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If your employee hands in their notice of resignation, one of your options here is to request that they finish up immediately and take payment in lieu of notice.
This is quite a common step to take in this situation, but why and when can you do it?
What Is Payment in Lieu Of Notice?
Payment in lieu of notice (PILON) is payment ‘in place of’ serving out the notice period specified in a contract of employment. Basically, it means that instead of your employee working for the amount of time that they would normally have to work after being terminated, they would just get paid for that time instead.
For example, if your employee was resigning but they still had 4 weeks to work, offering payment in lieu would mean you simply pay them the amount of money they would’ve earned within those 4 weeks and the termination of employment would take effect immediately.
So, why might you decide to provide payment in lieu of notice?
Reasons for Payment in Lieu of Notice
There are several reasons why an employer might opt for PILON:
- Protecting the business – If there is a risk of disputes, ill-feeling, or client poaching.
- Performance concerns – If the employee is not fulfilling their role and needs to be replaced urgently.
- Redundancy – If there is no work available for them to complete their notice period (e.g., during the COVID-19 pandemic).
Can I Provide Payment In Lieu Of Notice?
Yes, you can. Employers can either:
- Require an employee to work their notice period,
- Provide payment in lieu of notice, or
- Use a combination of both.
However, notice periods are governed by Fair Work regulations, industry awards, enterprise agreements, and the employee’s contract of employment. Always check these to confirm specific notice requirements.
What Is The Process Of Payment In Lieu Of Notice In 2025?
Amount
The amount is based on the notice period the employee is entitled to under their contract or minimum legal standards.
Fair Work Act Minimum Notice Periods
The Fair Work Act sets out the minimum notice periods based on length of service:
- Less than 1 year – 1 week
- 1 to 3 years – 2 weeks
- 3 to 5 years – 3 weeks
- 5+ years – 4 weeks
- Employees 45+ years old (with 2+ years of service) – +1 extra week
- Casual employees – Generally not entitled to notice
Unless terminated for serious misconduct, the employee must receive full payment for the notice period, including any allowances, loadings, penalty rates, bonuses, or overtime.
Assuming there has been no serious misconduct (in which case the employer is only required to pay for work done and entitlements earned so far), the employee is entitled to, not only the pay the employee would have earned during the notice period, but also other entitlements, such as any allowances, loadings, penalty rates, bonuses or overtime.
Timing of Final Payment
Final payment would normally be included with their final pay, and is normally specified by awards as within 7 days unless otherwise specified in their contract or award agreement.
Does Payment in Lieu Affect Other Entitlements?
Annual Leave Accrual: No, once the notice period is paid out, the employment is officially terminated, and no further leave accrues.
Superannuation: Yes, super is payable on payment in lieu of notice, as it is considered ordinary earnings.
Tax Obligations: Payment in lieu is not tax-free but may have concessional tax treatment if part of an Employment Termination Payment (ETP).
For more details, the ATO provides further guidance on ETP tax obligations.
What About Redundancy?
When making an employee redundant, specific legal obligations apply. Redundancy is not performance-related but typically occurs when a business can no longer retain the employee, e.g.:
- A project has ended
- The company is downsizing
- A branch is closing
Understanding the difference between redundancy and termination is essential for compliance.
What If My Employee Raises A Dispute?
The first thing to do is check the contract of employment. Most contracts have what we call boilerplate clauses that cover the fundamentals of your contract, and this is where you’ll probably find the terms relating to notice.
Your employee may try to resolve the issue with you, and if this doesn’t work out, they could also contact the Fair Work Ombudsman and potentially the Fair Work Commission.
So, it’s important that you try to resolve the issue as much as you can in the early stages of a dispute before things get messy.
What Is A Boilerplate Clause?
Boilerplate clauses, or miscellaneous clauses, are standardised clauses that set out some of the general terms of the contract, and are usually at the end of the contract. They specify some key aspects of how employees can fulfil their obligations and enforce your obligations as their employer. Just because they’re not specifically about the workings of the business relationship, don’t be tricked into thinking they’re insignificant – there are some very important boilerplate clauses in almost all contracts. It is important you read them carefully.
They might cover such matters as:
- Confidentiality
- Jurisdiction
- How to make amendments
- Limitations on liability
- Indemnity
- Notice requirements
- Assignment to another party
- Dispute resolution
- Force majeure (unforeseen circumstances forcing non-fulfillment of the contract)
Many contracts contain a boilerplate clause that allows agreement between the parties to a payment in lieu of notice. It makes a lot of sense for an employee to take the money owed and spend the time job-hunting or earning elsewhere rather than sitting in an office twiddling their thumbs!
The last example in the list above is an interesting one in relation to notice and payment in lieu of notice, as COVID-19 has thrown up the question as to whether it can be used as the basis for inciting a force majeure clause e.g. when the contractual obligations can’t be fulfilled due to COVID restrictions.
Many employers have found themselves unable to continue employing staff due to restrictions put in place or reticence on the part of consumers.
What If COVID Is To Blame For Termination?
Not all contracts contain a force majeure clause and even if they do, they won’t always be written in such a way that it covers the failing of a contract due to COVID or other external factors. Essentially, force majeure clauses relate to events that are unforeseeable and outside the parties’ control, like acts of God or war, natural disasters and government intervention.
Whether COVID would fall under the interpretation depends on the definition in that contract. If the wording includes ‘pandemic’, ‘government action’ or ‘labour shortages’, for example, then it might enable one party to cite COVID as the reason they couldn’t fulfil their obligations. It may also depend on the effect COVID had. Did it ‘prevent’ or ‘impair’ fulfilment? Wording in a contract is key and why it’s always advisable to engage contract lawyers at the outset.
Another issue regarding COVID and notice is when the notice period starts. What specific occasion gave rise to the problem: when a COVID wave hit or when the government announced restrictions?
COVID is just one example of when the employer is likely to give payment in lieu of notice, as many employers may simply have no work for the employee. The notice period is contractual and would be calculated from when the employer decides they can no longer fulfil his obligations. Of course, this doesn’t apply to casual workers.
Key Takeaways
- Employment contracts usually specify the amount of notice required to terminate employment. Check the boilerplate clauses.
- If an employer asks an employee to leave earlier than what the notice period specifies, they can pay them the amount you would have earned during that period, including all entitlements.
- Employees should receive all final payments in their last paycheck, normally within 7 days of finishing employment.
If you have any questions around employment law or how payment in lieu would pan out in your situation, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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