what does payment in lieu of notice mean
Payment in lieu of notice means ending employment immediately and paying the employee what they would have earned if they had worked their full notice period. This payment must include their normal wages, allowances, overtime, penalty rates, and any other amounts they were entitled to, up to the final day of employment. It allows employers to manage staffing changes quickly while still meeting their legal obligations.
Terminating employment
When you need to make an employee redundant or terminate employment before the end of a probation period or because of serious misconduct, you may, as the business owner, opt for payment in lieu of notice.
Instead of working the notice period that is outlined in the employment contract (for example four weeks), you can choose to end employment immediately.
To do this you must give your employee written notice of the day of termination. In this situation the employee is entitled to be paid the same amount they would have earned had they worked the full notice period.
It must include the employee’s entire pay for normal work hours. It also includes pay for allowances, overtime, penalty rates, and any other separate amounts the employee should have received. Any accrued annual or long service leave days up to the termination day must also be paid.
Payment in Lieu of Notice provides the employee some financial security while they seek new employment opportunities. It also enables employers to quickly manage their workforce.
An employee’s full pay rate should include:
- Incentive-based payments and bonuses
- Loadings.
- Monetary allowances.
- Overtime or penalty rates.
- Any other separately identifiable amounts.
Employees that have been made redundant receive payment based on their continuous period of service with your business. This is paid at the employee's base pay rate for ordinary hours worked.
It does not include:
- Incentive-based payment and bonuses.
- Loadings.
- Monetary allowances.
- Overtime or penalty rates.
- Any other separately identifiable amounts.
Any employee over 45 years of age who has completed at least 2 years of service is given an additional one week of notice.
Why do businesses choose payment in lieu of notice?
There are many reasons why you may choose payment in lieu of notice. These can include:
- To protect sensitive client information from being purposely deleted or compromised.
- Prevent the theft of business-critical data by a disgruntled employee.
- Your business is restructuring and need to end the employment relationship immediately.
- If your employee deals directly with customers, guests or clients. Either as part of a call centre or face-to-face interaction in a retail or hospitality environment.
Termination should be in writing
The National Employment Standards (NES), under the Fair Work Act 2009 states, you must not terminate an employee without providing the minimum notice period in writing. You must methodically document everything and follow a fair process to mitigate any dispute or the potential of an unfair dismissal claim.
Redundancy
If termination of employment is due to redundancy, the role must genuinely be no longer required or to be done by anyone. This could be due to business closure or restructuring. Particularly following an acquisition.
In the case of genuine redundancy, consultation obligations under the award or enterprise agreement still apply. Payment in lieu doesn’t replace consultation or redeployment considerations to a different role within your business should one be available that the employee able to do.
Do employees have a right to payment in lieu of notice?
If there is no provision for payment in lieu of notice included in your employee’s contract term or modern award, they should not assume to have a right to payment and demand to be paid out for the notice period without attending work.
Final pay
The employer should pay out any wages owing, and any unused annual leave, as well as notice (if applicable) as part of the employee’s final pay, but there may be additional entitlements that need to be paid, for example long service leave or redundancy pay. This is referred to as final pay.
Common final pay can include:
- Ordinary wages up to and including the employee’s final day of employment.
- Payment in lieu of notice (if applicable).
- Accrued but unused annual leave (and, where applicable leave loading).
- Redundancy pay (if applicable).
- Any outstanding allowances or reimbursements owed.
The specialist team at Peninsula can help you navigate the process of ending employment and offer advice on employee entitlements.
This article is for general information purposes only and does not constitute as business or legal advice and should not be relied upon as such. It does not take into consideration your specific business, industry or circumstances. You should seek legal or other professional advice regarding matters as they relate to you or your business. To the maximum extent permitted by law, Peninsula Group disclaim all liability for any errors or omissions contained in this information or any failure to update or correct this information. It is your responsibility to assess and verify the accuracy, completeness, and reliability of the information in this article.