Quick Summary
Quick Summary
- Payment in lieu of notice (PILON) lets employers dismiss immediately by paying what the employee would have earned during the notice period, under Fair Work Act 2009 s.117.
- PILON replaces the notice period entirely — the employee does not work out their notice.
- NES notice periods range from 1 to 4 weeks based on length of service, plus 1 extra week if the employee is over 45 with 2+ years of service.
- PILON is generally taxed as an employment termination payment (ETP), not ordinary income.
- Superannuation is usually not payable on PILON classified as an ETP, but employers must confirm ATO classification before processing.
Payment in lieu of notice (PILON) is an arrangement under section 117 of the Fair Work Act 2009 that lets an employer dismiss an employee immediately without making them work out their notice period, provided the employer pays the full amount the employee would have earned during that period. Every employer covered by the National Employment Standards can use PILON, and the Fair Work Ombudsman enforces these rules strictly. Getting the calculation or tax wrong can cost thousands in back-pay and penalties.
For most employers, PILON is a practical tool to end employment cleanly when keeping a departing employee on site creates risk — whether the dismissal is performance-based, a redundancy, or a mutual agreement to part ways.
Payment in Lieu of Notice Meaning
PILON means the employer pays the employee the equivalent of what they would have earned during the minimum notice period, and the employee leaves immediately. Under the NES, the employer chooses: require the employee to work the notice period, or pay in lieu and dismiss on the spot. PILON replaces the notice period entirely.
NES notice periods are: 1 week (1 year or less), 2 weeks (1–3 years), 3 weeks (3–5 years), and 4 weeks (5+ years). An extra 1 week applies if the employee is over 45 with 2+ years of service. A contract cannot provide less than these minimums.
When Can an Employer Use Payment in Lieu of Notice?
You can use PILON any time you terminate employment and the NES requires notice. Section 117(3) gives the employer this right — you do not need the employee’s agreement. Common situations include performance dismissals, redundancies, and restructures.
You cannot use PILON to avoid other obligations. For unfair dismissal purposes, the employee retains the right to file a claim with the Fair Work Commission within 21 days. If the dismissal is for serious misconduct, no notice or PILON is required.
How to Calculate Payment in Lieu of Notice
Multiply the employee’s ordinary weekly pay rate by the number of notice weeks. Ordinary pay means base wage or salary — not overtime, penalty rates, or allowances unless your contract or award requires otherwise.
Example: an employee earning $1,500 per week for 6 years with 5 weeks’ notice (4 weeks + 1 week over-45) = $7,500 PILON. Check your modern award for additional requirements. For payroll compliance, getting this number right on the final pay is essential.
⚠️ PILON does not override substantive dismissal requirements
Paying in lieu of notice does not make a dismissal legally valid. If the dismissal itself is unfair or unlawful, the employee can still file an unfair dismissal claim with the Fair Work Commission within 21 days. PILON only replaces the notice period — it does not protect you from a claim about the reason for dismissal.
Key Takeaways
Key Takeaways for Employers
- ✓PILON = immediate dismissal with full payment for the notice period (Fair Work Act s.117)
- ✓Minimum notice: 1 week (under 1 year) to 4 weeks (5+ years), plus 1 extra week for over-45s with 2+ years
- ✓Calculate PILON using the employee’s ordinary weekly wage — not overtime or penalty rates
- ✓Get ATO classification right: ETP vs ordinary income determines tax and super treatment
- ✓Include a PILON clause in your employment contracts to avoid disputes
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Payment in Lieu of Notice Tax Rate and Treatment
The ATO generally classifies PILON as an employment termination payment (ETP) when paid as a consequence of the employment ending. ETPs receive concessional tax treatment — tax-free portions for employees over 60, concessional rates for under-60s, up to the ETP cap. If the PILON is structured as ordinary salary paid in advance, it is taxed as ordinary income at the employee’s marginal rate. Always confirm ETP classification with the ATO or your payroll provider.
Payment in Lieu of Notice and Superannuation
Superannuation guarantee is payable on ‘ordinary time earnings’. If PILON is classified as an ETP, it is generally not ordinary time earnings, and super is not required. If classified as ordinary income, super may apply. This is a common compliance trap — employers who misclassify can face super shortfalls plus ATO penalties. Document your classification decision and confirm it with your payroll provider.
Payment in Lieu of Notice for Redundancy
In a genuine redundancy, the employer must give notice (or pay in lieu) in addition to paying redundancy pay under NES s.119. PILON in a redundancy works the same way as any other dismissal. Redundancy pay is a separate entitlement based on years of service — up to 16 weeks at 9–10 years’ service (dropping to 12 weeks at 10+ years) — calculated independently. Employers cannot substitute redundancy pay for notice pay; both apply.
Include a PILON Clause in Your Employment Contracts
A well-drafted PILON clause in every employment contract confirms the employer’s right to pay in lieu, specifies the calculation method, and removes ambiguity at termination. Without a clear clause, common law may require actual notice. Fair Work Centre offers free employment documents including termination templates with PILON clauses to prevent disputes and ensure compliance.
Frequently Asked Questions
Yes. In Australia, payment in lieu of notice is generally classified by the ATO as an employment termination payment (ETP) when it is paid because the employment is ending. ETPs are taxed at concessional rates, with the first portion tax-free depending on the employee’s age (the tax-free component is higher for employees over 60). If the PILON is instead classified as ordinary income — for example, when the employee works the notice period but is paid salary in advance — it is taxed at the employee’s normal marginal rate. Employers must confirm the ETP classification with the ATO or their payroll provider before processing.
Superannuation guarantee contributions are generally not required on a payment in lieu of notice that is classified as an ETP, because ETPs are not ‘ordinary time earnings’ for super guarantee purposes. However, if the PILON is classified as ordinary income rather than an ETP, superannuation may apply. The classification depends on how the payment is structured and the terms of the employment contract or award. Employers should verify the treatment with their payroll provider or the ATO, as getting this wrong can trigger superannuation shortfalls and penalties.
Under Fair Work Act s.117, PILON must equal the full amount the employee would have been paid if they had worked the notice period. This is based on the employee’s ordinary pay rate — their base salary or wages — for the number of weeks in the notice period. For example, if an employee earning $1,500 per week is entitled to 4 weeks’ notice, the PILON amount is $6,000. You do not include overtime, penalty rates, or allowances unless the employment contract or applicable award specifically requires it. Check the relevant modern award for any additional PILON requirements.
Yes, employees can also pay in lieu of notice if they want to leave immediately without working their notice period, but only if the employment contract allows it or the employer agrees. The NES only requires employers to give notice — it does not impose the same obligation on employees. However, if an employee resigns without working the notice period and the contract requires them to give notice, the employer may be able to deduct the equivalent amount from any final pay, provided the deduction is authorised in writing under Fair Work Act s.324.
Employers use PILON to remove a departing employee from the workplace immediately while still meeting their legal notice obligations. Common reasons include reducing the risk of damage to business relationships, preventing misuse of confidential information, avoiding disruption to remaining staff, or simply ending the employment on clean terms without an awkward notice period. PILON ensures the employee receives the money they would have earned during notice, so the employer satisfies the National Employment Standards while ending the working relationship promptly.
In a genuine redundancy, the employer must give the employee notice of termination (or pay it in lieu) in addition to paying redundancy pay under NES s.119. PILON in a redundancy works the same way as any other dismissal — the employer pays the wages the employee would have received during the notice period. Redundancy pay is a separate entitlement based on years of service (up to 16 weeks at 9–10 years, dropping to 12 weeks at 10+ years) and is calculated independently from PILON. Employers cannot substitute redundancy pay for notice pay — both entitlements apply.
No. Annual leave does not accrue during a payment in lieu of notice period because the employee is not actually working — the PILON is a payment in substitution of the notice period, not a continuation of employment. The employee’s annual leave accrual stops on the last working day. However, the employer must pay out any accrued but untaken annual leave as part of the final pay, along with any accrued long service leave where applicable.
No. The whole point of payment in lieu of notice is that the employee does not work the notice period — they are dismissed immediately and the employer pays what they would have earned. If the employer wants the employee to work part of the notice period, they should give notice for that period and only pay PILON for the remainder. Allowing an employee to work after a PILON has been paid can create confusion about whether the dismissal was effective and may undermine the legal clean break that PILON is designed to achieve.
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