still bound by their employment contract, which usually means they can’t start a new job until the notice period officially ends.
Think of garden leave as paid time off while you’re still technically employed. PILON is more like getting a severance check and walking away. The choice between them often comes down to how much control you want to maintain over the departing employee and whether you’re concerned about them joining a competitor immediately.
Both approaches let you remove someone from the workplace immediately, but the legal implications and restrictions are quite different.
Navigate international employment changes with confidence
Understanding PILON for your domestic employees is one thing. But when you’re managing a global team, termination requirements become significantly more complex. Notice periods in Germany work differently from how they do in Australia. What constitutes a proper pay-in-lieu notice in the U.K. might not meet requirements in Brazil.
Get these details wrong, and you could face legal challenges, compliance violations, or unexpected costs that turn a routine employment change into a major headache. Each country has its own rules about notice periods, severance requirements, and how terminations must be handled.
That’s exactly why employers like you partner with Pebl. When you need to make employment changes across your international team, our Employer of Record (EOR) service handles the local requirements so you can focus on managing your business transitions professionally. Whether it’s calculating proper PILON amounts, understanding notice period requirements, or ensuring compliance with local termination laws, our in-country expertise keeps you on the right side of employment regulations.
No more guessing about foreign employment laws. No more wondering if you’ve calculated termination payments correctly. Just clear, compliant international employment management.
Ready to simplify how you handle employment changes globally? Let’s talk about how Pebl makes international workforce management straightforward.
This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.
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