Payments In Lieu Of Notice: Employer’s Compliance Guide

Ending employment is never easy, but getting the legal steps right will save you time, stress and money. One key obligation is how you handle notice of termination. In many cases you can choose to end employment immediately and make a payment in lieu of notice instead of having the employee work out their notice period. Done correctly, this approach can reduce risk, protect your customers and team, and keep your business moving.

In this guide, we’ll explain what a payment in lieu of notice is, when it’s required, how to calculate it, what to document, and common tax and super questions employers ask. You’ll also find practical tips and links to helpful resources so you can feel confident you’re compliant in Australia.

What Is Payment In Lieu Of Notice?

Under the National Employment Standards (NES), employees are generally entitled to a minimum period of notice when their employment ends (unless an exception applies). Instead of requiring the employee to work during that period, an employer can choose to make a payment in lieu of notice. In simple terms, it’s the amount the employee would have earned if they had worked through the required notice period.

The NES allows employers to do this. You don’t need a special clause in the contract to make a lawful payment in lieu, though you should still check the employee’s Employment Contract and any applicable award or enterprise agreement in case they set out additional or more generous entitlements you must meet.

When you pay in lieu, employment ends on the date you specify in the written termination notice (often the same day). It’s not tied to the day funds hit the employee’s bank account-however, you should process the final pay promptly and in accordance with your usual payroll cycle and any instrument requirements.

When is payment in lieu useful?

• You want to remove system access or protect confidentiality immediately.
• The role is redundant and there’s no useful work during the notice period.
• You want to reduce disruption or workplace risk while still meeting legal obligations.

Important: Payment in lieu of notice is separate from redundancy pay, unused annual leave or long service leave. Those entitlements may also be payable, depending on the circumstances.

When Do You Have To Provide Notice Or Pay In Lieu?

Your starting point is the NES notice table based on continuous service. Awards, enterprise agreements or contracts may specify longer notice, and you must provide the higher amount. To help plan terminations lawfully, many employers find it helpful to review their obligations around calculating employee notice periods before they act.

You generally must give notice or pay in lieu when:

• You initiate termination for performance, conduct (not serious misconduct), or business reasons.
• A fixed-term contract is being ended early (subject to the contract terms and any applicable instrument).
• A genuine redundancy occurs and the employee is not redeployed, in addition to any redundancy pay required.

When notice (and payment in lieu) may not be required

• Serious misconduct (summary dismissal): Where the employee engages in serious misconduct (for example, theft, fraud, violence or a serious breach of safety), you can dismiss without notice. Be cautious-if there’s any doubt, seek advice or consider measures like standing down pending investigation before making a final decision.
• Casual employees: A true casual (with no firm advance commitment to ongoing work) generally has no notice entitlement unless an award, agreement or contract provides one.
• End of a genuine fixed term: If a fixed-term contract ends on its stated expiry date (and it’s not rolled over or varied), notice is usually not required unless the instrument says otherwise.

Make sure your process is fair and you meet any consultation obligations for redundancy under the relevant award or agreement. Where the Fair Work Act factors about procedure are relevant (for example, performance dismissals), understanding the unfair dismissal criteria can help you avoid claims.

How To Calculate A Payment In Lieu (Step By Step)

Paying the correct amount is essential. Incorrect calculations are a common trigger for disputes. Here’s a clear way to approach it.

Step 1: Confirm the required notice period

Use the NES minimums based on length of continuous service, and add one extra week if the employee is over 45 and has completed at least two years of service. Then check the applicable award, enterprise agreement and contract. If any instrument requires a longer period, that longer period applies.

Step 2: Identify the hours the employee would have worked

Work from the employee’s ordinary hours over the notice period. If the employee has a regular roster, use that pattern. If hours vary, use a reasonable assessment based on recent patterns and any contractual minimums. For part-time employees, rely on their agreed ordinary hours.

Step 3: Apply the “full rate of pay” to ordinary hours

Under the Fair Work Act, payment in lieu is for what the employer would have had to pay if the employee had worked the notice period at their full rate of pay for ordinary hours.

• Full rate of pay generally includes loadings, monetary allowances and penalty rates that attach to ordinary hours under the relevant instrument.
• Overtime is typically excluded unless it is guaranteed or already rostered during the notice period (and would have been worked as part of the employee’s ordinary working pattern).
• Commissions and bonuses are included only if they are not discretionary and would have been earned during the notice period under the contract or instrument.

Because these elements depend on the instrument and the facts, document your assumptions. If any component is unclear, get advice before processing the final pay.

Step 4: Calculate the dollar amount

Multiply the ordinary hours the employee would have worked in the notice period by the full rate of pay identified above. Keep a simple worksheet that shows the inputs, including any allowances or loadings included for ordinary hours.

Step 5: Add other termination entitlements

In addition to the payment in lieu amount, you’ll generally need to add:

• Accrued but unused annual leave (plus any applicable leave loading)
• Long service leave if the employee is entitled
• Redundancy pay if a genuine redundancy applies

For payroll accuracy and transparency, it helps to separate each component in the final pay. For a broader checklist, many employers refer to our guide to calculating final pay.

What about superannuation on payment in lieu?

Whether superannuation is payable on a payment in lieu can be technically complex and may depend on how the payment is characterised for tax and superannuation purposes. In practice, payments in lieu are often treated as Employment Termination Payments (ETPs), and super guarantee is generally not payable on ETPs. However, there are exceptions, and treatment can vary based on the specific facts and instruments.

To stay compliant, cross-check your situation with current ATO guidance or your accountant. For more context, you can also read our overview on payment in lieu of notice and superannuation.

Documenting Termination And Final Pay Correctly

Clear paperwork reduces the risk of misunderstandings and claims. Here’s what to provide and keep on file.

Written notice of termination

Give the employee written notice stating:

• The date employment ends (the effective termination date)
• Whether the employee will work the notice or be paid in lieu (and how much notice applies)
• A brief reason for termination (for example, redundancy or performance)

If redundancy is involved, also confirm any consultation steps required by the award or agreement have been followed. Where redundancy entitlements are triggered, organise your documents early-our redundancy document suite can help you streamline the process.

Final pay breakdown

Provide a pay advice or statement that clearly separates each payment component (payment in lieu, unused annual leave, redundancy, long service leave, etc.), the tax withheld and the termination date. This is a simple but powerful way to reduce queries and disputes.

Employment Separation Certificate

If requested by the employee (or Services Australia), issue an Employment Separation Certificate. This helps the employee access government support and ensures your records align with what’s provided to agencies.

Use the right templates

Having the right forms and letters on hand saves time when you need to move quickly. Many businesses rely on an Employee Termination Documents Suite so they can issue compliant notices, calculate entitlements and formalise terms consistently across the team.

Common Pitfalls, Tax And Superannuation Questions

A few areas routinely trip up well-meaning employers. Here’s how to avoid them.

“Do I need the employee’s consent to pay in lieu?”

No. The NES permits employers to pay in lieu of notice. You should still check contractual and industrial instrument terms so you meet any additional requirements.

“Does employment end when the payment lands in the employee’s account?”

No. Employment ends on the termination date stated in your written notice (which can be immediate). Make sure your payroll team and managers use the same date in all records and communications.

“Do I include overtime and penalties in the in-lieu amount?”

Include what the employer would have been liable to pay for ordinary hours at the full rate of pay during the notice period. Guaranteed or already-rostered overtime during that period may need to be included; ad hoc overtime that isn’t part of ordinary hours usually is not. If in doubt, align with the relevant instrument and seek advice.

“What about commissions or bonuses?”

Only include commissions or bonuses that are not discretionary and would have been earned under the contract during the notice period. Discretionary bonuses are typically excluded.

“How is payment in lieu taxed?”

Payments in lieu of notice are commonly treated as an Employment Termination Payment (ETP) for tax withholding purposes. ETPs have specific tax rates and caps. Because tax treatment can vary with circumstances (for example, age, reason for termination, and whether there are other termination payments), check current ATO guidance or your tax adviser. As a rule of thumb, tell employees the amount may be taxed differently to their normal wages.

“Is superannuation payable on payment in lieu?”

As noted above, super guarantee is generally not payable on ETPs. Because the treatment of payment in lieu can depend on the circumstances and instrument, confirm your position with your payroll adviser or review ATO guidance, and see our guide on payment in lieu and superannuation for context.

“What else should I pay on termination?”

Don’t forget other entitlements that may be due, such as accrued annual leave, long service leave and redundancy pay. A quick internal checklist against your award or agreement, plus this overview of final pay calculations, will help you catch everything.

“How do I avoid unfair dismissal risk?”

Notice and payment in lieu are only one part of a fair process. Keep a clear record of reasons, follow any procedural steps required by the instrument, and consider the factors in section 387 of the Fair Work Act when relevant. If you’re unsure, getting advice before you act can save a lot of time later.

“What documents should I have in place before terminations happen?”

Clear, up-to-date contracts and policies reduce risk. Each employee should have a modern Employment Contract that sets out notice arrangements and key obligations. If there are co-founders or investors, ensure your company has the right governance documents too (for example, a Company Constitution) so termination decisions are authorised and consistent with your processes.

Key Takeaways

• Payment in lieu of notice is a lawful way to end employment immediately by paying what the employee would have earned during the required notice period.
• You don’t need a special contract clause to pay in lieu, but you must still meet the longest applicable notice period across the NES, award, agreement and contract.
• Calculate the in-lieu amount using ordinary hours at the employee’s full rate of pay, including any loadings or allowances that attach to those ordinary hours; only include overtime or commissions if they would have been payable during the notice period under the relevant instrument.
• Employment ends on the termination date you state in writing, not when payroll processes the payment-issue clear written notice and a detailed final pay breakdown.
• Tax and super treatment of payments in lieu can be technical; they’re commonly taxed as an ETP and super guarantee is generally not payable on ETPs-confirm your position with your accountant or current ATO guidance.
• Use reliable templates for notices and termination letters, and keep contracts up to date so you can act quickly and compliantly when employment ends.

If you’d like a consultation about payments in lieu of notice or you need help preparing compliant termination documents and contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.