Guide to Drafting a PILON Clause

Your standard employment contract should include a PILON (a power to Pay in Lieu of Notice) clause. If you do not have one (in the absence of gross misconduct) you will not be able to terminate before the end of the notice period without breaching the employment contract. Breaching an employee’s contract of employment could render any restrictive covenants, contained within the contract unenforceable.

The PILON clause should specify exactly what the employee will receive in the event that you exercise your PILON power, i.e. whether salary, salary and benefits or salary, benefits and bonus.

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In the case of Locke v Candy and Candy Ltd, the employer was successfully sued for bonus payments in the sum of £160,000, which would not otherwise have been due had the PILON been worded to exclude them.

This case highlights your potential exposure to claims if your employment contract fails to define what will be due when a PILON payment is to be made. Bonus schemes and PILON clauses should be considered together when drafting, never in isolation.

Your employment contract should also make it clear that you can pay in lieu of notice within 7 days of you exercising that power or alternatively allow you to make the first installment payment of the same within 7 days of termination.  If you do not have this wording you must pay in lieu on the day that you exercise that power.

A well drafted PILON clause will also allow you to make the PILON payment by installments and can also include a duty on the employee to mitigate her/his loss.  Hence in the event the former employee obtains a new income stream elsewhere you may not be obliged to make any further installment payments.

Make sure that when you exercise a PILON clause you expressly state in the dismissal letter that you are doing so, referring to the specific PILON clause in the contract.

If you need help or advice or have any questions in relation to drafting a PILON clause or in relation to dismissing an employee where you have no such power, please call David Greenhalgh 0203 603 2177 or Click To Make A Free Online Enquiry.