You've made the call to end an employment relationship, and you want to finalise it today rather than have the employee work out their notice. Maybe there are confidentiality concerns, a role has been made redundant, or the working relationship has simply reached its natural end. Whatever the reason, paying in lieu of notice is a legitimate and commonly used option — but it has to be done correctly.
When you get it right, you'll have a signed-off termination letter, a compliant final pay statement, and a clean separation that closes out all entitlements. What you won't have is a dispute about underpayment, a Fair Work complaint, or a record-keeping gap that comes back to bite you in an unfair dismissal proceeding.
Prerequisites
Before you start the process, make sure you have the following in hand:
- The employment contract — to confirm whether it expressly permits payment in lieu and to identify any notice period longer than the statutory minimum.
- The employee's service start date and date of birth — you need both to calculate the correct notice period under s 117 of the Fair Work Act 2009 (Cth).
- Coverage confirmation — is the employee covered by a modern award or enterprise agreement? Awards and registered agreements can set longer notice periods than the NES. Find out now, not after you've issued the letter.
- The employee's usual roster and pay components — base rate, any regular loadings, allowances, or rostered penalty rates you will need to replicate in the in-lieu calculation.
- Authority to terminate — confirm you have the appropriate internal approval (board resolution, HR sign-off, or whatever your governance requires) before you proceed. Issuing a termination letter without authority creates a separate legal problem.
- A clear decision on the reason for termination — if you are contemplating dismissal for serious misconduct, the analysis is different: s 123 of the Fair Work Act 2009 (Cth) removes the obligation to give notice or pay in lieu altogether for a lawful serious misconduct dismissal, but the threshold is fact-specific and the consequences of getting it wrong are significant. Get advice before you rely on that exception.
Step 1: Confirm the correct notice period
Work out the NES minimum
Under s 117 of the Fair Work Act 2009 (Cth), the minimum notice period an employer must give (or pay in lieu of) depends on the employee's period of continuous service at the time notice is given:
| 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 |
One additional week applies if the employee is over 45 years old and has completed at least two years of continuous service with you at the time notice is given.
Check whether a longer period applies
These are statutory floors — they cannot be undercut. An award, enterprise agreement, or employment contract can require a longer notice period, and if it does, that longer period is what you must pay. Always check:
- The applicable modern award (if any) — some awards impose longer notice for senior or longer-tenured employees.
- Any enterprise agreement in force.
- The employee's individual contract — particularly for senior or specialist roles, contracts routinely specify four to twelve weeks.
The longest applicable period is the one you must use.
Note the exceptions to the notice obligation
Most employees are entitled to notice or pay in lieu. The main exceptions under s 123 of the Fair Work Act 2009 (Cth) are:
- Serious misconduct: A lawful dismissal on genuine serious misconduct grounds removes the obligation to give notice or pay in lieu. The definition of serious misconduct in reg 1.07 of the Fair Work Regulations 2009 (Cth) includes wilful conduct inconsistent with continuing the employment relationship, conduct causing a serious and imminent risk to health and safety, and engaging in theft, fraud, assault, or sexual harassment in the course of employment.
- Casual employees: Casual employees are generally not entitled to notice or pay in lieu under the NES. However, if your contract or the relevant award gives a casual a notice right, honour it.
Step 2: Calculate the payment in lieu
The payment in lieu must put the employee in the same financial position they would have been in had they worked through the notice period. The starting point is base wages or salary, but that is rarely the whole picture.
What to include
- Base wages or salary for the notice period at the employee's current rate of pay.
- Loadings and allowances that would ordinarily have applied — shift loadings, leading hand allowances, tool allowances, or any other allowance the employee receives as a regular component of their pay.
- Rostered penalty rates and overtime — if the employee had a regular pattern of overtime or penalty rates, include a reasonable estimate based on that pattern. Document your assumptions clearly; an underpayment dispute will focus on exactly this calculation.
- Superannuation — check whether super is payable on the in-lieu amount. The answer depends on which components attract ordinary time earnings under the superannuation legislation. If you are unsure, ask your accountant before you finalise the payment.
What to handle separately
Pay in lieu closes out the notice entitlement. It does not replace these amounts, which must be calculated and paid regardless:
- Accrued but untaken annual leave — must be paid out on termination at the employee's applicable rate (including any relevant loading under an award).
- Long service leave — payable under the relevant state or territory legislation once the employee meets the qualifying period. The applicable law depends on the state or territory where the employee ordinarily works, not where the business is incorporated.
- Any other contractual entitlements — time off in lieu balances, contractual bonuses or commissions that have accrued, or any other amounts the contract specifies are payable on termination.
Tax treatment
Pay in lieu of notice is generally taxable as ordinary income and subject to PAYG withholding. The precise treatment of other termination components — particularly long service leave — can be more nuanced. Get specific advice from your accountant before you finalise the payment run.
Step 3: Prepare the termination documents
Having the right documents in place protects you if the termination is later disputed and gives the employee what they are legally and practically entitled to.
Termination letter
The letter should set out:
- The employee's name and role.
- The effective date of termination (the date of the letter, since employment ends immediately when you pay in lieu).
- A statement that the employment is ending immediately and that you are making a payment in lieu of the notice period.
- The notice period being paid out and the gross amount of the in-lieu payment.
- A brief, accurate statement of the reason for termination (required for unfair dismissal purposes and good practice in any event).
Itemised final pay statement
Produce a payslip or separate statement that itemises every component of the final payment:
- In-lieu payment broken down by notice period length and rate.
- Annual leave payout (and any leave loading).
- Long service leave (if applicable).
- Superannuation contributions.
- Any other amounts.
This document is what a Fair Work inspector or tribunal will ask for first if a dispute arises. Itemise clearly; do not lump everything into a single "termination payment" line.
Separation certificate
If the employee is likely to claim jobseeker payments, they will need a Separation Certificate (SU1 form) from you. Completing and handing this over at the time of termination avoids delays in their Centrelink processing and reduces the likelihood of follow-up contact.
Employment contract and HR policies
If your employment contract does not already contain a clear election-to-pay-in-lieu clause, this termination is a good prompt to update your standard template for future hires. A contract that is silent on the method of notice does not prevent you paying in lieu, but a clear clause avoids uncertainty. Similarly, if your HR policies do not include a consistent termination procedure, now is the time to build one.
Step 4: Hold the termination meeting
Do this in person where possible, or by video call if the employee works remotely.
- Keep it brief and direct. State that the employment is ending, explain the reason clearly, and hand over the documents.
- Walk through the calculation. Explain in plain language what each component of the final payment is and why. Most disputes start because the employee does not understand what they have been paid and why.
- Arrange the practical logistics — return of access passes, laptop, keys, or company vehicle; removal of the employee's access to systems; forwarding of emails if required.
- Provide a point of contact. Give the employee a name and contact number for follow-up questions, particularly about payment timing or the separation certificate.
Send a follow-up email confirming what was discussed, what documents were provided, and what the agreed logistics are. Verbal conversations do not survive disputes.
Step 5: Process and confirm the final payment
- Pay on the date required by the applicable award or agreement, or by the next pay cycle if there is no specific obligation. Delays can trigger civil remedy claims under the Fair Work Act 2009 (Cth).
- Ensure the payslip is issued promptly — employers are required to give payslips within one working day of making a payment.
- Confirm that superannuation contributions are paid to the fund by the applicable due date.
- Update your payroll records and notify your payroll provider to close out the employee's file.
Where Artificer Legal can assist
Pay in lieu of notice sits at the intersection of the Fair Work Act 2009 (Cth), applicable modern awards, the employment contract, and (for long service leave) state legislation. Getting the sequence and the calculation wrong in any one of those instruments can result in an underpayment claim or a successful unfair dismissal application.
An Artificer Legal employment practitioner can:
- Review the employment contract and applicable award to confirm the correct notice period and identify any obligations you might not have anticipated.
- Calculate the final pay entitlements — including the in-lieu amount, leave payouts, and super — and document the basis for the calculation in a way that is defensible if challenged.
- Draft the termination letter to make sure it accurately records the effective date, the reason, and the payment, and does not inadvertently create an admission or a gap that could support an unfair dismissal claim.
- Advise on the serious misconduct exception — if you are considering terminating without notice on misconduct grounds, an Artificer Legal practitioner can assess whether the facts meet the statutory definition and what process you need to follow before you make the call.
- Prepare or update your employment contract template and HR policies to include a clear pay-in-lieu election clause and a consistent termination procedure, so the next time this arises the process runs smoothly from the start.
The one thing that drives everything else
The single most common reason a pay-in-lieu termination goes wrong is a miscalculated notice period — either because no one checked the award, or because the employment contract had a longer notice period than the NES minimum and the employer used the statutory minimum instead. The payment in lieu is only as correct as the notice period it is based on. Get that figure confirmed before you issue a single document, and the rest of the process is straightforward.
Key points from this guide:
- Under s 117 of the Fair Work Act 2009 (Cth), minimum notice ranges from one week (for employees with up to one year of service) to four weeks (for employees with more than five years), plus an extra week for employees over 45 with at least two years of service.
- Awards, enterprise agreements, and employment contracts can require longer periods — always check, and always use the longest applicable period.
- The in-lieu payment must replicate what the employee would have earned during the notice period: base pay, loadings, allowances, and rostered penalties. Annual leave, long service leave, and superannuation are separate obligations.
- Serious misconduct dismissals under s 123 of the Fair Work Act 2009 (Cth) remove the notice obligation, but the threshold is demanding — get advice before relying on it.
- Casual employees are generally not entitled to notice under the NES, but always check the contract and applicable instrument.
- Document everything: a termination letter, an itemised final pay statement, and a separation certificate are the minimum.