Blog
Table of contents
When it comes to payment in lieu of notice, how confident are you that you’re getting it right? Any organisation paying PILON needs to avoid key errors like late payment, underpayment, and miscalculated tax.
Here’s a guide to help you navigate this payment type correctly to minimise legal and compliance risks.
What Is Payment in Lieu of Notice?
Payment in Lieu of Notice, or PILON, is a payment made to an employee when their employment is terminated and the employer doesn’t require them to work through their full notice period.
The employee is paid the equivalent of what they would have been paid had they worked for that time.
How does PILON differ from working out a notice period?
Payment in lieu of notice and a notice period are two ways of handling the end of employment.
Depending on the individual contract and award, an employer might choose to:
- Have the employee work out the full notice period
- End the employment immediately and pay PILON for the full notice period
- Combine the two methods: for example, with one week of working and two weeks of PILON.
Contractual vs. Discretionary PILON
Contractual PILON refers to situations where the employment contract contains a clause allowing the employer to use the PILON option. It’s common practice to include this clause in Australian employment contracts.
Discretionary PILON refers to when the employment contract does not contain a PILON clause, but the employer chooses to offer PILON. This can be for a number of reasons.
Why Do Employers Use Payment in Lieu of Notice?
Under Australia’s Fair Work Act 2009, all full-time and part-time employees are entitled to notice of termination, with a few rare exceptions, as we cover below in the FAQs.
Sometimes, it’s not practical to have an employee work out their full notice period. You might want to protect the workplace culture, there might be sensitive data to protect, the employee might want to start another job before the notice period ends, or an earlier departure might line up best with payroll.
In these situations, it can be helpful to have the option of payment in lieu of notice, meaning the employee departs earlier and is still paid the same amount.
HR's Core Responsibilities When Actioning PILON
HR professionals and business owners can prevent the most common PILON mistakes and associated risks by following these five steps correctly.
1. Review the Employment Contract
Many awards and employment contracts already include a requirement to work notice periods. However, it’s crucial to check the individual contract to see if PILON is allowable either by employer discretion or mutual agreement.
- If by employer discretion, the employer can choose to pay out the notice period
- If by mutual agreement, both employer and employee would need to agree for the notice period to be payable in PILON.
2. Calculate the Correct Payment in Lieu
With PILON, an employee needs to be paid exactly the same as if they had worked their notice period. This includes the full rate of pay for ordinary hours over the notice period. The notice period depends on the length of service and any relevant contracts or awards.
PILON = (gross weekly pay × notice period in weeks) + relevant payments, bonuses and allowances for that notice period
This amount includes:
- loadings
- monetary allowances, such as for travel or tools
- overtime
- penalty rates
- any other separately identifiable amounts.
Leave accrued in the worked notice period is payable, but is separate from PILON. Leave doesn’t accrue for any time covered by PILON.
3. Coordinate with Payroll Early
Payment in lieu of notice needs to be made either on or before the employee’s final day, not after. HR should be coordinating closely with payroll to ensure PILON is paid on time.
In a 2025 case, Jewell v Magnesium Australia Pty Ltd (2025), the judge penalised the employer for failing to pay termination entitlements on time.
PILON also needs to be taxed correctly. Employers need to withhold tax under usual pay-as-you-go (PAYG) obligations. The withheld amount needs to appear on the payslip and income statement, and the PAYG amount needs to be reported as part of the employee’s final pay through Single Touch Payroll.
4. Document the Decision
As with all employee relations, an accurate paper trail during termination helps HR to meet compliance and document due process to provide clarity in any future investigations, audits or disputes.
Be sure to document the rationale for choosing PILON, any relevant award or contract information, and the calculation used to determine the final payment amount.
Notice of termination needs to be documented in writing, and this must state the final day of employment. This notice can be in person, in writing to the employee’s last known address, or electronically if agreed to by the employee.
5. Communicate Clearly with the Employee
Communication is always key, whether the termination is via resignation, redundancy, or previously addressed underperformance.
HR plays an essential role in communicating clearly and fairly, and is responsible for:
- Explaining the termination decision
- Seeking the employee’s agreement for PILON, if required by the award or contract
- Explaining the notice period and PILON arrangement, what will be paid, what will be withheld for PAYG, and when the payment will be made
- Conducting an exit interview and ensuring the employee is aware of any post-employment obligations
- Collecting company property and revoking system access
Legal and Compliance Risks HR Needs to Manage
The last thing any employer needs is a breach of contract claim or workplace violation. HR professionals play a vital role in preventing the following risks:
- Failing to pay PILON on time
- Miscalculating either PILON or the withheld tax
- Failing to honour notice entitlements
- Insisting on PILON where no PILON clause or mutual agreement exists
- Failing to document termination and PILON decisions
- Failing to determine whether superannuation is payable on PILON figures (see FAQs)
- Overlooking whether PILON will undermine the enforceability of any restraint of trade clauses.
Standardising how PILON is handled across the organisation can help maintain consistency and reduce risk. It’s also critical that HR stays updated on all legislative changes affecting PILON.
Summary
Payment in lieu of notice is a common offboarding element for Australian organisations, and it can be useful in ending employment quickly for a variety of reasons.
If your organisation could use support in standardising your PILON policy as well as staying up-to-date for compliance, one option is to speak with HumanX and see how our HR consultants can help.
Frequently Asked Questions About Payment in Lieu of Notice
Below are answers to some of the common questions about PILON, specific to Australia.
Does PILON end employment immediately?
PILON can be used to end employment immediately, paying out the notice equivalent to the employee. Partial PILON can also be used to shorten the notice period worked.
What needs to be included in a PILON payment?
Payment in lieu of notice includes the gross pay plus entitlements the employee would have received over their notice period. If the employee has varying hours, payment is calculated on the average weekly earnings over the past 4-12 weeks (depending on the award or contract).
Do you need to pay superannuation on PILON?
Yes, superannuation is generally payable on the time covered by PILON. This should work out the same as working the notice period.
Can an employee refuse PILON and insist on working out their notice?
If there’s a PILON clause in their employment contract, the employer would be able to insist on using PILON.
If there is no PILON clause, the employer can ask the employee to mutually agree to PILON, but they can’t force the employee to agree.
Does PILON still apply if the employee is being terminated for serious misconduct?
The short answer is no. Under the National Employment Standards, notice periods don’t apply to employees who are fired for serious misconduct. There are some other situations that are exempt from the notice period listed at Fair Work, including if the employee is casual or does seasonal work.
