What Is Wages in Lieu of Notice (PILON) in 2026? Explained

What if you need to let an employee go but don’t want them working through their notice period? Don’t worry; wages in lieu of notice handle that situation perfectly. For US employers, founders, and HR leaders navigating employee exits, understanding how this works can prevent compliance headaches and payroll errors.

In this article, we break down what wages in lieu of notice (PILON) actually means, when it should be used, how it’s calculated, how employment contracts and the WARN Act come into play, and the key tax and compliance risks employers often miss.

What is wages in lieu of notice (PILON)?[toc=Wages in Lieu of Notice]

Wages in lieu of notice (also known as PILON, pay in lieu of notice) are payments an employer makes to an employee instead of requiring them to work their contractual or statutory notice period, allowing the employment to end immediately while compensating for the lost notice pay.

Payment in lieu of notice typically covers base salary and any contractually guaranteed earnings the employee would have received during the notice period. It is treated as taxable income and is distinct from severance pay, which is discretionary and designed to support post-employment transition.

When do employers use wages in lieu of notice (PILON)?[toc=When to Use]

From our extensive experience helping global companies manage compliant offboarding and workforce transitions, here are when employers use Payment in Lieu of Notice (PILON).

• Immediate termination is necessary due to access to sensitive data, systems, or client information
• Redundancies or restructurings, where a clean and quick exit reduces workplace disruption
• Senior or strategic roles, where continued presence could influence teams, customers, or competitors
• Employee requests an early exit, and the employer agrees to pay instead of enforcing notice
• Low productivity or morale concerns during the notice period
• Compliance or contractual obligations, where the employment contract explicitly allows PILON

From what we see working with global employers, PILON is less about generosity and more about risk control, compliance, and operational clarity. Used correctly, it protects both sides. Used casually, it creates payroll and legal problems fast.

Is wages in lieu of notice legally required in the US?[toc=US PILON legal requirement]

No. Wages in lieu of notice (PILON) are not automatically required by law in the US. But this is where many companies get it wrong.

Based on our experience helping global companies hire and manage teams, the US runs on at-will employment. That means employers can usually terminate employment immediately, without notice or notice pay, as long as there’s no discrimination or retaliation involved.

Pay in lieu becomes legally required only when you create the obligation yourself. This typically happens when:

• An employment contract or offer letter promises notice or pay in lieu
• A company policy or handbook mentions notice periods
• A collective bargaining agreement applies
• The WARN Act is triggered in mass layoff or plant-closure situations, requiring 60 days’ notice or pay in lieu

Okay, now that we’ve clearly covered what wages in lieu of notice (PILON) are, when employers use it, and whether it’s the default in the US, let’s step back and look at how PILON actually works in practice.

How does payment in lieu of notice (PILON) work?[toc=How PILON Works]

Across the payroll and HR operations we support, these are the steps employers follow to apply wages in lieu of notice correctly.

1. Confirm eligibility first: Check whether the employment contract, offer letter, company policy, or collective agreement allows notice to be replaced with pay.
2. Calculate the notice pay accurately: Base the amount on the employee’s notice period and regular earnings, typically fixed salary and any contractually guaranteed components.
3. Apply payroll and tax treatment: PILON is processed through payroll and subject to the same tax withholdings as regular wages.
4. Account for final pay obligations: Review whether accrued leave, guaranteed bonuses, or other contractual payments must be settled alongside PILON.

If you’re navigating an employee exit and want a clear, step-by-step view of what to do next, read our full guide on "How to Terminate an Employee: Legal Steps & Best Practices".

How do you calculate wages in lieu of notice?[toc=Calculation of Pay in Lieu]

Based on our experience helping companies with payroll processing, employment compliance, and exit management, here are the key steps that explain how wages in lieu of notice are calculated in practice.

1. Start with the notice period: First, check the employment contract. That’s your source of truth. The notice period might be two weeks, one month, or longer depending on role and seniority.
2. Lock in the base pay: Take the employee’s regular salary or hourly wage and apply it to the full notice period. This part is almost never disputed.
3. Ask “what else is guaranteed?”: Some contracts include fixed allowances, vacation pay, or continued health coverage during the notice period. If it’s written in, it gets included. If it’s not, it usually doesn’t.
4. Be careful with bonuses and commissions: This is where things get messy. Only include variable pay if it’s contractually guaranteed or consistently earned. Discretionary bonuses usually stay out.
5. Apply normal payroll deductions: Wages in lieu of notice are still wages. That means income tax, social security, and standard deductions apply before you land on net pay.
6. Write it all down: Document the calculation clearly. When exits go sideways, paperwork is what saves you, not good intentions.

Wages in lieu of notice calculation example

Let’s say an employee has a monthly salary of $4,700 and is entitled to a three-month notice period. Instead of requiring the employee to work through the notice period, the employer chooses to pay wages in lieu of notice (PILON).

• Step 1: Notice period: 3 months
• Step 2: Base salary: $4,700 per month
• Step 3: Fixed benefits: $800 per month
• Step 4: Transport allowance: $110 per month

Total monthly compensation: $5,610

PILON calculation: $5,610 × 3 = $16,830 (gross)

Note: Taxes and statutory deductions apply on top of this.

How do employment contracts and company policies affect PILON?[toc=Employment Contracts and PILON]

Having supported 300+ global companies through payroll execution and compliance, we’ve seen that PILON is governed by what’s documented internally, not assumptions about at-will employment.

• Contracts control PILON: If a contract specifies a notice period or explicitly allows payment in lieu of notice, the employer must follow that structure. Failing to do so can result in a breach-of-contract claim.
• Policies can create obligations: Written policies, handbooks, or offer letters that promise notice or notice pay can create enforceable obligations, even when there is no formal employment contract.
• Inclusions depend on wording: Some agreements limit PILON to base salary, while others require payment of commissions, bonuses, or benefits that would have accrued during the notice period.
• No clause increases risk: If there is no PILON clause, paying notice wages may technically be treated as damages for early termination. This can affect enforceability of post-termination restrictions and expose employers to disputes if the amount is miscalculated.

Contracts define most PILON outcomes, but they aren’t the final authority. When workforce reductions reach a certain scale, statutory notice obligations step in. That’s where the WARN Act changes how wages in lieu of notice apply.

How does the WARN Act apply to wages in lieu of notice?[toc=WARN Act and PILON]

The Worker Adjustment and Retraining Notification (WARN) Act is a federal law that requires certain employers to give advance notice before large-scale job losses. It applies to mass layoffs and plant closures, not routine terminations.

Under the WARN Act, covered employers must provide 60 days’ advance written notice to affected employees. If that notice isn’t given, employers can substitute notice with pay, which is where wages in lieu of notice come into play.

Here’s how PILON works under WARN:

• PILON can replace notice, but only if it is equivalent: Employers may pay employees instead of providing 60 days’ notice, but the payment must fully cover what the employee would have received during that period.
• WARN-level pay is broader than contractual PILON: Unlike many employment contracts that limit PILON to base salary, WARN requires pay and the value of benefits, such as health insurance and retirement contributions.
• Employment contracts do not override WARN obligations: Even if a contract limits PILON to base pay, WARN obligations apply independently and take precedence during qualifying layoffs.
• Partial payments still trigger liability: Paying only base salary when benefits are excluded can result in back pay, benefit reimbursement, and civil penalties.

So even when WARN is handled correctly, there’s still a downstream effect to consider. That’s where unemployment benefits come into the picture.

Does wages in lieu of notice affect unemployment benefits?[toc=Unemployment Benefits and PILON]

Yes, wages in lieu of notice can affect unemployment benefits, but how it plays out depends on how the payment is treated and how unemployment agencies classify it.

In most cases, unemployment benefits are designed to support people who are no longer receiving wages. Wages in lieu of notice blur that line.

Here’s how it typically works in practice:

• PILON is usually treated as wages, not severance: When wages in lieu of notice are paid, they are often considered regular earnings for the notice period, even though the employee is no longer working.
• Unemployment benefits are commonly delayed, not denied: Employees are generally not eligible for unemployment benefits during the period covered by Payment in lieu of notice. Eligibility usually starts only after the paid notice period ends.
• Timing matters more than the termination date: Even if employment ends immediately, unemployment agencies often look at when wages stop, not when the employee last worked.
• Short or partial PILON can change eligibility: If wages in lieu of notice cover only part of a week or a shortened period, some jurisdictions may allow unemployment benefits to start sooner.
• Classification must be accurate: Mislabeling Pay in lieu as severance or damages can create reporting issues for both employers and employees, especially during benefit claims.

Wages in lieu of notice usually postpone unemployment benefits, they don’t eliminate them. Clean payroll classification and clear documentation make a big difference in avoiding disputes later.

How is wages in lieu of notice taxed in the US?[toc=is PILON Taxable]

When paying wages in lieu of notice (PILON), employers must ensure they handle the tax implications properly to remain compliant with U.S. tax laws. Here are the key tax considerations:

• Taxable Income: PILON is considered part of the employee’s regular wages and is taxed at the employee’s marginal income tax rate. It is not eligible for any tax exemptions or special treatment, unlike certain severance payments in other jurisdictions.
• Withholding Requirements: Employers are required to withhold federal income tax, Social Security tax, and Medicare tax on PILON payments, just as they would with regular wages. State and local income tax withholding may also apply, depending on the jurisdiction.
• Reporting: PILON must be included in the employee’s final paycheck and reported on their W-2 form for the tax year in which the payment is made. Employers must ensure this is done in accordance with IRS payroll reporting rules to avoid penalties.
• No Special Tax Treatment: Unlike some countries, the U.S. does not provide favorable tax treatment for PILON. It is treated as ordinary wages, and no specific exemptions or reduced rates apply.
• Social Security and Medicare: Employers must also deduct Social Security and Medicare contributions from PILON, just as they do from regular wages. These deductions must be reported and paid to the Internal Revenue Service (IRS).

According to the IRS, wages in lieu of notice are considered supplemental wages, which are typically subject to a 22% federal withholding rate when paid separately from regular wages, as outlined in IRS Publication 15-T.

Is payment in lieu of notice the same as severance pay?[toc=PILON vs. Severance Pay]

No, payment in lieu of notice (PILON) and severance pay are not the same. Both are paid when an employee leaves, but they serve very different purposes and are triggered under different conditions.

Here’s the quick difference:

• PILON is paid when an employer ends employment immediately and chooses to pay wages for the notice period instead of having the employee work it.
• Severance pay is a lump-sum compensation given after termination, usually due to redundancy or restructuring, based on the employee’s length of service.
• PILON covers the notice period, while severance pay compensates for job loss, both are taxable income under standard payroll and employment law rules.

If you’re curious how severance works, check out our in-depth guide on "Severance Pay: Comprehensive Guide" to understand rules, calculations, and employer obligations.

What distinguishes PILON from garden leave?[toc=PILON vs. Garden Leave]

While both Payment in Lieu of Notice (PILON) and garden leave are related to the termination of employment, they serve different purposes and have distinct implications.

• PILON: This involves providing an employee with payment instead of requiring them to work through their notice period. The employee is compensated for the notice period without having to continue working. This method allows for an immediate separation from the company.
• Garden Leave: On the other hand, garden leave refers to a situation where an employee is placed on paid leave during their notice period, but remains technically employed. During this time, they are not required to perform any work, but still receive their salary and benefits. Garden leave is often used when an employer wants to ensure that the employee does not have access to sensitive information or influence other employees before leaving.

According to UK government guidance, during garden leave, an employee “is told not to come into work, but you’ll get the same pay and contractual benefits".

What are the key compliance risks employers should watch for?[toc=Compliance Risks]

Through our experience managing payroll and compliant workforce exits, these are the key pitfalls employers should avoid when handling wages in lieu of notice.

• Wage deduction violations: Employers sometimes offset loans, equipment costs, or advances from termination pay without proper authorization. In many states, improper deductions from wages can trigger penalties.
• COBRA notice failures: Ending the employment relationship immediately still triggers COBRA obligations. Delayed or missing notices, especially when health benefits stop sooner than expected, are a common miss.
• Final paycheck timing laws: Several states require termination pay, including wages in lieu of notice, to be paid within strict timelines. Miss the deadline, and state-specific wage payment penalties apply fast.
• Inconsistent contract language: Conflicts between offer letters, policies, and the employee’s contract create ambiguity around what’s included in notice calculated amounts, leading to potential legal disputes.
• Unemployment disputes: Misclassifying wages in lieu of notice as severance can delay or disrupt unemployment claims for the terminated employee, pulling employers into avoidable disputes.

Once you’ve seen where things go wrong, the next step is obvious: structure PILON the right way from the start, so exits stay clean, compliant, and drama-free.

What are best practices for offering payment in lieu of notice?[toc=Best Practices]

With deep experience across payroll operations and employment law compliance, these are the right ways to structure pay in lieu of notice.

• Use clear contracts and policies: Spell out when PILON applies, what financial compensation includes, and whether vacation pay or health benefits continue. Vague language is the root of most disputes.
• Coordinate payroll before termination: Payroll should be looped in before the employer decides on immediate termination. This avoids errors in notice calculated amounts, deductions, and tax treatment.
• Document everything in writing: Written confirmation of termination pay, timing, and benefits coverage protects both sides and reduces misunderstandings after exit.
• Handle edge cases deliberately: Executives, commission-heavy roles, and long-tenured employees often have different notice and compensation structures. Treating them like standard exits is risky.
• Plan for a multi-state workforce: Employment law varies widely by state. Final pay timing, benefit continuation, and deductions must align with local legal obligations.

How Wisemonk supports end-to-end HR and payroll compliance?[toc=How Wisemonk Helps]

Wisemonk is a specialized Employer of Record (EOR) in India, built for global companies looking to hire, pay, and manage employees in India without the complexities of setting up a local entity. We provide end-to-end workforce solutions tailored to India’s regulatory landscape, ensuring seamless compliance, payroll, and dedicated HR support for your offshore teams.

Why global companies trust Wisemonk for hiring in India:

• Fast talent acquisition and onboarding: Helping 500+ international companies hire top Indian talent with quick role kickoffs, structured preboarding, and day-one readiness powered by our India-first workflows.
• Accurate payroll and statutory operations: Managing $20M+ in monthly payroll with error-free TDS, PF, ESI, PT, compliant contracts, and fully automated filings across all Indian states.
• End-to-end employee lifecycle support: Supporting 2K+ employees with dedicated HR specialists who handle onboarding, offboarding, background checks, equipment procurement, and daily employee needs.
• Transparent and predictable pricing: Starting at $99 per employee per month with no hidden fees, no FX markups, and clean cost visibility that global teams can trust.
• Compliance and risk protection: Keeping global teams protected from misclassification, labor disputes, and accidental Permanent Establishment risk through airtight documentation and local labor law expertise.

Wisemonk Client review/feedback:

“Wisemonk has helped us hire right people from India for a Canadian entity. The process is so smooth we don't even notice that our payroll has people in both Canada and India.”

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