What Is Payment in Lieu of Notice (PILON)?
Payment in lieu of notice (PILON) lets you leave immediately while getting paid for your notice period. See how it's calculated and taxed.
What Is Payment in Lieu of Notice?
You just got called into HR. They’re eliminating your position—effective immediately. But instead of the awkward two weeks where everyone knows you’re a dead man walking, they hand you a check for those two weeks and walk you out today.
That’s PILON: payment in lieu of notice. You get paid for the notice period without actually working it.
Here’s the honest truth: for most people, this is a relief. Nobody wants to sit at their desk for two weeks pretending to care about Q4 projections when they’re actually updating their resume under the desk. You get the money. You get your time back. You start job hunting tomorrow morning instead of two weeks from now.
The deal in plain English
PILON = your regular wages for however long your notice period is. Two weeks’ notice means two weeks’ pay. Four weeks means four. The catch? It’s taxed like regular income—not some magical tax-free severance windfall.
Most U.S. jobs are at-will, so there’s no legal notice requirement. But if your contract says you get two weeks’ notice before termination, PILON lets the company pay you those two weeks instead of having you show up. It’s separate from severance—you could get both. And it’s different from resigning yourself, where you’re the one walking away.
When Do Companies Actually Use PILON?
Think about it from the employer’s perspective. Why would they pay you to not work?
You know too much. You’re in sales and you know every client’s birthday, their kids’ names, and exactly when their contracts are up for renewal. They’re not letting you hang around for two weeks making calls to “say goodbye.” You’re getting walked out today with a check.
You’re going to a competitor. Same logic. If you’re leaving for the company across the street, they don’t want you at your desk with access to the CRM for another two weeks.
The whole department is getting cut. Mass layoffs are brutal. Having 50 people shuffle around the office for two weeks knowing they’re all gone is bad for morale, bad for productivity, and frankly kind of cruel. Cleaner to just pay everyone out and let them start their job search.
Your contract says they can. Some employment agreements have explicit PILON clauses—meaning the company reserves the right to pay you out instead of keeping you around. Check your paperwork.
How Is PILON Calculated?
The math is simple: your regular pay × your notice period.
Let’s say you make $52,000 a year and your contract says two weeks’ notice.
- Weekly pay: $52,000 ÷ 52 = $1,000
- PILON: $1,000 × 2 = $2,000
That’s it. Two grand, deposited in your account, and you never have to pretend to look busy for those last two weeks.
What counts toward your PILON
Everything you’d normally earn in those weeks:
- Your base salary or hourly wages
- Shift differentials (if you work evening or night shifts)
- Regular overtime you consistently work—not one-off weeks, but your actual pattern
- Commissions and guaranteed bonuses
- Car or tool allowances
What doesn’t count
- Discretionary bonuses—the “good job this quarter” kind that aren’t guaranteed
- Stock options that haven’t vested yet
- Expense reimbursements (those were never yours anyway)
- Health insurance premiums (that’s a COBRA conversation)
Real Examples
| Situation | The Math | Your PILON |
|---|---|---|
| Salaried, 4-week notice | ($60,000 ÷ 52) × 4 weeks | $4,615 |
| Hourly, 2-week notice | ($22/hr × 40 hrs) × 2 weeks | $1,760 |
| Night shift worker, 1-week notice | ($18 base + $2 differential = $20/hr × 40 hrs) × 1 week | $800 |
If you’re an exempt employee, the calculation might work slightly differently depending on how your salary is structured. When in doubt, ask HR to show you the math.
Does the Law Require PILON?
In the U.S., here’s the thing: most jobs are “at-will.” That means your employer can fire you today with no notice, no reason, and no payout. Harsh, but legal.
PILON only comes into play when there’s a contractual notice period—your employment agreement, a union contract, or company policy that promises you notice before termination. If that document says “two weeks’ notice,” then they either let you work those two weeks or pay you out.
The one major exception: the WARN Act. If a company with 100+ employees does a mass layoff, they’re required to give 60 days’ notice. If they don’t? They can satisfy that requirement with 60 days of pay instead—basically a government-mandated PILON.
If you’re outside the U.S.: The rules are different. The UK has statutory notice periods (1–12 weeks depending on how long you’ve worked there). Canada varies by province. EU countries can require anywhere from 2 weeks to 6 months. In these places, PILON is more common because notice periods are actually required by law.
PILON vs Severance vs PTO Payout: What’s the Difference?
People confuse these all the time. Here’s the breakdown:
| What You’re Getting | Why You’re Getting It | How Much |
|---|---|---|
| PILON | Replaces the notice period you would have worked | Your wages for however many weeks your notice period is |
| Severance | A “thank you” (or “please don’t sue us”) payment beyond what’s owed | Usually 1–2 weeks per year you worked there |
| Accrued PTO | Your unused vacation days—you earned these | Hours accrued × your hourly rate |
| WARN Pay | Penalty when companies don’t give 60 days’ notice for mass layoffs | Up to 60 days of wages |
The key thing: PILON and severance are different. You could get both.
PILON replaces your notice period—it’s what you were owed by contract. Severance is extra, usually offered as goodwill or to get you to sign a release agreement. And your accrued PTO payout? That’s yours regardless. In many states, they legally have to pay it out when you leave.
Is PILON Taxable?
Sorry, yes. Fully taxable. No magic loopholes.
PILON is treated exactly like your regular paycheck. They’ll withhold federal income tax, Social Security (6.2%), Medicare (1.45%), plus whatever your state and local taxes are. It shows up on your W-2 as regular wages—no special box, no special treatment.
The tax trap nobody warns you about: If you get PILON in December, it counts as income for that tax year. Combined with the rest of your annual salary, it might push you into a higher tax bracket. Not a huge deal for most people, but worth knowing.
The unemployment wrinkle: In some states, PILON can delay when you’re eligible for unemployment benefits. The logic is that you’re still being “paid” for those weeks, even though you’re not working them. Check your state’s rules before assuming you can file immediately.
Quick comparison: Both PILON and severance are taxable. The difference is how they withhold. Severance often gets hit with a flat 22% federal rate. PILON uses your normal withholding calculation. Either way, Uncle Sam gets his cut.
What to Do If You’re Getting PILON
You just got handed a PILON offer. Here’s your checklist:
Check the math. Pull out your contract and find your notice period. Two weeks? Four weeks? That’s your baseline. Now make sure they’re including everything—your base pay, any shift differentials, regular overtime you consistently work. If you’re a night shift worker making $2 extra per hour, that better be in there.
Don’t expect a tax-free windfall. This isn’t some special payout. It’s wages. They’re going to withhold taxes like any other paycheck.
Check your state’s unemployment rules. Some states make you wait until your PILON “period” ends before you can file. Others don’t. Know before you assume.
Start job hunting today. Unless you signed a non-compete, you’re free to look. The whole point of PILON is that you’re no longer employed there. Use the time.
For Employers: Getting PILON Right
If you’re on the other side of this—actually offering PILON—here’s what matters:
Put it in the contract. If you want the option to pay someone out instead of having them work their notice, the employment agreement needs to say that. Springing PILON on someone whose contract says “two weeks’ notice” without a PILON clause is asking for trouble.
Document everything. The termination letter should spell out: notice period length, calculation breakdown, payment date. No ambiguity.
Know your state’s final paycheck laws. Some states require immediate payment on termination day. Others give you until the next regular payday. Get this wrong and you’re looking at penalties.
Accept the knowledge loss. When someone walks out today instead of working two more weeks, they take everything in their head with them. No transition. No documentation. No “here’s where I left off.” That’s the trade-off.
The Bottom Line
PILON is simple: you get paid for your notice period without working it.
You get your money. You get your time back. You can start job hunting immediately. The catch is it’s fully taxable—no special treatment—and it’s separate from severance (you could get both).
If you’re receiving PILON, check the math and know your state’s unemployment rules. If you’re offering it, make sure your contracts allow it and you’re following final paycheck laws.
Sources
- U.S. Department of Labor – FLSA
- DOL – WARN Act
- IRS Publication 15 – Employer Tax Guide
- DOL – State Payday Requirements
Frequently Asked Questions
What does payment in lieu of notice mean?
Instead of making you work your two-week (or whatever) notice period, your employer pays you for those weeks and lets you leave today. You get the money without the awkward final days.
How is PILON calculated?
Your regular weekly pay times the number of weeks in your notice period. If you make $50k/year and have two weeks’ notice, that’s roughly $1,923. Include shift differentials and regular overtime—anything you’d normally earn in those weeks.
Is PILON the same as severance?
No, and this trips people up. PILON replaces your notice period—it’s what you were contractually owed. Severance is extra, usually based on how long you worked there. You could get both.
Is PILON taxable?
Yep. Fully taxable as regular wages. Federal income tax, Social Security, Medicare, state taxes—the works. It shows up on your W-2 like any other paycheck. No special tax treatment.
