Ending an employment relationship is never just a “quick admin task”. If you employ staff, you’ll usually need to give notice of termination (or receive notice if an employee resigns), and that notice period can affect rosters, handovers, payroll, access to systems, and team morale.
That’s where payment in lieu of notice can be a practical option. Instead of having the employee work out their notice period, you pay them the amount they would have earned during that time, and the employment ends sooner.
In 2026, the rules around notice, final pay and lawful deductions are still heavily shaped by the Fair Work Act, modern awards, enterprise agreements, and what your employment contract says. Getting it wrong can create underpayment risk, unfair dismissal issues, and disputes about final entitlements.
Below, we’ll walk you through how payment in lieu of notice works in Australia, when you can (and can’t) use it, how to calculate it, and how to reduce risk in your process.
What Is Payment In Lieu Of Notice (And When Is It Used)?
Payment in lieu of notice means you pay an employee for their notice period instead of requiring them to work through it.
In practice, it often looks like this:
- You terminate the employee’s employment effective immediately (or on a near date).
- You pay them an extra amount in their final pay, equal to what they would have been paid if they had worked their notice period.
- The employment ends earlier, so the employee stops performing work and stops accruing entitlements from that end date (subject to any specific award/contract rules).
This is commonly used where:
- there is a risk to confidential information, client relationships, or workplace safety
- the role is customer-facing and an immediate clean break is best
- you’re restructuring and need the role to end quickly
- the relationship has broken down and continuing to work together isn’t realistic
It’s also worth separating payment in lieu of notice from other concepts that sound similar:
Payment In Lieu Of Notice vs Garden Leave
Garden leave usually means the employee is still employed during the notice period, but is directed not to attend work (or to perform limited duties). They remain employed, so they keep accruing leave during that period, and their employment ends at the end of the notice period.
Payment in lieu of notice ends employment earlier and pays out the notice amount instead. This can change accruals and final pay calculations, so you need to be precise.
Payment In Lieu Of Notice vs Redundancy Pay
Redundancy pay is a separate entitlement (where it applies). You might owe both redundancy pay and payment in lieu of notice, depending on the circumstances.
If you want a deeper overview of the concept and how it’s generally handled, payment in lieu of notice is explained in more detail here: payment in lieu of notice.
Do You Have To Pay Notice, And Can You Always Pay It Out?
In many cases, yes: if you’re terminating someone’s employment (and it’s not summary dismissal for serious misconduct), you’ll need to provide the minimum notice required by the Fair Work Act, plus any extra notice under an award, enterprise agreement, or the employment contract.
Some employers assume they can always “just pay it out” and end employment immediately. In reality, you should check:
- the legal minimum notice that applies (Fair Work Act and any industrial instrument)
- the contract terms (does it allow payment in lieu, and on what conditions?)
- award/enterprise agreement provisions (some awards have specific notice and termination rules)
- the reason and process for termination (a payment doesn’t “fix” an unfair process)
What Is The Minimum Notice Under The Fair Work Act?
The minimum notice period depends on the employee’s length of service and age (for some cases). These rules are commonly discussed alongside section 117 notice requirements, which is the key Fair Work Act provision dealing with notice of termination.
Even if you meet the minimum notice payment, you still need to ensure the termination itself is lawful and procedurally fair.
When Is Payment In Lieu Most Appropriate?
Payment in lieu can be appropriate when you genuinely do not want (or cannot safely allow) the employee to continue working. For example:
- Access and security risk: the employee has access to customer lists, pricing, or commercially sensitive information.
- Workplace conflict: continuing attendance could inflame team issues.
- Operational needs: you need to fill the role quickly or restructure immediately.
When Might Paying Out Notice Create Extra Risk?
There are situations where paying in lieu can create practical or legal complications, such as:
- Commission/bonus-heavy roles where “what would have been earned” is not straightforward
- award-covered employees where notice, allowances, and penalty rates need careful handling
- disputed terminations (paying notice doesn’t prevent an unfair dismissal claim)
If you’re not sure whether the employee is award-covered or what minimum standards apply, it’s often best to get advice before you finalise the termination letter and final pay.
How Do You Calculate Payment In Lieu Of Notice?
At a high level, payment in lieu of notice is usually the amount the employee would have earned if they had worked their notice period.
But the details matter. A clean calculation in payroll depends on the employee’s classification, pay structure, and whether there are award inclusions (like allowances or penalties) that would likely have been worked.
Step-By-Step: A Practical Calculation Approach
- Confirm the notice period
Check the Fair Work Act minimum, then check the contract, award, or enterprise agreement for any longer notice requirement. - Confirm the “base” rate of pay
Usually this includes ordinary hours at the employee’s ordinary rate. For salaried employees, you may need to translate salary into an hourly/weekly equivalent. - Consider predictable components
Depending on the instrument and role, you may need to consider things like:- guaranteed allowances
- car allowance (if contractual and paid regularly)
- regular overtime/penalties (only if the legal instrument requires it or it’s clearly part of the ordinary pattern)
- Calculate the gross amount for the notice period
Multiply the applicable rate by the notice period (weeks/days/hours) that applies. - Process it clearly in payroll
Record it as “payment in lieu of notice” or similar, so it’s transparent on the payslip and in your termination file.
Do You Include Superannuation On Payment In Lieu Of Notice?
Super can be a tricky area because superannuation obligations often depend on whether the payment is treated as “ordinary time earnings” (OTE) in the relevant context.
Rather than guessing, it’s important to treat super on payment in lieu consistently with current rules and the employee’s arrangements. This topic is discussed in more detail here: payment in lieu and superannuation.
What If The Employee Resigns And Doesn’t Work Their Notice?
Resignations are different to employer-initiated terminations, but notice still matters.
Employees may be required to give notice under their award or contract. If an employee resigns and doesn’t work the required notice, some employers want to “deduct” money from final pay. Whether you can do that lawfully depends on the contract terms, the award, and the Fair Work Act rules around deductions.
As a general rule, don’t assume you can withhold pay. If you’re unsure, it’s safer to get advice and ensure your deductions comply with section 324 requirements.
For a broader look at how notice works when someone leaves voluntarily, resignation notice periods are covered here: resignation notice periods.
How Payment In Lieu Fits Into Final Pay (Leave, Public Holidays, And Other Entitlements)
Payment in lieu of notice is usually just one part of the final pay calculation. You’ll also need to consider what else must be paid out on termination.
Common final pay components include:
- ordinary wages up to the last day of employment
- payment in lieu of notice (if applicable)
- any accrued but unused annual leave (and leave loading where applicable)
- any redundancy pay (where applicable)
- any outstanding reimbursements or allowances owed
Annual Leave Payouts: Don’t Miss Leave Loading Or Award Rules
Many employees are entitled to payment of unused annual leave when employment ends. Some are also entitled to leave loading depending on their award/enterprise agreement and arrangements.
If you want to sense-check your approach, annual leave obligations on exit are explained here: annual leave on resignation.
Timing And Recordkeeping
Final pay timing can vary depending on an award, enterprise agreement, and company payroll cycles. Even if your payroll system allows you to process the final pay in the next pay run, that might not always meet industrial requirements.
From a risk-management perspective, you should keep clear records of:
- the termination letter (and whether notice is worked or paid in lieu)
- the calculation worksheet used for payment in lieu and other entitlements
- the instrument relied on (contract / award / enterprise agreement) to determine notice and entitlements
- payslips and payment confirmation
If you want a practical guide to wrapping everything into the final payment correctly, final pay steps are discussed here: calculating final pay.
Common Mistakes Employers Make (And How To Avoid Them)
Payment in lieu of notice can be straightforward, but the disputes we see often come from a handful of predictable issues. Here are the most common ones (and what you can do to reduce risk).
1. Paying The Wrong Notice Period
If you only pay the Fair Work Act minimum notice but the contract or award requires more, you may create an underpayment issue.
What to do: Before you issue the termination letter, confirm:
- the employee’s length of service (and any relevant age factor)
- award coverage and classification (if applicable)
- what the contract says about notice and payment in lieu
2. Underpaying Because You Missed Allowances Or “Usual Earnings”
Some roles have allowances or pay components that are regularly earned. If they would have been earned during the notice period (or are required to be paid under the relevant instrument), missing them can lead to a shortfall.
What to do: Look at the employee’s pay history and the industrial instrument. If the role is complex (commission, allowances, shift penalties), it’s worth getting advice.
3. Using Payment In Lieu As A Substitute For A Fair Process
Paying notice doesn’t automatically protect you from claims. An employee may still bring an unfair dismissal claim if, for example, there was no valid reason, no procedural fairness, or the dismissal was harsh in the circumstances.
What to do: Treat payment in lieu as an administrative tool, not a legal shield. Ensure you have documented reasons and a defensible process (especially for performance or misconduct terminations).
4. Making Unlawful Deductions From Final Pay
When employment ends, it’s tempting to “net off” costs like unreturned equipment, training costs, or an employee failing to work notice on resignation. But deductions are regulated, and getting them wrong can create wage theft and underpayment risk.
What to do: Only make deductions if you’re confident they’re lawful and properly authorised, and keep clear written evidence.
5. Unclear Wording In The Termination Letter
Confusion happens when the termination letter doesn’t clearly state whether:
- the employee is required to work notice
- the employee is being paid in lieu of notice
- the end date is “today” or after a short administrative period
What to do: Make the end date explicit and list the final pay components at a high level (without promising exact figures if payroll still needs to calculate). Clarity early can prevent disputes later.
How To Set Yourself Up With A Cleaner Termination Process In 2026
Even if you rarely terminate employees, having a consistent process helps you move quickly while staying compliant.
A Simple Payment In Lieu Checklist
- Check the rules: confirm notice under the Fair Work Act, award/enterprise agreement, and the employment contract.
- Confirm the end date: decide whether employment ends immediately or after a short period.
- Calculate notice pay: include the correct rate and any required components.
- Calculate other entitlements: wages to end date, annual leave payout, redundancy (if applicable).
- Confirm super treatment: apply correct super handling for each component.
- Document everything: termination letter, calculations, and payroll records.
Make Sure Your Employment Contract Supports Payment In Lieu
While minimum standards can apply regardless, a well-drafted contract usually helps reduce ambiguity about how notice and termination will be handled.
If you’re hiring (or reviewing your templates), having a properly prepared Employment Contract can make exit processes clearer and reduce the risk of disputes about notice, duties during notice, and post-employment obligations.
Consider The Human Side Too
Payment in lieu of notice can feel abrupt to employees, even where it’s lawful and appropriate. A respectful process can protect your culture and reduce the chance of conflict.
Consider:
- having the conversation privately and calmly
- providing a clear written summary of what will be paid and when
- offering a handover option if appropriate (without extending employment if you’re paying in lieu)
- planning internal communications to the team
Key Takeaways
- Payment in lieu of notice lets you end employment sooner by paying what the employee would have earned during the notice period.
- Before paying in lieu, you should confirm the correct notice period under the Fair Work Act, any applicable award/enterprise agreement, and the employment contract.
- Calculations should account for the employee’s ordinary earnings and any required components, and should be recorded clearly in payroll.
- Payment in lieu is only one part of final pay, which may also include unused annual leave (and leave loading), redundancy pay, and other owed amounts.
- Common mistakes include paying the wrong notice period, missing required pay components, and making unlawful deductions from final pay.
- A clear termination letter, good recordkeeping, and a consistent process help reduce disputes and compliance risk.
If you’d like help reviewing a termination situation or getting your employment documents and processes right, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
