Sometimes, ending employment quickly is the right call for your business. In those situations, you may choose to pay an employee instead of requiring them to work out their notice period.
This is called payment in lieu of notice (often shortened to “PILON”). It can be straightforward, but there are specific rules under Australian employment law you need to follow.
In this guide, we’ll explain when you can use payment in lieu, how to calculate the right amount, what else you must pay (including tax and any final entitlements), and a step-by-step process so you stay compliant and reduce the risk of disputes.
What Is Payment In Lieu Of Notice (PILON)?
Payment in lieu of notice is when you end employment immediately and pay the employee what they would have earned during the required notice period.
Under the Fair Work Act 2009 (Cth), an employer may either provide notice or make a payment instead of notice. The statutory basis is in section 117(2)(b). If you choose PILON, the payment must be at least the amount the employee would have earned during the notice period at their full rate of pay for ordinary hours of work.
“Full rate of pay” for these purposes is a defined concept under the Fair Work Act. It generally includes incentive‑based payments and bonuses, loadings, monetary allowances, overtime or penalty rates, and any other separately identifiable amounts the employee would have been entitled to for their ordinary hours during the notice period. In practice, you are paying what they would have taken home had they worked through notice on their usual pattern.
PILON is different from other end-of-employment options:
- Work the notice: The employee remains employed until the end of the notice period and continues to perform duties (and accrue certain entitlements).
- Garden leave: The employee stays employed for the notice period but is directed not to attend work or perform duties (see Garden Leave).
- PILON: Employment ends immediately and you pay out the value of the notice period.
Your right to use PILON will usually be supported by the National Employment Standards (NES), and it may also be addressed in the Employment Contract, an applicable modern award or an enterprise agreement.
When Can You Use PILON-and When Should You Avoid It?
PILON is commonly used when you want a clean break, you need to remove system access quickly, or you want to reduce disruption to your team or clients. It’s also sensible where the working relationship has broken down or there are confidentiality concerns.
Check Your Contract, Award Or Enterprise Agreement
Start by reviewing the contract and any applicable award or enterprise agreement to confirm you can provide payment in lieu and to verify the notice entitlement. If you’re unsure how much notice is required, this overview of Calculating Employee Notice Periods is a helpful primer.
Fair Reason And Process Still Matter
Even if you pay in lieu, you still need a valid reason and a fair process. PILON doesn’t cure an unfair dismissal risk. The Fair Work Commission assesses procedural fairness and reasons for dismissal under factors similar to those in Section 387 of the Fair Work Act. Think about warning processes, opportunities to respond, and whether dismissal is proportionate to the issues.
If the termination is due to redundancy, consultation obligations under the award or enterprise agreement still apply, and the role must genuinely be no longer required. Payment in lieu doesn’t replace consultation or redeployment considerations. Ensure the decision meets the “genuine redundancy” test before finalising the termination.
When To Avoid PILON
- Mandatory consultation is incomplete: For example, moving ahead with redundancy before consultation can create compliance and unfair dismissal risks.
- The instrument forbids it: If a contract or enterprise agreement expressly requires worked notice (rare), follow it.
- Adverse action risk: If timing could suggest you’re acting because of a protected attribute or activity, get advice first.
How To Calculate A Lawful Payment In Lieu Of Notice
At a high level, you must pay at least what the employee would have earned if they had worked their notice period at the full rate of pay for ordinary hours. The detail depends on the NES minimums, your contract, and any applicable award or enterprise agreement.
1) Determine The Correct Notice Period
- Start with the NES minimum notice based on length of service (and an extra week if the employee is over 45 and has at least two years’ service).
- Check the Employment Contract and any award or enterprise agreement for longer notice requirements.
- Senior or executive contracts often provide more generous notice-apply the higher requirement.
2) Confirm The “Full Rate Of Pay” Components
The amount must be at least the full rate of pay for the employee’s ordinary hours during the notice period.
- Include: Base pay for ordinary hours, plus incentive-based payments and bonuses, loadings, monetary allowances, overtime or penalty rates, and any other separately identifiable amounts that would have been payable for those ordinary hours during the notice period under the relevant instrument.
- Usual roster patterns: Use the employee’s established roster as the basis for ordinary hours during the notice period. If the roster varies, use a fair and reasonable average consistent with the award/EA and your payroll practices.
- What’s typically excluded: Discretionary bonuses, commission that wouldn’t have been earned for ordinary hours during the notice period, and reimbursements. Always check the wording of your contract and instrument.
3) Add Other Final Entitlements (Separate From PILON)
PILON is only the notice value. On termination, you will also need to process other entitlements, which are separate line items:
- Unused annual leave (including leave loading if applicable under an award/EA or contract).
- Long service leave (according to the relevant state or territory laws).
- Redundancy pay (if it’s a genuine redundancy and the business is not exempt under the Fair Work Act or a small business exemption).
4) If An Employee Doesn’t Work Their Own Notice
When employees resign and don’t work their required notice, your recovery rights come from the contract or the relevant award/EA (and deductions must be lawful). This is different from PILON, but the two issues often arise together. See Employee Not Working Notice Period for common scenarios and limits on deductions.
Do You Need To Pay Super, Tax And Other Final Entitlements?
It’s important to get payroll settings right when you pay in lieu, including PAYG withholding, superannuation and reporting.
Superannuation On PILON
Whether superannuation is payable on a PILON amount can depend on how the payment is characterised under superannuation law and relevant guidance. Some instruments also specify treatment. For a practical overview, read Payment In Lieu Of Notice And Superannuation and the broader guidance on Super On Termination Payments.
Because super and tax treatment can be nuanced and fact‑specific, speak with your payroll provider or accountant alongside your employment law advice.
PAYG Withholding And Final Pay Breakdown
- PAYG tax will generally apply to PILON, unused annual leave and any other taxable amounts in the final pay.
- Provide a clear final pay statement showing notice in lieu, leave payouts, redundancy (if applicable), tax withheld, and any super contributions.
- Issue a final payslip and report the termination in your STP reporting as required.
Employment Records And Certificates
Employees may request an employment separation certificate for Services Australia. Ensure requests are handled promptly and accurately-see Employer Separation Certificates for what to include.
Step-By-Step Process To Implement PILON Correctly
Here’s a practical process to follow so you stay compliant and minimise risk.
Step 1: Confirm The Legal Basis
- Check that the NES and your instrument allow a payment instead of notice (Fair Work Act s 117(2)(b)), and confirm the applicable notice period.
- Review the Employment Contract, relevant award/EA, and any policy settings that might affect notice or termination benefits.
- Identify risks such as unfair dismissal, general protections or discrimination. Consider obtaining advice if in doubt.
Step 2: Decide Whether PILON Is The Best Option
- Balance the benefits of ending immediately (e.g. security, continuity) against the extra cost of paying notice upfront.
- Consider alternatives such as garden leave if you prefer the employee to remain employed-and bound by obligations-during the notice period while away from the workplace.
Step 3: Calculate The Payment And Final Entitlements
- Determine the correct notice period under the NES and your instrument.
- Calculate the PILON amount using the employee’s full rate of pay for ordinary hours that would have been worked, including applicable loadings, allowances, incentive components and penalties that attach to those ordinary hours.
- Add other termination entitlements (annual leave, long service leave, redundancy if applicable) as separate line items.
- Confirm superannuation treatment by reference to your instrument and ATO guidance (see PILON And Superannuation), and check payroll tax settings with your accountant.
Step 4: Prepare Clear Documentation
- Termination letter: Set out the decision, the effective termination date (immediate for PILON), the notice in lieu amount, and all other entitlements being paid.
- Obligations and property return: Remind the employee of confidentiality, IP and restraint obligations as applicable, and include return/collection arrangements for devices, passes and data.
- Optional settlement terms: For higher‑risk exits, consider a separation agreement or deed setting out mutual releases and expectations.
Step 5: Pay, Withhold And Report
- Process the final pay on time with PAYG withholding applied correctly and STP reporting updated.
- Provide a detailed final payslip and any required statements or certificates.
- Update internal systems promptly to remove access and protect confidential information.
Step 6: Tie Off Post‑Employment Matters
- Confirm who will handle reference or verification requests.
- Ensure all company property is returned and accounts are disabled.
- Keep records of the decision, calculations and payments in case of future queries.
Key Takeaways
- Payment in lieu of notice lets you end employment immediately and pay out the value of the notice period instead of requiring it to be worked.
- The Fair Work Act (s 117(2)(b)) allows PILON, and the amount must be at least what the employee would have earned during the notice period at their full rate of pay for ordinary hours.
- Check your Employment Contract, award or enterprise agreement for any longer notice requirements or special rules that affect calculation.
- Calculate the full rate of pay correctly and pay other final entitlements separately (unused annual leave, long service leave, and redundancy if applicable).
- Superannuation and tax treatment can be nuanced-review guidance on super on termination payments and talk to your accountant or payroll provider.
- PILON doesn’t remove the need for a fair reason and process. Consider the factors in Section 387 and complete redundancy consultation where required.
- If an employee resigns and won’t work their notice, review your rights carefully-start with this guide to employees not working notice.
If you’d like a consultation on handling payment in lieu of notice lawfully, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.
