Payment in lieu of notice (PILON) looks like the simple option. You pay out the notice period, the employee leaves today, and everyone moves on.
The trouble is in the detail. Pay it a few days late and you’ve breached the Fair Work Act, even if the amount was right. Pay it without a contractual right to do so and you may lose the benefit of the employee’s restraints. Pay only the base rate and you’ve probably underpaid. And since 1 July 2026, the super on it is due on payday, not at the end of the quarter.
Recently, an employee brought us a deed of release from their employer. The notice payment had been worked out on base salary alone, left out a regular allowance, said nothing about super, and was only payable if the employee signed. Every one of those was a problem.
When can you pay in lieu of notice?
There are two layers to this, and they don’t always line up.
Under the National Employment Standards (NES), you must give the employee written notice of the day their employment ends. You then have a choice. Either the employee gets at least the minimum notice period, or you pay them in lieu of it (Fair Work Act 2009 (Cth), s 117).
The contract is a different question. At common law, there is no right to pay in lieu of notice unless the contract says so, and the courts are unlikely to imply one (Sanders v Snell (1998) 196 CLR 329). If you end the employment immediately and pay out the notice without that right, you’ve breached the contract. The payment is treated as going towards the employee’s damages for that breach.
That sounds technical. It isn’t. In one case, an insurance broker paid an employee in lieu of notice without a contractual right to do so, and as a result couldn’t rely on the post-employment restraints in the employee’s contract (Northern Tablelands Insurance Brokers Pty Ltd v Howell [2009] NSWSC 426). Each case turns on the wording of the contract, but losing a restraint over a missing clause is an expensive way to save a few weeks of notice. In another case, an employer paid out three months’ notice to an employee based in Malaysia, who then had to leave the country within days. The court awarded $30,000 for the lost chance to find work there during the notice period (WT Partnership (Aust) Pty Ltd v Sheldrick [1999] FCA 843).
So before you pay anyone in lieu, check that your employment contract (or the award or enterprise agreement) actually lets you. If it doesn’t, you can ask the employee to agree to it in writing, or you can put them on garden leave for the notice period, as long as nothing in the contract requires you to give them work.
How much notice do you have to pay?
The NES sets the minimum, based on the employee’s continuous service at the end of the day you give notice (s 117(3)):
| Continuous service | Minimum notice |
|---|---|
| 1 year or less | 1 week |
| More than 1 year, up to 3 years | 2 weeks |
| More than 3 years, up to 5 years | 3 weeks |
| More than 5 years | 4 weeks |
Add one week if the employee is over 45 and has at least two years of continuous service. Time spent as a casual doesn’t count towards continuous service (s 117(4)).
The NES is a floor, not the answer. If the contract, award or enterprise agreement gives a longer period, the longer period applies. And if the contract says nothing at all about notice, the courts will usually imply a term for ‘reasonable notice’, which can be considerably longer than the NES minimum, particularly for senior employees.
Paying more than the minimum doesn’t end the conversation either. In a recent redundancy dispute where we acted for the employee, the employer had paid two months in lieu of notice, well above the two weeks the NES required, and leaned on that in defending an unfair dismissal claim. A generous payment can help commercially, but it doesn’t answer whether the dismissal was fair or a genuine redundancy. That matter also turned partly on which contract governed notice, because a later agreement had replaced the first. Before you calculate anything, make sure you’re working from the contract that’s actually in force.
Service can also come from someone else. When you buy a business and take on its employees, their service with the seller generally counts towards their notice period with you. In a recent business purchase we advised on, the buyer was inheriting notice obligations that some employees had built up over many years with the previous owner. And where an employee has been wrongly treated as a casual, a court may be able to offset an identified casual loading against a claim for payment in lieu of notice (s 545A). That offset is tied to the employer that paid the loading, so a buyer may not be able to rely on loading the seller paid.
Some employees aren’t entitled to NES notice at all, including casuals, employees engaged for a specified period, task or season, and employees dismissed for serious misconduct (s 123). If you’re relying on serious misconduct, make sure it really is serious misconduct. Our guide to summary dismissal explains where that line sits.
How to calculate payment in lieu of notice
This is where most underpayments start. The NES doesn’t say ‘base rate’. It says you must pay at least what the employee would have earned at their full rate of pay for the hours they would have worked had the employment continued to the end of the notice period (s 117(2)(b)).
The full rate of pay includes incentive-based payments and bonuses, loadings, monetary allowances, overtime and penalty rates, and any other separately identifiable amounts (s 18). So if the employee would have worked that rostered Saturday, it goes in.
Here’s how that plays out. (The figures are illustrative only.)
Sam is 52 and has worked for you for six years. That’s four weeks’ notice, plus one more because Sam is over 45 with more than two years’ service. Five weeks in total. Sam works 38 ordinary hours a week at $35 an hour, receives a $40 weekly site allowance, and is regularly rostered for four hours of Saturday overtime at time and a half.
| Per week | Five weeks | |
|---|---|---|
| Base rate only (38 × $35) | $1,330 | $6,650 |
| Site allowance | $40 | $200 |
| Rostered Saturday overtime (4 × $52.50) | $210 | $1,050 |
| Full rate of pay | $1,580 | $7,900 |
Pay Sam the base rate and you’re $1,250 short. That’s an underpayment, and a contravention of the NES. It happens more often than you’d think. In one deed of release we reviewed recently, four weeks’ notice had been calculated on base salary only. The employee’s car allowance, worth more than $1,500 over the notice period, was missing, and so was the super on the payment.
The termination date matters too. When you pay in lieu, the employment ends on the termination day, not at the end of the notice period that would have been worked. Leave stops accruing on that day. That can make a real difference for an employee who is only weeks away from a long service leave milestone, or from a bonus or share vesting date, so check before you choose a date.
Super, tax and leave on PILON (2026 update)
Payday super started on 1 July 2026, and it changes the timing on termination.
Super is now calculated on ‘qualifying earnings’. The ATO’s guidance confirms that payment in lieu of notice is qualifying earnings, whatever the reason for the termination, so the 12% super guarantee applies to it. Unused annual leave and long service leave paid out on termination are not, and nor are redundancy pay or ex gratia payments (ATO: What payments are qualifying earnings). Under payday super, the super on PILON follows the final pay rather than waiting for the end of the quarter. Check your contract too. Some contracts promise super on more than the minimum, and those promises are enforceable (Willis v Health Communications Network Ltd [2008] NSWCA 2).
For tax purposes, PILON is an employment termination payment, which can attract concessional tax treatment up to certain caps. The rules are fiddly, so get your accountant or payroll provider to confirm the withholding before the final pay goes out.
PILON also sits alongside other termination entitlements. It doesn’t replace them. You can’t set it off against redundancy pay or accrued leave, because each entitlement serves a different purpose (Caputo v Conroys Smallgoods Pty Ltd [2008] SAIRC 33). And accrued annual leave must be paid out at the rate the employee would have received had they taken the leave while still employed, which can include loadings, penalties and allowances (Centennial Northern Mining Services Pty Ltd v CFMEU [2015] FCAFC 100).
Where employers get it wrong (and what it costs)
The most common mistake isn’t the amount. It’s the timing.
Many businesses pay final entitlements in the next pay run. For PILON, that’s too late. Section 117(2) says you must not terminate the employment unless you have paid in lieu, so the payment has to be made on or before the termination day. In Southern Migrant and Refugee Centre Inc v Shum (No 3) [2022] FCA 481, the employee was dismissed by email on 19 June 2017 and told her payment in lieu would follow the next week. It arrived four days later. The Federal Court held that the employer had contravened s 117(2).
That case has now reached penalty. In 2026, the employer was fined $5,400, even though the court accepted the delay was an unintentional payroll mistake that was quickly corrected (Shum v Southern Migrant and Refugee Centre Inc (No 4) [2026] FedCFamC2G 853). Four days. And the maximum penalty for the same contravention today is roughly double what it was in 2017. Courts have also penalised slow payment of other final entitlements, including a $17,000 penalty for paying out annual leave three months late (Dorsch v HEAD Oceania Pty Ltd (Penalty) [2024] FCA 484).
If your payroll can’t run an out-of-cycle payment, plan the termination date around the pay run, or use a short period of garden leave so the employment ends on a day you can actually pay.
Other common mistakes include:
- paying the base rate only, instead of the full rate of pay;
- forgetting the extra week for employees over 45;
- counting casual service towards the notice period;
- relying on the NES minimum when the contract or award gives a longer period;
- paying in lieu without a contractual right to do so, and putting your restraints at risk;
- giving notice verbally. The NES requires written notice of the day the employment ends (s 117(1));
- setting PILON off against redundancy pay or leave, or making it conditional on the employee signing a deed of release. Notice is owed either way, so only an additional payment should depend on the deed; and
- forgetting the super on it, or paying the super late under the new payday super timing.
A failure to give notice or pay in lieu is a breach of the NES, which is a civil penalty provision (Melbourne Stadiums Ltd v Sautner [2015] FCAFC 20). On top of any penalty, the employee can claim the shortfall, interest and, in some cases, compensation.
Before you pay in lieu: a checklist
This is the order I’d work through before the termination meeting, not after it:
- Check the contract, award or enterprise agreement, and any binding policies, for the notice period and for a right to pay in lieu.
- Work out the employee’s continuous service at the end of the day you’ll give notice. Leave out casual service, and check the employee’s age.
- Use the longest notice period that applies (NES, award, agreement or contract).
- Calculate the payment at the full rate of pay for the hours the employee would have worked, including allowances, loadings, bonuses and rostered overtime.
- Check whether the termination date cuts across a long service leave milestone, a bonus or a share vesting date.
- Put the notice in writing, stating the day the employment ends.
- Pay the PILON (and the super on it) on or before that day. Arrange an out-of-cycle pay run if you need one.
- Pay the other final entitlements separately, without setting anything off.
- Keep a record of the calculation and the date of payment.
Frequently asked questions
Can I have the employee work part of the notice period and pay out the rest?
Generally, yes, if the contract allows it. The notice worked plus the payment for the balance must together cover the whole notice period, and the payment must be at the full rate of pay.
Is super payable on payment in lieu of notice?
Yes. PILON is qualifying earnings, so the 12% super guarantee applies, and under payday super it’s due with the final pay.
Does annual leave keep accruing if I pay in lieu?
No. When you pay in lieu, the employment ends on the termination day, so leave stops accruing on that day.
Can I pay PILON in the next pay run?
No. Under the NES the payment must be made on or before the termination day. A delay of even a few days is a contravention.
Do casual employees get payment in lieu of notice?
Not under the NES. Check the award, enterprise agreement and contract, because some give casuals a notice entitlement.
How can Prosper Law help?
Our employment law team for employers helps businesses plan terminations before they happen: checking the contract and award, calculating notice and final pay, preparing the termination letter and managing the risks around restraints and unfair dismissal. If you’re about to end someone’s employment, call us first. It’s much easier to get the date and the numbers right before the meeting than to fix them afterwards. Contact our employment team.
About the Author
Farrah Motley
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