Is payment in lieu of notice required?

Chloe Boike, Workplace Relations Advisor 

A common question that is asked by employers is whether an employee is entitled to payment in lieu of notice upon termination or resignation. Payment in lieu of notice refers to the compensation provided to an employee when their employment is terminated, either by the employer or employee, where notice of the termination is required, and the employer does not seek to have the employee work the notice period. 

Notice Periods 

The National Employment Standards (NES) within the Fair Work Act 2009 (FW Act) provides the minimum notice period an employer must provide when terminating an employee. These periods are as follows: 

If the employee is over 45 years old and has completed at least 2 years of continuous service with the employer at the end of the day the notice is given, they are entitled to an additional week of notice. Employers may be required to give more notice under employment contract terms or enterprise agreements. 

The notice periods that an employee is to provide to an employer, in the case that they resign, is usually similar to the NES, and is captured in either the applicable modern award, employment contract terms or enterprise agreements. 

Casual employees are not required to give notice and employers are not required to provide them with notice of termination. In many circumstances, an employer will also not be required to provide notice of termination to permanent employees, such as when an employee is summarily dismissed as a result of serious misconduct. There are also other circumstances where notice of termination is not required e.g. at the conclusion of a fixed-term contract or where a contract of employment is repudiated. 

Where an employee or employer does not need to give notice, there is no need for payment in lieu of notice.  

Terminating an Employee 

If an employer decides to terminate an employee without requiring the employee to work out the notice period, they may decide to pay the employee in lieu of notice. Payment in lieu of notice essentially involves compensation to the employee for the wages they would have earned during the notice period had the employee worked the notice period. This payment is usually calculated based on the employee's regular salary or wages and any other entitlements they would have received during the notice period. It does not usually include overtime, unless overtime is guaranteed. 

It's essential to note however that the terms regarding pay in lieu of notice can vary based on the employment contract. Some contracts may explicitly mention the employer's right to terminate the employment by making a payment in lieu of notice, while others may not. Additionally, the contract may specify how the amount of pay in lieu of notice will be calculated and whether any other entitlements, such as accrued leave or bonuses, will be included in the payment. 

When terminating an employee, the employer must provide written notice of the termination under section 117(2) of the FW Act. If employers would like assistance with drafting a termination letter, they can contact our Workplace Advisory Team or purchase Business Chamber Queensland’s Termination Letter Template. For payment in lieu of notice and any agreement made to bring the termination date forward, this should also be put in writing to avoid any potential disputes. 

It is usually the employers’ decision to not require an employee to work out their notice and pay an employee in lieu of that notice. In the absence of a contractual term or an award provision, employee cannot demand to be paid out for the balance of their notice period without attending work or accessing leave entitlements. Payment in lieu of notice is an option provided under the FW Act to the employer to use if they wish. If the employer and employee do not agree to payment in lieu of notice, the employee will generally not be entitled to receive notice unless they work out that period. 

When an employer requires an employee to work out their notice period, and the employee would prefer to be paid in lieu of working out their notice, they may seek to avoid working by taking leave during the notice period. Whether or not the employer needs to approve that leave, as is the case of annual leave and long service leave, or suitable evidence must be provided, in the case of personal/carer’s leave, does not change during a notice period as it did before notice was given. 

 An employee may take annual leave during a notice period if the employer agrees. This does not extend the employee’s notice period and an employer cannot force an employee to take annual leave as part of the notice period. An employee may also take personal/carer’s leave during a notice period if they provide notice of the leave as soon as possible and any evidence requested by the employer such as a medical certificate. An employer and employee can also agree to part of the notice being worked and the remainder being paid in lieu.  

Employee Resignations 

Sometimes, employees attempt to resign without giving the correct notice. When this occurs, employers should remind employees of the notice period they are required to give. This will allow the employee to adjust their resignation to give the correct notice. If an employee still wishes to resign without the correct notice, the employer may be able to deduct up to one week’s wages from the employee’s pay. This can only be done if the relevant modern award or enterprise agreement allows the deduction to occur. The deduction of up to one week’s wages may occur if: 

• The employee is over 18 years of age 
• The employee has not given the correct amount of notice 
• The deduction is not unreasonable. 

The deduction can only be made from wages owed and cannot be from any other entitlements owed to the employee such as leave or other over-award payments. 

Example Scenario: 

Gary is a full-time employee at an accounting firm. He works in the administration department and falls under the Clerks Private Sector Award 2020.  

On Thursday (also payday), Gary decides he wants to pursue a career as an artist and provides a resignation letter to his manager stating that he resigns immediately. Gary’s manager asks him if he wants to reconsider resigning immediately as he is required to provide 3 weeks' notice as per his employment contract. Gary does not want to reconsider and has already begun packing up his desk.  

Under the Clerks Private Sector Award 2020, Gary’s manager may deduct up to one week’s wages for failure to give notice. Gary also forfeits any payments for notice he has not worked. Unfortunately, as Thursday is payday, Gary’s wages have already been paid.  

Gary’s manager will not be able to deduct from Gary’s accrued annual leave entitlements. 

In other circumstances, an employee may provide the correct notice when resigning, however, during the notice period, they may start conducting themselves improperly or provide work of a poor standard. When this occurs, employers can meet with employees and offer to pay the remaining notice period in lieu of notice or begin performance management activities. An employee may still be dismissed during their notice period and if they are found to have committed serious misconduct they would not be entitled to any notice beyond the days they have already worked, or payment in lieu of notice. Employers are encouraged to seek advice from Business Chamber Queensland under these circumstances. 

 
Payment 

Modern Awards usually include terms surrounding when the final payment of wages must be made by. This payment would include the pay in lieu of notice if one is to be paid. If an employer does not comply with the applicable Modern Award or the FW Act in paying employees in lieu of notice when it is required, this will contravene the FW Act. If an employer is found to have underpaid, or not paid, the employee their final pay this could possibly constitute wage theft resulting in civil penalties. Employees, and former employees, can pursue underpayment claims through the Fair Work Ombudsman and, separately, they can report wage theft through the Queensland Police Service. Wage theft is a criminal offence in Queensland. 

Conclusion 

Payment in lieu of notice is a common aspect of employment termination in Queensland, providing a choice for employers to pay employees rather than have them work out their required notice period. Understanding the legal framework surrounding payment in lieu of notice is essential for employers to navigate termination processes effectively and fairly. 

If you have any questions or concerns about payment in lieu of notice, please contact the Workplace Relations Team on 1300 731 988 or email [email protected].