When an employer ends an employee’s job, they are usually required to give a period of notice. In some cases, instead of requiring the employee to work through this period, the employer may choose to make a Payment in Lieu of Notice (PILON).
This guide is written by a Brisbane employment lawyer. We explain what PILON means under Australian law, employer obligations, employee rights, tax implications, and the latest 2025 legal updates.
Key Takeaways
Employers must provide either the minimum notice period or make a payment in lieu to eligible employees.
Payment must reflect the employee’s full rate of pay, including allowances and regular overtime.
As of 2025, payment must occur before termination.
Certain employees, such as casuals and those dismissed for serious misconduct, are excluded from notice entitlements.
Non-compliance can lead to legal claims or penalties from the Fair Work Commission.
PILON lets employers end employment immediately by paying out notice.
Taxed as an Employment Termination Payment (ETP).
What is Payment in Lieu of Notice (PILON)?
Payment in Lieu of Notice is a sum paid to an employee instead of requiring them to work out their notice period.
For example, if an employment contract requires 4 weeks’ notice, the employer may terminate immediately and pay 4 weeks’ salary in lieu of notice.
Legal Basis: Fair Work Act 2009 (Cth)
Section 117 of the Fair Work Act 2009 (Cth) governs payment in lieu of notice in Australia. Under this section employers must:
- Give written notice of termination or pay in lieu of notice
- Provide a minimum notice period as determined by length of service, with an extra week for employees over 45 who have served at least two years
- Reflect what the employee would have received for ordinary hours, including base pay and regular allowances
For a deeper understanding of employer responsibilities see our guide: The Fair Work Act – A Guide for Employers.
Calculating the Minimum Notice Period
Length of Service | Minimum Notice Period |
Less than 1 year | 1 week |
1 – 3 years | 2 weeks |
3 – 5 years | 3 weeks |
Over 5 years | 4 weeks |
Over 45 years old (with 2+ years service) | Add an extra 1 week |
Note: Continuous service excludes periods as a casual employee.
For official guidance on notice requirements and final pay, visit the Fair Work Ombudsman’s page on Notice and Final Pay.
What Must Be Included in the Payment?
Payment in lieu must cover all amounts the employee would have earned during the notice period, including:
- Base salary for ordinary hours
- Allowances (e.g. travel, meal, uniform)
- Overtime and penalty rates, if regularly worked
- Separately identifiable amounts (e.g. commissions, bonuses)
- Value of non-cash benefits such as company cars (where private use forms part of remuneration)
If you’re considering an additional discretionary payment, our article explains when and how to offer an Employment Ex Gratia Payment.
Case Example: Company Cars
Courts have clarified that if a company car is provided mainly for private use as part of an employee’s remuneration (see Zappia v Universal Music Australia Pty Ltd), its value should be included in payment in lieu. If use is primarily business-related, it may be treated as a work tool and excluded.
2025 Legal Update – Timing of PILON
A Federal Court decision (Southern Migrant and Refugee Centre Inc v Shum (No 3) [2022] FCA 1003) clarified that PILON must be paid on or before the termination date.
Delayed payment (even by a few days) may render the termination unlawful.
Employers should process PILON immediately when employment ends.
When Is Payment in Lieu Not Required?
Employers do not need to provide notice or payment in lieu for:
- Casual employees
- Employees on fixed-term contracts
- Seasonal workers
- Employees dismissed for serious misconduct (e.g., theft, fraud)
- Certain trainees and apprentices
- Daily or weekly hire employees in specific industries
Common Law and Summary Dismissal
At common law, summary dismissal (instant termination without notice or pay in lieu) is only justified for serious misconduct. Otherwise, failure to provide notice or payment in lieu can result in breach of contract claims.
Tax and Redundancy Implications
Payment in lieu of notice is treated as an eligible termination payment for tax purposes. If termination is due to a bona fide redundancy, special tax concessions may apply.
Redundancy pay is separate from notice requirements; employees may be entitled to both under section 119 of the Fair Work Act 2009 (Cth).
Practical Tips for Employers
To reduce legal risk and ensure compliance with Australian employment law, employers should follow these best practices when handling payment in lieu of notice:
Include a clear payment in lieu clause in all contracts.
Accurately calculate pay components and document the process.
Ensure payment is made on or before the final working day.
Seek legal advice if the employment contract is silent on notice terms.
After terminating an employment contract, make sure you follow the correct legal process with our step-by-step article: Post‑Employment Contract Termination Steps.
Frequently Asked Questions
Can an employer choose to pay out only part of the notice period?
Yes, provided the contract or industrial instrument allows it and the payment covers all entitlements for the period not worked.
Make the most of employee departures with valuable insights from our Employer’s Guide to Exit Interviews.
What if the employment contract is silent on payment in lieu?
Employers should seek written agreement from the employee to pay out the notice period. It is best practice to include a clear clause in all contracts.
Protect your business by ensuring your contracts include essential provisions – learn more in our article on What Clauses Should Always Appear in an Employment Contract.
Does annual leave accrue during the notice period if paid out?
No, annual leave only accrues if the employee works through the notice period. If paid out, employment ends immediately.
Stay compliant and informed about statutory leave by reviewing Leave Entitlements for Employees.
What happens if PILON is paid after the termination date?
This may breach section 117 of the Fair Work Act and expose the employer to legal claims or penalties.
Are commissions and bonuses included in payment in lieu?
Yes, if the employee would have been entitled to them during the notice period, they must be included.
