When an employment relationship ends, it’s crucial for both employers and employees to understand the rules around payment in lieu of notice. Under the Fair Work Act 2009 (Cth), strict guidelines apply to how and when this payment can be made.
This article, b our employment lawyers, outlines the legal framework, calculation methods, exclusions, and practical steps to ensure compliance.
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.
It must be made on or before the termination date.
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.
What is Payment in Lieu of Notice?
Payment in lieu of notice allows an employer to end employment immediately by paying the employee what they would have earned if they had worked through their required notice period. This approach is commonly used to manage workplace dynamics, protect business interests, or facilitate a swift transition.
Legal Framework: 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.
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 payment in lieu is made 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.
