Payment in lieu of notice.

Payment in lieu of notice is what you get when your employer decides you will not work out your notice period and hands you the money instead. It is the same entitlement as notice of termination, just delivered as cash rather than as time. The choice belongs to the employer, not to you, and the swap has three consequences that catch people out: the payment must be worked out at your full rate of pay (not the lower base rate used for redundancy pay), your employment ends the day the payment is made rather than at the end of the notice period, and from that day you stop accruing leave. This guide walks through each of those, explains when the money must land in your account, sets out how the Australian Taxation Office (ATO) treats it, and finishes with a worked dollar example.

What payment in lieu of notice actually is

Before an employer can dismiss you, section 117 of the Fair Work Act 2009 says they must give you written notice of the day your employment ends. They then have three options: let you work the notice period, end your employment straight away and pay the notice out, or split the two by having you work part of it and paying out the rest. The Fair Work Ombudsman (FWO) puts the paid-out version simply: employment ends when notice is given, and you get paid what you would have earned if you had worked out the notice period.

How much notice you are owed depends only on your length of continuous service with that employer. It does not change with your salary, your seniority or your industry, although an award, enterprise agreement or contract can set a longer period. The NES minimums are:

On top of the table, employees over 45 years old who have completed at least 2 years of service when they receive notice get an extra week. That makes 5 weeks the NES ceiling, and it is the figure most payment in lieu calculations top out at. Some employees get no notice and therefore no payment in lieu at all: casuals, employees engaged for a specified period or season, anyone dismissed for serious misconduct, certain trainees, and daily hire workers in building and construction or in the meat industry. Those exclusions come from section 123 of the Act. Our NES guide sets out how the standard fits with the rest of your minimum entitlements.

It is paid at your full rate, not your base rate

This is the single most valuable thing to know about payment in lieu of notice, and it is where a lot of final pays are quietly short. The FWO fact sheet on notice and redundancy states that an employer must not dismiss an employee unless they have given the minimum notice period or paid the employee instead, and that the payment is made "at the employee's full pay rate as if they had worked the minimum notice period". Your full pay rate includes:

• incentive-based payments and bonuses;
• loadings;
• monetary allowances;
• overtime or penalty rates; and
• any other separately identifiable amounts.

Compare that with redundancy (severance) pay, which is calculated on your base rate of pay for ordinary hours worked, a rate that expressly excludes that exact same list. Two amounts can appear on the same final payslip, generated by the same dismissal, and be worked out on two different rates:

So if you regularly work weekend penalty shifts, pull rostered overtime, or receive a tool, travel or first aid allowance, those amounts belong in your payment in lieu of notice. If your payslip shows four weeks of notice at your bare hourly rate multiplied by 38 hours, and your normal week is worth considerably more than that, ask for a breakdown.

Your employment ends the day the payment is made

When notice is worked, your last day of employment is the last day of the notice period. When notice is paid out, that date moves forward. The FWO states plainly that if the employer pays out the notice period, the employee's employment ends on the day payment is made. The Fair Work Commission puts the same point this way: where payment in lieu of notice is made, the dismissal usually takes effect immediately.

That earlier end date matters in several practical ways:

• Your service stops there. Any time you actually work during a notice period counts towards continuous service, but paid-out weeks do not. If you were weeks away from crossing a service milestone that changes your redundancy entitlement or your long service leave, being paid out can put that milestone out of reach.
• Time limits start running. An application to the Fair Work Commission for an unfair dismissal remedy must be lodged within 21 days of the dismissal taking effect. If your notice is paid out, that clock starts from the earlier date, not from the date the notice period would have finished.
• Your last day for other purposes changes. The date your employment ends is the date used for your income statement, your separation certificate, and the financial year in which your termination payments fall.

Leave stops accruing from that day

This is the trade-off buried inside a paid-out notice period. The FWO states that if the employer pays out the notice period, the employee's employment ends on the day payment is made and they stop accruing leave and other entitlements. A full-time employee accrues 4 weeks of annual leave a year, building up gradually rather than landing in one lump, so every week you do not work is a week of accrual you do not get. On a 4-week paid-out notice period that is roughly a third of a week of annual leave, plus a matching slice of personal and carer's leave, that never appears on your final payslip.

Two things are worth separating here. Leave you have already accrued is untouched: unused annual leave (with loading where it applies) is still paid out in your final pay, and so is long service leave where you qualify. What you lose is only the future accrual that working the notice would have produced. Sick and carer's leave is never cashed out at the end of employment either way.

One related quirk: public holidays that fall inside a notice period do not extend the notice period. Neither does taking leave. If you want to check what your accrued balance is worth before you sign anything, run it through the annual leave payout calculator.

When part is worked and part is paid out

Employers are allowed to mix the two. You might be told on a Tuesday that your employment is ending, asked to work until Friday, and then paid out the remainder. The FWO uses this example, which is worth following closely because it shows exactly how the days line up.

Notice that the notice period starts the day after Gunter is told, not the same day, and that his 3 worked days still count towards his service. The 2 paid-out days do not. If you are the one leaving rather than being dismissed, the arithmetic is different again, and our resignation notice period guide covers it.

When the money has to be paid

Payment in lieu of notice has its own deadline, and it is stricter than the rest of your final pay. The FWO states that if an employer chooses to pay an employee payment in lieu of notice instead of having them work out the notice period, the employer must make the payment before or on the day of termination, and that this is a requirement under the NES.

That is a tighter timeframe than the rest of the money you are owed. Most awards require employers to pay final pay within 7 days after the last day of employment, and where an award or agreement has no rule, the Fair Work Act requires payment at least monthly. Where the NES requires an entitlement sooner than an award or agreement does, the NES wins. So it is entirely possible, and lawful, for the notice payment to hit your account on your last day while your unused annual leave arrives in the following pay run. See our termination pay and final pay pages for the full list of what should be included.

If your employer becomes bankrupt or goes into liquidation, the Fair Entitlements Guarantee (FEG) can cover unpaid entitlements, including payment in lieu of notice of termination up to a maximum of 5 weeks. FEG also covers up to 13 weeks of unpaid wages (capped at the FEG maximum weekly wage), annual leave, long service leave, and redundancy pay of up to 4 weeks per full year of service. It does not cover superannuation, bonus payments or reimbursements.

How payment in lieu of notice is taxed

The ATO treats an amount in lieu of notice as an employment termination payment (ETP), which is a payment made in consequence of the termination of employment and taxed concessionally up to a cap. Payment in lieu of notice sits in the ATO's "non-excluded payments" group along with golden handshakes, gratuities, unused sick leave and unused rostered days off. Non-excluded payments are concessionally taxed only up to the smaller of two caps: Notice paid in lieu is also the one termination payment that still attracts superannuation, which matters more now that payday super has started.

• the ETP cap, which is $270,000 for the 2026-27 income year and is indexed annually; and
• the whole-of-income cap of $180,000, which is not indexed and is reduced by any other taxable payments you receive in the same income year, such as your salary and wages.

Because the whole-of-income cap is cut down by everything else you have earned that year, the ATO notes that in the majority of cases it will be the smaller of the two and will therefore apply. Up to whichever cap applies, the taxable component is taxed at 32% if you have not reached your preservation age, or 17% if you have. Anything above the cap is taxed at the top marginal rate of 45% plus the 2% Medicare levy, that is, 47%. Preservation age is 60 for everyone born after 30 June 1964. On your income statement the payment carries ETP code O.

There is an important exception. If you are made genuinely redundant, the ATO says a genuine redundancy payment may include payment in lieu of notice, depending on your employment conditions. Where it does, that amount is folded into the genuine redundancy payment and is tax-free up to a limit of $13,598 plus $6,801 for each completed year of service in 2026-27. The tax-free part is not an ETP at all: it is reported as a lump sum (lump sum D) on your income statement, and only the excess above the limit becomes an ETP, taxed against the ETP cap rather than the whole-of-income cap. Unused annual leave and long service leave are always excluded from that calculation and taxed under their own rules. Our redundancy tax guide works through the full sum.

Superannuation is the other difference worth knowing. The ATO classifies payment in lieu of notice as ordinary time earnings and as qualifying earnings, so the super guarantee (12% for 1 July 2026 to 30 June 2027) is payable on it. Redundancy payments, unused annual leave, unused long service leave and golden handshakes are all classified the other way and attract no super guarantee.

A worked example

Priya is 39 and has worked full time at a distribution centre for 6 years. Her ordinary hours are 38 a week at $40.00 an hour, she reliably works a 4-hour Saturday shift at time and a half, and she receives a $40 weekly equipment allowance. Her employer decides to end her employment and pays out the notice rather than having her work it.

Now change one fact. If Priya's role had instead been genuinely redundant, she would also be entitled to redundancy pay of 11 weeks under the NES scale for 6 years of service, but calculated on her base rate: 11 × $1,520 = $16,720, not 11 × $1,800. Depending on her employment conditions, her $7,200 payment in lieu could form part of the genuine redundancy payment, and her tax-free limit for 6 completed years in 2026-27 would be $13,598 + (6 × $6,801) = $54,404. Her combined $23,920 sits under that limit, so it would be reported as a tax-free lump sum rather than taxed as an ETP. Use the redundancy calculator to check the weeks, and the glossary for any term you are unsure of.

Frequently asked questions

Is payment in lieu of notice paid at my normal rate or just my base rate?

Your full rate. The amount must equal the full amount you would have been paid if you had worked to the end of the notice period, and that expressly includes incentive-based payments and bonuses, loadings, monetary allowances, overtime, penalty rates and any other separately identifiable amounts. Only redundancy pay is restricted to the base rate for ordinary hours.

Can I insist on working my notice instead of being paid out?

No. The employer chooses whether you work the notice period, are paid it out, or do a combination of the two. What they cannot do is give you neither notice nor payment.

When does my employment actually end if my notice is paid out?

On the day the payment is made. The Fair Work Commission describes the dismissal as usually taking effect immediately where payment in lieu is made. That is also the date the 21-day window for lodging an unfair dismissal application starts running, so do not assume you have until the end of the notional notice period.

Do I keep accruing annual leave during a paid-out notice period?

No. Once the notice is paid out your employment has ended, and you stop accruing leave and other entitlements from that day. The leave you had already accumulated is still paid out with your final pay.

When does my employer have to pay it?

Before or on the day of termination. That is an NES requirement and it is stricter than the general rule for final pay, which under most awards allows 7 days after the last day of employment.

Is superannuation paid on payment in lieu of notice?

Yes. The ATO classifies payment in lieu of notice as ordinary time earnings, so the super guarantee applies to it, unlike redundancy pay or unused annual leave.

How is it taxed?

As an employment termination payment. It is concessionally taxed up to the smaller of the ETP cap ($270,000 in 2026-27) and the whole-of-income cap ($180,000 reduced by your other taxable income for the year), at 32% under preservation age or 17% at or above it, with 47% applying above the cap. If it forms part of a genuine redundancy it may instead fall inside the tax-free limit.

What if my employer goes broke before paying?

The Fair Entitlements Guarantee can cover payment in lieu of notice to a maximum of 5 weeks, alongside unpaid wages, annual leave, long service leave and redundancy pay. More common questions are answered in our FAQ, and you can browse related topics from the guides index.

Author & reviewer

Sarah Reid, CAHRI

Certified Australian HR Practitioner · Cert IV Payroll · 12 years Fair Work compliance

Sarah has spent over a decade advising Australian SMBs on Fair Work, NES compliance, and payroll. Based in Sydney, she has worked across hospitality, retail and professional services.

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