What is a payment in lieu of notice clause?

A payment in lieu of notice clause (sometimes referred to as a pay in lieu of notice clause or PILON clause) is a contractual provision that allows an employer to pay a specified amount instead of providing whatever notice of termination may be required by the contract or by law. Although the clause can apply regardless of whether the employer or employee intends to end the employment relationship, it often focuses on the employer’s right to terminate.

In some jurisdictions, where employment may be subject to “at will” termination, an employer may not be required by law to give notice of its intent to dismiss an employee. Instead, the employer and employee may agree under the terms of an employment contract to establish a particular notice period for termination, and that same contract may also give the employer the right to pay a stipulated amount in lieu of the agreed notice.

In other jurisdictions, applicable law may prescribe a minimum amount of notice that an employer must give when dismissing an employee. This legal notice is often a function of, among other things, the length of time a particular employee has been continuously employed by the employer. Where notice is mandated by law, the payment in lieu of notice clause typically accounts for this requirement.

The payment in lieu of notice clause is most often found in employment agreements, including those for ordinary employees, management and executives. It can also, however, appear in other documents such as a company’s severance policy (see example 6 below), which may supplement its employment agreements.

How do you review the payment in lieu of notice clause in contracts?

If a contract contains a payment in lieu of notice clause, it will typically be in a section or part of the agreement addressing termination of employment. Although these clauses often include the phrase “in lieu of” in close proximity to “pay”, “paying”, “payment”, etc., this won’t always be the case. Careful review may therefore be necessary to locate the payment in lieu of notice clause in certain contracts.

After locating all the payment in lieu of notice language in each agreement, key things to focus on when reviewing these provisions include:

1. Notice period. An important aspect of reviewing this clause is establishing the relevant notice period. The notice period may be stated as a specific number of days, weeks or months. Alternatively, the clause may refer to a particular statute (see example 10 below) or may otherwise indicate that applicable law determines the requisite notice (see example 9 below), in which case be sure to consult the relevant legislation to ascertain the amount of notice required by law given the particular employee’s circumstances. Note that the notice period may not always be stated in the payment in lieu clause itself, but it should be stated somewhere in the section or part of the agreement addressing termination of employment. In example 1 below, for instance, the notice period appears at the beginning of the Termination of Employment section in paragraph (a) and the payment in lieu of notice clause appears closer to the end of that section. Similarly, in example 7 below, the notice period appears in subsection 10.1 of the Termination of Employment section and the payment in lieu of notice clause appears in subsection 10.4. Finally, where applicable law prescribes minimum notice requirements, be sure to confirm that the notice period for the purposes of the contract is consistent with these rules.
2. How the right is triggered. As noted above, the payment in lieu of notice clause often focuses on termination by the employer. In some cases, however, the clause may be triggered when either party intends to terminate (see, for instance, examples 3, 5 and 7). Example 2 below is interesting in that the clause applies only when the Executive (the employee) intends to terminate, and in that case the Company (the employer) can accelerate the termination date without any obligation to provide the Executive payment in lieu of notice. In other words, the Company has the benefit of a payment in lieu of notice clause (accelerated termination) without the burden (no payment).
3. Circumstances of termination. The payment in lieu of notice clause may apply only to certain types of termination, such as termination by the employer “without cause” (or “without Cause”). In such cases, be sure to check the definition of any applicable defined terms like “Cause” or “Separation from Service” (example 9 below) to determine the exact circumstances to which the clause applies. Even if the clause is silent on this matter, consider whether applicable law provides any further guidance on when termination notice or a payment in lieu of notice may or may not be required. For example, an employee’s gross misconduct (e.g., stealing from an employer, workplace violence, sexual harassment, etc.) may be grounds for immediate dismissal without any legal requirement to provide notice or a payment in lieu of notice.
4. Type and amount of compensation. The termination pay provided in lieu of notice almost invariably includes the amount of base salary or wages the affected employee would have earned by working to the end of the applicable notice period. This may be the only compensation to which the employee is entitled. In some cases, however, the clause may stipulate that other entitlements - such as accrued vacation, bonuses, commission, and/or compensation for the loss of benefits - be included in computing the payment amount (see, for instance, examples 3 and 14 below). Often (though not always - see example 11 below), the amount will be paid as a lump sum. It will also generally be net of any deduction or withholding required by law (e.g., taxes), and the clause may state this for greater certainty (see, for instance, examples 3 and 9 below). Finally, where applicable law establishes the amount to be paid to employees in lieu of notice (including rules governing how this amount is computed), be sure to confirm that the terms of any such payment outlined in the clause align with the requirements established by law. Clauses that try to limit or reduce the amount otherwise payable by law may not be enforceable.

As with the review of any contractual provision, it’s also important to be aware of other provisions that may affect the interpretation of payment in lieu of notice clauses. Defined terms, for example, were mentioned in point 3 above. In addition to providing information about the notice period (see point 1 above), the termination of employment section may specify other rights or obligations that may arise on termination, including an employee’s right, if any, to severance pay. Finally, provisions outlining an employee’s entitlement to salary, bonuses, vacation, benefits, etc. should help with determining the amount of any termination payment provided in lieu of notice pursuant to the contract.

Software that uses AI to identify and extract payment in lieu of notice clauses (as well as other terms that may affect their interpretation) can accelerate the work of finding these provisions and enable a more comprehensive review than can otherwise be done manually.

Examples of the payment in lieu of notice clause

Below are some examples of payment in lieu of notice clauses from different kinds of agreements. While these examples do not necessarily cover the full range of payment in lieu of notice clauses one may encounter, they are meant to illustrate the degree to which these provisions can vary from contract to contract. Where an example includes broader contextual language, the payment in lieu of notice clause is highlighted in bold.

Example 1: From an Executive Employment Agreement

5. Termination of Employment.

(a) By Company Without Cause. Subject to the last paragraph of this Section 5(a), the Company may terminate Executive’s employment without Cause (as defined below) effective on thirty (30) days’ written notice (such thirty (30)-day period, the “Notice Period”, and such notice, the “Termination Notice”)…

…Notwithstanding the foregoing paragraphs of this Section 5(a), the Company may terminate Executive’s employment prior to the expiration of the Notice Period, and in the case of such termination, the Company shall pay Executive the equivalent of the Base Salary he/she would have earned over the remainder of the Notice Period (less necessary withholdings and authorized deductions) at his/her then current Base Salary rate (the “Termination Notice Replacement Payment”), subject to Executive satisfying the requirements of the previous sentence. Any such Termination Notice Replacement will be paid in a lump sum at the same time as the Severance Payment.

Example 2: From an Executive Employment Agreement

(iii) Termination by Executive. Executive may terminate his employment with the Company at any time upon 90 days advance written notice to the Company (provided that the Company may accelerate such date of termination in its sole discretion and no such action shall entitle the Executive to notice pay, pay in lieu of notice, severance pay or other similar payments or benefits) (such 90 day or shorter period, as the case may be, the “Notice Period”).

Example 3: From an Employment Agreement

14 Termination Provisions

14.1 Subject to Clause 1.3 and this Clause 14, the Employee’s employment may be terminated by either party giving the other the 30 days written notice of termination…

14.3 Once notice has been given by either party, the Company may, in its absolute discretion, terminate the Employee’s employment at any time during the applicable notice period by making a payment in lieu of the remaining period of notice.

14.4 Any payment in lieu of notice shall consist of the Employee’s basic salary for the number of days of the notice entitlement which the Employee has not received, and include any other entitlements, benefits, incentives, bonus, commission or holiday entitlement referable to the Employee’s employment which would have accrued to the Employee had he/she remained employed during the notice period, and shall be subject to deductions for income tax and national insurance contributions as appropriate.

Example 4: From an Executive Employment Agreement

(d) If the Company terminates the Executive’s employment hereunder without Cause, the date specified in the Notice of Termination, which shall be no less than thirty (30) days following the date on which the Notice of Termination is delivered; provided that, the Company shall have the option to provide the Executive with a lump sum payment equal to thirty (30) days’ Base Salary in lieu of such notice, which shall be paid in a lump sum on the Executive’s Termination Date and for all purposes of this Agreement, the Executive’s Termination Date shall be the date on which such Notice of Termination is delivered;

Example 5: From an Employment Agreement

12. Notice Period

The Period of Notice required from you to terminate employment with the Company during your probation period is one week, and thereafter one month, and, with the exception below, the Company will provide the same period to terminate your employment. Notice must be given in writing. The Company may, at its discretion, pay you a sum equivalent to your salary for that period of notice and not require you to work out the notice period.

Example 6: From a Severance Policy

At the Bank’s discretion, the Bank may either give the Corporate Senior Officer one week’s notice of a Separation from Service and eligibility for severance, or pay the Corporate Senior Officer one week of base salary in lieu of notice.

Example 7: From an Employment Agreement

10. Termination of Employment.

10.1 The Employee’s employment may be terminated by the Employee giving not less than twelve weeks of notice in writing to Company, or by Company giving to the Employee not less than twelve weeks of notice of termination in writing, unless the Employee is terminated for cause under clause 10.3, in which case no advance notice from Company is required. The Employee’s employment will automatically be terminated upon his death…

10.4 Company may, in its absolute discretion, elect to terminate the employment of the Employee at any time with immediate effect by paying the Employee twelve weeks of his salary under clause 3.1 in lieu of notice of termination, payable in a lump sum within thirty days of the employment termination date, less such deductions as Company may be required to make by law.

Example 8: From an Executive Employment Agreement

17. TERMINATION WITH PAYMENT IN LIEU OF NOTICE

Notwithstanding clause 2, the Company may in its absolute discretion at any time on or after the first anniversary of the Commencement Date terminate the Executive’s employment with immediate effect by giving written notice to the Executive and paying the Executive an amount equal to the Base Salary (as at the date of Termination) that the Executive would have been entitled to receive under this Agreement during the notice period referred to in clause 2 or, if notice has already been given, during the remainder of the notice period.

Example 9: From an Amendment to an Employment Agreement

7. Section 8(a) is amended by inserting a new first paragraph as follows:

During and in respect of any periods of employment in the United Kingdom, the termination of the Executive’s employment shall be subject always to the statutory minimum notice period (“Statutory Notice Period”) as applicable, except in the case of dismissal by the Company for Cause in accordance with Section 8(e).

In circumstances where the Statutory Notice Period applies, the Company reserves the right to terminate the Executive’s employment lawfully at any time by written notice having immediate effect by notifying the Executive that the Company is exercising this right and will make payment of the Executive’s basic salary only in lieu or all or any part of the Statutory Notice Period (less any tax and national insurance which the Company may be required to deduct) (“Payment in Lieu of Notice”). If the Company discovers after notice has been served that it would otherwise have been entitled to terminate the employment in accordance with Section 8(e), the Executive shall cease to have any entitlement to a Payment in Lieu of Notice payment pursuant to this paragraph and if payment has already been made it shall be recoverable as a debt.

For the avoidance of doubt, all references to the Severance Payment in this Section 8 shall be deemed to include a Payment in Lieu of Notice, where applicable, and shall be paid less any deductions required by law, including any necessary PAYE deductions in respect of any period of employment in the United Kingdom.

Example 10: From an Employment Agreement

Termination

Company may terminate your employment at any time for cause.

After the end of your probationary period, Company may terminate your employment without cause at any time by providing you with the minimum notice, or pay in lieu of such notice, and any severance pay required by the Employment Standards Act, 2000 and no more.

Example 11: From an Employment Agreement

4.5 Pay in Lieu. Subject to the provisions of Section 5, Company may, at its sole and absolute discretion, terminate Employee’s employment forthwith at any time by serving a notice under this Section 4.5 stating that this Agreement is being terminated in accordance with this Section 4.5 and undertaking to continue pay to Employee amounts equivalent to the salary benefits that would otherwise have been paid during such notice period in lieu of any required period of notice or unexpired part thereof (subject to tax and National Insurance), which amounts will be paid in accordance with Company regular payroll practices over the applicable required period of notice or unexpired part thereof, subject to any delay in payment that may be required pursuant to Section 9.7 of this Agreement in order to avoid adverse tax consequences to Employee under Section 409A of the Internal Revenue Code. Where Company terminates this Agreement otherwise than in accordance with Section 1.6 or this Section 4.5 (subject always to Section 4.1), Employee’s sole remedy shall be a claim in damages which shall be calculated in accordance with ordinary common law principles including those relating to mitigation of loss, and Employee shall not be entitled to enforce the payment referred to in this Section 4.5 as a contractual debt nor as liquidated damages.

Example 12: From an Employment Agreement

(B) If you have given notice of termination of employment to the Company instead of requiring you to work during your notice period (or any remaining part of it), the Company may (at its discretion) choose to terminate your employment immediately and pay you a sum equivalent to your basic salary (less appropriate income tax and social security deductions) in respect of the notice period (or the remaining part of it). The Company may elect at its discretion to make any such payment as one lump sum or in equal instalments on the days when you would have received your basic salary if you had continued in employment throughout your notice period.

Example 13: From an Employment Agreement

11. Termination:

11.01 You may resign your employment voluntarily upon giving thirty (30) days prior written notice to the Company. The Company may waive the said notice by providing you with pay in lieu of notice. Upon resignation, you will have no entitlement to compensation except for unpaid Base Salary and vacation earned to the effective date of resignation. All of your benefits will cease upon the effective date of your resignation.

Example 14: From an Employment Agreement

8. TERMINATION

(a) Termination

The Employment shall be terminated by either party on 12 months’ written notice. Upon observance of the notice period, termination shall be effective as of the end of the applicable business day (Monday to Friday).

The Company may, in its sole and absolute discretion, terminate the Employee’s employment at any time and with immediate effect. If the Company exercises its discretion to terminate the Employee’s employment in this way, the Employee shall be entitled to receive payment in lieu of notice (“Payment in Lieu”). This Payment in Lieu will be equal to (i) the Base Salary and pension contributions which the Employee would have been entitled to receive under Section 4(a) (or if notice has already been given, during the remainder of the notice period) less income tax and Employee National Insurance contributions as required by law, (ii) payment of a pro-rata portion of Employee’s Annual Bonus (assuming for purposes of this payment that Employee’s Annual Bonus is equal to 50% of Employee’s Base Salary). The Payment in Lieu may be made in instalments.

Example 15: From an Executive Employment Agreement

11.5 The Company shall have the right lawfully to terminate this Agreement with immediate effect by giving notice of such termination and by paying to the Executive, in lieu of salary and other benefits pursuant to this Agreement, an amount equal to the basic salary which the Executive would have earned from then until the first date upon which his employment could, apart from this Clause 11.5, have been lawfully terminated together with a further sum equivalent to the value of benefits to which the Executive would have been entitled during such period. The Executive has no duty to mitigate severance benefits by finding alternative employment, nor shall amounts he earns from other employment be offset against these benefits. Any such payment to the Executive will be subject to tax and other statutory deductions required from time to time.