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Summary: Wages in lieu of notice let employers terminate contracts immediately by paying out the notice period. This guide explains how it works, when to use it, and what to consider legally and financially.
If you’re an employee who’s suddenly been told that your contract is being terminated, it can come as quite a shock. If you’re an employer who wants to make quick changes, however, waiting around for your employee’s notice period to wrap up can slow things down and potentially even cause you problems.
Providing wages in lieu of notice can help employers move termination procedures along quickly while softening the blow for employees.
What are Wages in Lieu of Notice?
Wages in lieu of notice are payments made to employees to replace their notice periods and compensate them when they’re terminated. Instead of giving an employee notice of termination and then paying them to work for this last remaining period, an employer may choose to pay their wages for this period without requiring them to work. The payment of wages in lieu of notice is permissible in many jurisdictions and can be used by employers strategically to remove employees quickly.
The word lieu is an old French word which means ‘place’, so the phrase “in lieu of” simply means in place of or instead of. These payments are often also referred to as payments in lieu of notice or PILON.
Why Would Employers Pay Wages in Lieu of Notice?
Imagine you have an employee who hasn’t been performing well or is perpetually in conflict with others. The law may allow you to dismiss this employee for these reasons. However, the local law or the employee’s contract may require that you give them a month’s notice of their termination. During this last month, you may (justifiably) worry that the employee may cause problems in the workplace, as terminated workers are known to often spread discontent. Even if that’s not a concern, you may expect them to lose their motivation to work. They may start to come in late, leave early, take unjustified breaks, and generally produce poorly.
You could choose to offer them the opportunity to receive their full wages for a month without having to come into work. This would allow you to reduce the negative impact they might have on others and the work culture in general, and also replace them quickly with a new, more motivated and productive employee.
Payment in lieu of notice can also be used when, for economic reasons, an employer needs to lay off several workers at once. In these cases, the motivation for providing wages could be that operations will actually cease and there is simply no work for these employees to do. Rather than require them to come into work to do nothing, their notice periods can be paid out while they stay home or take time to find new employment. In this way, paying wages in lieu of notice can reduce the stress put on terminated workers and free up their time so they can find new jobs.
Wages in Lieu of Notice vs Severance Pay
While both wages in lieu of notice and severance pay are payments made to outgoing employees, they have different purposes and are regulated differently.
| What | Wages in Lieu of Notice | Severance Pay |
|---|---|---|
| Why it’s paid | To end work right away but still pay the notice period | To help the employee after losing their job |
| When it’s paid | Instead of working during notice | After termination |
| How it’s paid | Like normal wages | One-time lump sum |
| Is it taxed? | Yes | Yes |
An employer wishing to terminate an employee may have a contractual or legal obligation to provide them with a minimum period of notice of that termination. In the US, where most employment is at-will, notice periods aren’t normally required, but giving two weeks’ notice is still considered a best practice. Otherwise, notice periods may be written into employee contracts. In other countries, however, minimum notice periods are often required to protect employees from the financial strain of sudden job loss.
If the employer wishes, however, they are normally entitled to ask the employee not to come into work. The employee still receives their wages for the agreed notice period and these wages are taxed as usual. The employee still receives social security and their other regular benefits for the notice period, but they don’t have to work – this can be advantageous both for employers and employees.
Severance pay, on the other hand, is a pre-agreed lump sum payment. It is awarded to employees when they are terminated, except for reasons of gross misconduct (violence, inebriation, etc.), which may cause them to lose their rights to severance pay.
The purpose of severance pay is to soften the financial shock of being terminated by providing the employee with extra income to help them finance their expenses while they search for new employment.
Again, employees in some countries must legally be provided with a minimum amount of severance pay, which is often related to the number of years they’ve worked for their employer. In other places like the US, severance pay is not mandated but may be included in employee contracts which makes it legally required. Severance pay is also subject to income tax, Social Security and Medicare taxes, and FUTA (Federal Unemployment Tax Act) tax.
How Do You Calculate Wages in Lieu of Notice?
If you’re an employer with an employee you need to terminate, you can work out their PILON by following these steps:
- Determine their notice period: Figure out how long the employee’s required notice period is based on their contract or local employment law.
- Calculate their wages: Calculate the amount of gross wages or salary you would normally have to pay the employee during this period.
- Make deductions: From their gross salary, calculate the income tax, benefits, and other amounts you would normally need to withhold from the employee’s paycheck.
- Pay the employee: With deductions subtracted, you can pay the employee their net wages for their notice period without requiring them to come to work. This amount is normally given as a lump sum on the normal payday.
Wages in Lieu of Notice Example
An employer in Louisiana decides to terminate a worker who is always late and shows little dedication to their work. While there is no notice period in law in the state, the employee’s contract requires two months’ notice, but the employer doesn’t want the employee to come into the workplace and be disruptive.
Since the worker normally makes $2500 bi-weekly, the employer would start with this gross pay. They’d then withhold 22% of these wages for income tax, 6.2% for Social Security tax, and 1.45% for Medicare tax. They’d pay ($2500 x 70.35%) the employee $1758.75 in net pay instead of giving them a two-week notice period.
Example Computation
| Details | Amount |
|---|---|
| Gross Pay (Bi-weekly) | $2,500.00 |
| Less: Income Tax (22%) | − $550.00 |
| Less: Social Security (6.2%) | − $155.00 |
| Less: Medicare (1.45%) | − $36.25 |
| Net Pay (Take-home) | $1,758.75 |
How Wages in Lieu of Notice Offer a Practical Solution
When an employer has a good reason to terminate an employee and have them stop coming into work immediately, they may pay wages in lieu of notice.
While this can make the termination more abrupt for the employee, it can actually be beneficial as they don’t need to come into work but still get paid, so they can take time to look for a new job. The employer can use this option to prevent employee stress or to keep the terminated employee from sowing the seeds of discord in the workplace. This is why providing payment in lieu of notice is frequently used in places where notice periods, or at least payments for them, are legally required.
Frequently Asked Questions
The employee should receive the wages they would normally receive in a similar period, less their regular withholdings for taxes and benefits. They may, however, miss out on income from tips and commissions by not coming into the workplace.
This depends on the country. In the US, if a notice period is included in the contract, there should also be a clause providing the option for wages in lieu of notice to enable the employer to legally make this choice. In other countries where employment law allows for PILON, it is not necessary to include this option in employee contracts.
If this option is in the employee’s contract or is provided by law, the employer has the right to refuse the employee access to the workplace while still fulfilling their financial obligations.
Charlotte is an Human Resources Information Systems and Martech expect, Charlotte has worked for major brands in the industry including FactorialHR and Tooltester. Originally from Manchester, UK, with a Bachelor's degree from the Manchester Metropolitan University, Charlotte currently lives in Barcelona, Spain.