Payment in Lieu of Notice

What is payment in lieu of notice?

Payment in lieu of notice (PILON) is a payment an employer makes to an employee when ending their employment immediately and not requiring them work through their notice period. It compensates the employee for the wages and entitlements they would have received during that time, and is often used to wrap up employment quickly.

How does payment in lieu of notice work?

Under the Fair Work Act 2009, employers must provide a minimum notice period for terminating employment, unless the termination is for serious misconduct — in which case, no notice or payment is required.

Instead of having the employee serve out their notice, the employer can choose to end employment right away by paying the employee what they would have earned during the notice period. Here is how it works:

• Minimum notice period: The required notice depends on the employee’s length of service and age, ranging from one to five weeks. If the employee doesn’t work through it, the employer must pay the full amount they would have earned.
• What’s included: Payment in lieu typically includes the employee’s base pay for the notice period. It may also cover:
  • Regular allowances (e.g., for travel or tools) that would apply during the notice period
  • Superannuation contributions depend on the employment contract and company policy.
    Note: Accrued leave entitlements (like annual and long service leave) aren’t part of the PILON but must be paid out separately at termination.
• Payment timing: Payment in lieu must be made promptly, usually on or before the employee’s final day. Delays can result in legal or Fair Work complaints.
• Taxes and record-keeping: The payment is taxable and part of the employee’s final pay. It must be recorded on the payslip and reported to the Australian Taxation Office (ATO), including in the final Single Touch Payroll (STP) submission.
• Mutual agreement or employer discretion: Employers can generally make this decision unilaterally (if allowed by the contract or award), but some contracts or agreements may require mutual agreement.

HR tip

Always review the employment contract before making a PILON decision to check for any clauses that affect how notice must be given or paid.

Is payment in lieu of notice taxable? 

Yes, PILON is treated as employment income and must be included in the employee’s final pay and reported to the ATO.

Here are the key considerations:

• Tax treatment: PILON is taxed at the employee’s marginal tax rate, like regular wages. It is not classified as a tax-free redundancy payment or eligible termination payment (ETP), so no special tax concessions apply.
• PAYG withholding: Employers must withhold tax under the Pay As You Go (PAYG) system. The withheld amount should appear on the payslip and income statement.
• Superannuation: In most cases, superannuation is not required to be paid on PILON because it is not considered Ordinary Time Earnings (OTE). According to the Australian Taxation Office (ATO), OTE includes earnings for ordinary hours of work but excludes certain lump sum payments, like PILON. However, if the payment mirrors regular wages — under individual contracts or enterprise agreements — some employers may elect to pay superannuation on it.
• Reporting: Employers must report PILON through Single Touch Payroll (STP), as part of gross payments.

The ATO provides guidance on what constitutes OTE. Employers should review contracts, awards, and policies to determine if super should be included.

How do you calculate payment in lieu of notice?

To calculate PILON, first determine the amount an employee would have earned during the notice period. This includes base pay and applicable allowances, but usually excludes bonuses, commissions, and overtime unless required by the contract or award. Here is a step-by-step calculation:

• Step 1: Determine the employee’s gross weekly pay. This includes their base weekly wage plus any regular allowances (e.g., travel or tool allowances).
• Step 2: Identify the notice period (in weeks). The minimum notice period is based on the employee’s continuous service and age under the Fair Work Act 2009. Contracts or enterprise agreements may allow a longer notice period.
• Step 3: Apply the formula.

• Step 4: Add any additional entitlements. While not part of the PILON calculation, the final pay must include any accrued leave (e.g., annual leave, long service leave), calculated separately.

Calculation example

Employee details

• Role: Full-time administrative assistant
• Length of service: 3.5 years
• Age: 30
• Gross weekly pay: $1,200 (base pay)
• Notice period required: Three weeks (based on service) 

PILON calculation

PILON = $1,200 × 3 weeks = $3,600

This $3,600 represents the amount the employee would have earned if they’d worked through their three-week notice period.

Additional considerations

• If the employee receives regular allowances (e.g., a $50 weekly phone allowance), include them in the weekly pay. In the above case, gross weekly pay would be $1,250, and the PILON would be $3,750.
• Superannuation isn’t required on PILON unless specified.
• The PILON amount must be taxed and reported as part of the employee’s final pay through Single Touch Payroll (STP).
• If the employee is on variable pay (e.g, part-time with varying hours), the employer may need to calculate the average weekly earnings over the previous four to 12 weeks, depending on the award or contract.
• Accurate calculation and documentation are essential for legal compliance and to avoid disputes.

HR’s role in managing payment in lieu of notice

HR’s core role during a payment in lieu of notice period is to ensure the termination process is handled lawfully, consistently, and with minimal disruption, involving legal interpretation, administrative coordination, and employee support.

1. Interpreting contracts and legal requirements

HR is responsible for determining the correct notice period based on the employee’s contract, applicable award or enterprise agreement, and the Fair Work Act 2009. This includes confirming whether PILON is permitted in the situation and identifying any exceptions (like serious misconduct). HR must also stay updated on legislative changes affecting termination entitlements.

2. Coordinating with payroll and finance

HR works closely with payroll to calculate the correct PILON amount, ensuring it includes all relevant components (i.e., base pay, allowances, and deductions) and is processed and taxed correctly. HR may also coordinate with finance to ensure the payment timing aligns with the employee’s final day and complies with internal payroll schedules.

3. Managing communication and offboarding

Clear and timely communication with the employee is essential. HR is responsible for explaining the termination decision and the PILON arrangement, including what the payment covers, how it will be taxed, and when it will be paid. HR also manages the broader offboarding process, such as conducting an exit interview, collecting company property, revoking system access, and ensuring the employee is aware of any ongoing confidentiality or post-employment obligations.

4. Documenting the termination process

Accurate documentation is critical for legal compliance and future reference. The termination letter must clearly state that PILON is being provided, specify the amount being paid, and detail any other final entitlements. These records may be required during a Fair Work investigation, audit, or in response to any future disputes.

5. Supporting consistency and risk management

Standardizing how PILON is handled across the organization helps mitigate legal and reputational risks. HR should apply policies consistently across departments and locations, document decisions thoroughly, and ensure that actions are free from bias or any potential claims of unfair dismissal or discrimination.

HR tip

Use a termination checklist to ensure all final pay components (PILON, leave entitlements, and deductions) are calculated and approved before processing.

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