Payment In Lieu Of Notice And Superannuation: Employer’s Guide In Australia

Ending an employee’s time with your business can be stressful for everyone involved. Getting their final pay and entitlements right - including superannuation - is a critical part of a fair, compliant offboarding process.

One area that often causes confusion is payment in lieu of notice (sometimes called “PILON”). In particular, many employers ask: does payment in lieu of notice attract super? And if so, how do you calculate it correctly?

Good questions. In this guide, we’ll explain when super applies to payment in lieu of notice, how to work it out, and what else to include in final pay so you stay on the right side of Australia’s employment and super laws.

By the end, you’ll have a clear, practical checklist to follow - and the confidence to offboard staff properly and respectfully.

What Is Payment In Lieu Of Notice?

When you end an employee’s employment, you generally need to give a minimum notice period. That notice period comes from the Fair Work Act 2009, the applicable award or enterprise agreement, and the employee’s contract.

Sometimes, you don’t want the employee to work out that period (for example, there are role changes, security or cultural concerns, or you want a clean break). In those cases, you can end the employment immediately and pay the employee the amount they would have earned if they had worked through their notice period. That lump sum is payment in lieu of notice.

If you need a refresher on the concept and the legal steps involved, see our detailed guide to payment in lieu of notice.

Does Payment In Lieu Of Notice Attract Superannuation?

In most cases, yes - superannuation is payable on payment in lieu of notice.

Superannuation Guarantee (SG) contributions are based on an employee’s ordinary time earnings (OTE). The Australian Taxation Office (ATO) treats amounts that would have been earned for working ordinary hours as OTE. Because payment in lieu of notice replaces what the employee would have earned during their ordinary notice period, it is generally OTE and attracts SG contributions.

As at 1 July 2024, the SG rate is 11.5%. Unless an exception applies (covered below), you should include payment in lieu of notice in your OTE calculations and pay super on it.

If you’d like a quick refresher on what counts as OTE in different scenarios, we’ve broken this down in our guide to ordinary time earnings.

Why The Payment Method Doesn’t Change The Outcome

Whether you pay notice as regular wages over several weeks or as a single lump sum on termination, the character of the payment is the same: it’s replacing ordinary time that would have been worked. The fact it’s paid as a lump sum doesn’t remove the SG obligation.

How The Fair Work Framework Fits In

The Fair Work system determines notice minimums and other employment entitlements. Super treatment, however, flows from SG law and ATO guidance on OTE. So you’ll check Fair Work sources for how much notice (or payment in lieu) is due, then apply SG rules to work out super on that amount.

How To Calculate Super On Payment In Lieu Of Notice

Working out super on payment in lieu of notice is usually straightforward. Follow these steps:

1. Confirm the notice period the employee is entitled to (from the Fair Work Act, any award/agreement and the employee’s contract).
2. Calculate the gross payment in lieu (for example, four weeks of base pay at the ordinary hourly or weekly rate, plus any notice-period allowances that would ordinarily apply).
3. Multiply the gross amount by the current SG rate (11.5% from 1 July 2024).
4. Pay the SG contribution to the employee’s chosen fund by the regular quarterly due date (many employers pay it at the same time as final pay to keep everything tidy).

Worked Example

Let’s say Priya’s employment ends on 15 September 2024. Her ordinary weekly wage is $1,200. Her minimum notice period is three weeks, but you elect to pay in lieu so she doesn’t work during notice. You would pay $3,600 as payment in lieu of notice, and 11.5% superannuation on that amount ($414).

Don’t forget to include any other final entitlements (for example, accrued annual leave or long service leave) when you prepare the payout. For a broader checklist across all components, see our guide to calculating final pay.

Timing And Evidence

Make sure the payslip clearly shows the payment in lieu amount, the SG calculation and fund details. Keep the termination letter, contract terms and calculation notes on file in case you need to show your workings later.

How Does Super Apply To Other Termination Payments?

It helps to see how payment in lieu of notice compares to other common termination payments from a super perspective:

• Unused annual leave: Generally not OTE on termination payouts, so SG is usually not payable.
• Long service leave: Often not OTE when paid as a lump sum on termination.
• Genuine redundancy payments: The tax‑free component of a genuine redundancy is not OTE and does not attract SG.
• Bonuses and commissions: Sometimes OTE, sometimes not - it depends on what the payment is for and the ordinary hours context.
• Overtime: True overtime is usually not OTE (unless it forms part of the employee’s ordinary hours arrangement under an award or agreement).

The key principle to keep in mind is whether the amount substitutes for ordinary time earnings. Payment in lieu of notice typically does - hence it attracts super.

Exceptions And Edge Cases: When Might Super Not Apply?

While super is generally payable on payment in lieu of notice, there are a few less common scenarios where SG may not apply:

• Not actually an employee: If the person is a genuine independent contractor paid wholly for a result and not principally for their labour, SG may not apply. Be cautious here - many “contractor” arrangements are in fact employment at law, and super can be required. If you’re unsure, seek advice before classifying a worker.
• Payments after death: Amounts paid for a period after an employee’s death are not usually OTE.
• Under-18s working fewer than 30 hours per week: SG obligations can differ in limited cases, depending on hours and circumstances.

If you aren’t certain whether a situation falls into an exception, it’s wise to get tailored guidance from your accountant and, if needed, a workplace lawyer. It’s much simpler to confirm the right approach up front than to correct underpaid super later.

Practical Offboarding Steps For Employers

A smooth, compliant exit protects your business and supports the employee’s next steps. Use this checklist when payment in lieu of notice is part of a termination:

• Confirm the notice period: Check the Fair Work minimum, any award or enterprise agreement, and the contract. If you’re applying payment in lieu, record the rationale in the termination letter.
• Calculate each component: Work out payment in lieu of notice, accrued annual leave, long service leave (if applicable), and any other entitlements such as redundancy.
• Calculate superannuation on OTE: Include SG on all ordinary time earnings, which usually includes payment in lieu of notice. Keep your calculation notes.
• Issue clear paperwork: Provide a payslip that shows all components. If requested, provide a separation certificate.
• Pay on time: Pay final wages promptly and make SG contributions by the quarterly due date (or at final pay if you prefer to align the timing).
• Close out access and property: Recover company devices and revoke system access in line with your policies, while treating the employee with respect.

A well-drafted Employment Contract and a clear Staff Handbook make these steps far easier - they set expectations, outline notice terms, and guide your team on process.

What To Put In The Termination Letter

Your termination letter should confirm the end date, the notice period (and that you’re paying in lieu), how final pay will be calculated, and when payments (including super) will be made. Keep the language factual and respectful.

Common Pitfalls To Avoid

Small errors can become expensive quickly. Here are the traps we see most often:

• Forgetting super on payment in lieu of notice: Because it’s paid as a lump sum, some employers miss the SG obligation. Treat it as you would ordinary wages for the notice period.
• Confusing OTE with “anything paid” on termination: Not everything in a final payout is OTE. Separate each component and apply SG to OTE items only.
• Rushing the calculation: Underpaying even a small amount of notice (or super) can trigger back-pay issues. Use a checklist and peer review if possible.
• Misclassifying workers: If you’ve treated a worker as a contractor when legally they’re an employee, you may be liable for unpaid SG. Get advice early if the line is blurry.
• Missing SG deadlines: Late payments can lead to the Superannuation Guarantee Charge (which includes penalties and interest). Calendar the due dates and automate contributions where possible.

If redundancy is involved, it’s worth getting redundancy advice before you act, so you apply the correct process and payments and avoid unfair dismissal risks.

Tax And Payroll Withholding Notes

Final pay often includes items with different tax treatment (for example, unused leave or genuine redundancy). Work with your payroll provider or accountant to ensure the correct withholding and reporting. SG obligations are administered by the ATO - if you’re unsure about a specific scenario, it’s sensible to get accounting advice alongside your legal steps.

Frequently Asked Questions

Do I Pay Super On Garden Leave Instead Of Payment In Lieu?

Garden leave means the employee remains employed and paid during their notice period but does not work. Because they stay on ordinary pay during ordinary hours, super is typically payable during garden leave (it’s still OTE). The difference is timing and employment status, not the underlying super position.

What If The Contract Says No Super On Payment In Lieu?

Contract wording can’t override SG law. If the payment is OTE under SG rules, super is required even if a contract purports to exclude it. Contract terms should align with your legal obligations.

Is Payment In Lieu Treated As Overtime Or A Bonus?

No - think of it as a substitute for ordinary wages during the notice period. That’s why it is generally OTE and why SG is payable.

Can I Offset Payment In Lieu Against Accrued Leave?

Accrued annual leave and long service leave are separate entitlements with their own rules and tax treatment. Don’t offset unless the award or agreement expressly allows it and you’ve confirmed the approach is lawful. Most employers keep these items separate in the final pay calculation.

Key Takeaways

• Payment in lieu of notice usually attracts superannuation because it replaces ordinary time earnings during the notice period.
• Work out the gross payment in lieu, apply the current SG rate (11.5% from 1 July 2024), and pay the contribution to the employee’s fund by the usual due date.
• Not all termination payments are OTE - unused annual leave, long service leave and genuine redundancy payments typically don’t attract SG.
• Keep your paperwork tight: issue a clear termination letter, accurate payslip, and provide a separation certificate if requested.
• Strong foundations help: a clear Employment Contract, up‑to‑date workplace policies, and a simple process for payment in lieu reduce mistakes and disputes.
• If you’re unsure about OTE treatment or final pay calculations, get advice early - correcting unpaid super later can be costly.

If you’d like a consultation about handling payment in lieu of notice, superannuation obligations or any aspect of terminating staff in your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.