Payment in lieu of notice is a common feature of employment termination. However it can raise questions about termination timing, entitlements and calculation of pay.Understanding how it works is essential to ensure compliance with the Fair Work Act 2009 (Cth) and avoid payroll error or legal risks.
My Business Workplace receives many enquiries from subscribers in relation to notice of termination, particularly payment in lieu of notice. The Fair Work Act requires the employer to provide the relevant period of notice of termination to the employee or the payment of the equivalent in lieu of notice. Questions relate primarily to which payments are included in payment in lieu of notice and which date is the actual date of termination for calculating other entitlements, such as annual leave.
Questions generally relate to the following scenarios:
# 1 If an employee is paid out their notice in lieu, does the termination date still remain as the date they finish or is it projected to the end of the notice period?
The actual date of termination is the date determined by the employer for the employment to end. The contract of employment does not apply beyond this date. The Fair Work Act (s.117) requires the employer to give an employee notice of termination, in writing. Failure to do so may be in breach of the Fair Work Act, but may not necessarily mean a termination of employment has not been effected. Generally, a termination of employment is considered not to take effect unless and until it is properly communicated to the other party. This could include notice being given verbally (although this would not satisfy the Fair Work Act where verbal notice is given by the employer).
# 2 Is their annual leave balance calculated to the end of the equivalent notice period or only until their last day of work?
Annual leave is calculated to the date the employment ends. The Fair Work Act provides that if the employment ends and the employee has untaken paid annual leave, the employer must pay the employee the amount that would have been payable to the employee had the employee taken that period of leave, which includes “any other separately identifiable amounts.” It would seem that annual leave would be considered an entitlement, rather than being considered part of an employee’s rate of remuneration.
# 3 If an employee was rostered to work an overtime shift during the projected period of payment in lieu of notice must the overtime shift be included when calculating payment in lieu of notice?
Payment in lieu of notice is calculated at the employee’s “full rate of pay” for the hours the employee would have worked had the employment continued until the end of the minimum period of notice. “Full rate of pay” is defined in the Fair Work Act (s.18) to include the following:
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incentive-based payments and bonuses;
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loadings;
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monetary allowances;
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overtime or penalty rates;
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any other separately identifiable amounts.
Bottom line
Payment in lieu of notice brings employment to an immediate end, but requires the employee to be paid what they would have earned during the notice period.
Employers should take care to calculate these payments accurately and ensure all entitlements are finalised based on the actual termination date, not the notional notice period.
