What Is Pay in Lieu of Notice?

Pay in lieu of notice means an employer pays an employee instead of giving them advance notice that their job will be terminated. The employer may be obligated to provide pay in lieu of notice because of statutory requirements, company policy, a collective bargaining agreement, or an employment contract.

Learn more about pay in lieu of notice; when organizations must provide pay; how much employees are entitled to receive; the impact on unemployment benefits; and legal guidelines for compensation when employment is terminated.

Definition and Examples of Pay in Lieu of Notice

Pay in lieu of notice is compensation paid to an employee when their employment has been terminated, and the employer has decided to provide pay instead of having the employee work during the notice period. The employee is paid what they would have earned in wages during the notice period if they are covered by an employment contract, company policy, or federal or state law that requires notice prior to ending employment.

For example, if an employee is covered by a contract that stipulates 30 days’ notice and the employer ends the contract without providing that notice, the employee may be eligible for payment in lieu of notice. The employee would continue to receive wages for the duration of the notice period.

In New York State, covered businesses are required to provide 90 days’ advance notice if there are plant closings and mass layoffs. If the organization does not give notice but pays employees all their wages and benefits for the notice period, it can avoid civil penalties for not giving adequate notice to impacted workers.

• Alternate name: Termination pay, wages in lieu of notice, remuneration in lieu of notice 
• Acronym: PILON

How Does Pay in Lieu of Notice Work?

When an employer decides to terminate an employee without notice, the employee may be entitled to wages they would have earned during a required notification period. In all states other than Montana, employment is at-will, which means an employer can terminate an employee at any time for any reason with some exceptions, including when termination notification is legally or contractually required.

Eligibility for Payment

If an employee is covered by an employment contract, collective bargaining agreement, or company policy that requires notice, they are entitled to be paid for the notice period if their employment has ended and they are no longer working. Federal and state laws also regulate when organizations are required to provide termination notice. In most locations, advance notice is only required for mass layoffs or plant closings.

What’s Included in Pay

Employees who are eligible for payment in lieu of notice should receive wages and benefits for the duration of the notification period.

Federal and State Laws

Federal Law

The federal Worker Adjustment and Retraining Notification (WARN) Act requires companies with more than 100 employees to provide 60 days’ written notice of a plant layoff or mass closing affecting 50 or more workers (with some exceptions) at a single site. However, pay in lieu of notice could cover any penalties for businesses that didn’t provide the mandated notification.

Even though an employer who pays employees instead of giving them proper notice has technically violated the WARN Act, the provision of pay and benefits in place of a notice is a possible option for compliance.

State Laws

Some states have their own WARN Act legislation. The California WARN Act, for example, requires covered employers to provide 60 days’ advance notice to employees affected by plant closings and mass layoffs. Meanwhile, New York State’s WARN Act requires covered businesses to provide 90 days’ advance notice to employees, employee representatives, and the U.S. Department of Labor (DOL).

When Employers Don’t Have to Provide Notice

In most circumstances, unless an employee is covered by the federal WARN Act, a state WARN Act, a contract, labor agreement, company or public policy, or another exception to employment at will, the employer does not have to provide notice to a terminated employee or provide pay in lieu of notice.

Pay in Lieu of Notice When You Resign

An employer may be able to end employment immediately for an employee who resigns, even if the employee gives notice. Whether you are paid for the notice period depends on state law, company policy, or employment agreements that mandate payment of wages. If you’re not covered, you may not be eligible for payment.

For example, in Maryland, unless it’s provided for in an employment contract, agreement, or policy, an employer is not required to allow an employee to work the termination notice period or pay the employee for the time they are not actually allowed to work.

Pay in Lieu of Notice vs. Severance Pay

Pay in lieu of notice is not severance pay. Severance pay is compensation provided to a terminated employee, while pay in lieu of notice is the payment of wages and benefits the employee would have been entitled to if they had worked during the notice period. Severance pay is typically based on the length of employment. For example, an employee may be given a week’s severance pay for every year of service.

Pay in Lieu of Notice and Unemployment

When an employer ends employment immediately or at any point prior to the employee’s notice date, it can be considered an involuntary termination, and the employee may be eligible for unemployment benefits. In most states, pay in lieu of notice is considered wages, so unemployment eligibility would begin after the end of the notice period.

For example, in New Jersey, claimants are disqualified from receiving unemployment benefits for any week in which they receive remuneration in lieu of notice. In Utah, benefits will be denied for any week in which wages in lieu of notice of termination are paid.

How Much and When Employees Are Paid

When an employee receives payment instead of working through the notice period, they are entitled to the compensation they would have received if they were on the job. In addition to wages, employers should consider all forms of compensation, including benefits, typically received by the employee, when calculating payments.

Federal law does not require employers to give employees their final paychecks immediately, but some states have laws that determine when the payment must be made.