Employer Obligations For Payment In Lieu Of Notice In New Zealand

Ending an employment relationship is rarely the fun part of running a business.

And when you’re juggling rosters, customers, and cashflow, it can be tempting to “keep it simple” and pay someone out rather than having them work their notice period.

In New Zealand, that approach is often possible - but only if you handle payment in lieu of notice correctly. If you get it wrong, you can end up with wage disputes, personal grievances, and arguments about what should have been included in the final pay.

This guide breaks down what payment in lieu of notice is, when you can use it, and the key employer obligations you need to meet to protect your business from day one (and right through to the end of an employment relationship).

What Is Payment In Lieu Of Notice (And When Would You Use It)?

Payment in lieu of notice is when you pay an employee what they would have earned during their notice period, instead of requiring them to work that notice.

From a small business perspective, it’s commonly used when:

• you need an employee to leave immediately (for operational, safety, or relationship reasons);
• you’re concerned about disruption in the workplace during the notice period;
• you want a clean handover and quick separation;
• you’re making a role redundant and want to move fast (but still pay out notice correctly); or
• you’ve agreed with the employee that they won’t work out their notice period.

It’s important to be clear about what you’re doing. Payment in lieu of notice is not the same as:

• Garden leave (where the employee is still employed and still being paid, but isn’t required to attend work), or
• Paying out annual leave (which is a separate final pay obligation).

If you’re dealing with the end of employment and you want a deeper overview of how this usually works in practice, payment in lieu of notice is a helpful concept to understand early.

Can You Pay In Lieu Of Notice In New Zealand?

Often, yes - but you generally shouldn’t treat it as an automatic right.

In New Zealand, whether you can require an employee to accept payment instead of working their notice will usually depend on:

• the employee’s individual employment agreement (or collective agreement);
• any workplace policies you’ve incorporated into the agreement; and
• what’s been discussed and agreed as part of a fair process (especially for dismissals or redundancy).

Check The Employment Agreement First

The cleanest situation is where the employment agreement includes a clause allowing you to make payment in lieu of notice.

If your documents aren’t clear (or you’ve relied on a short template that doesn’t cover termination properly), you can quickly end up in “grey area” territory. Having a properly drafted Employment Contract makes this kind of decision much safer and more predictable.

Even If You Can Pay In Lieu, You Still Need A Fair Process

Payment in lieu of notice doesn’t replace the need to follow a fair process when ending someone’s employment.

For example, if you’re terminating someone for performance or misconduct, you still need to:

• raise concerns in good faith;
• carry out a proper investigation (where relevant);
• give the employee a reasonable chance to respond; and
• consider alternatives before deciding to terminate.

In other words, payment in lieu of notice is about how you handle the notice period - not whether the termination decision was lawful or fair.

If you’re looking at ending employment and want to sense-check the steps, How To Terminate An Employee is a useful starting point.

What Are Your Employer Obligations When Making Payment In Lieu Of Notice?

When you pay in lieu of notice, you’re still making a wage payment connected to employment. That means your usual payroll and employment obligations don’t disappear - they just get condensed into a final pay event.

Here are the main areas small businesses should get right.

1. Calculate The Correct Notice Period

First, confirm what the notice period actually is. It might be:

• 1 week, 2 weeks, 4 weeks, or longer (depending on the agreement and role);
• different during a probationary period (if used lawfully); or
• set out in a collective agreement.

If there’s no clear notice period in the employment agreement, you shouldn’t make assumptions. Depending on the circumstances, a “reasonable notice” period may apply - and this is where disputes often start. Getting advice early can be much cheaper than defending a claim later.

2. Work Out What “Pay” Includes

This is one of the biggest practical traps for employers.

When you pay in lieu of notice, you need to consider what the employee would have earned if they had remained employed and worked through that notice period. Depending on the employment agreement and the employee’s work pattern, this may include:

• base wages or salary;
• regular allowances (for example, a consistent weekly allowance);
• commission that would have been earned during that time (if applicable and predictable);
• regular overtime (if it’s genuinely regular and forms part of normal earnings); and
• any contractual entitlements that would have continued during the notice period.

In many small businesses, the simplest way to approach it is: if they had stayed employed for the notice period, what would payroll have looked like?

If the employee’s hours vary week to week, your calculation method needs to be defensible and consistent with the agreement and how you normally pay them.

3. Apply PAYE, KiwiSaver, And Payroll Deductions Correctly

Payment in lieu of notice is usually treated as taxable income paid in connection with employment, so PAYE will generally need to be deducted as normal.

KiwiSaver treatment can also depend on how the payment is treated for payroll purposes and the employee’s KiwiSaver status. Because this is a payroll/tax administration issue, it’s best to confirm the correct treatment with your payroll provider or accountant (or Inland Revenue guidance). From a legal risk perspective, the key point is: don’t treat it as an “off the books” settlement.

You also need to be careful with deductions. If you’re thinking about deducting money for things like:

• unreturned property (uniforms, keys, devices);
• damage; or
• training costs,

you should check you have a lawful basis to do so (for example, written consent or a valid contractual provision). Unauthorised deductions can create problems under wage protection rules.

4. Pay Outstanding Holiday Pay And Other Final Entitlements

Payment in lieu of notice is only one component of the employee’s final pay.

You may also need to pay:

• any wages owing up to the termination date;
• accrued annual holidays (and, depending on timing, any entitlement to annual holidays not yet taken);
• alternative holidays (for public holidays worked, if applicable);
• any contractual bonuses or commission that have already been earned; and
• reimbursements the employee is entitled to (if they’re outstanding and properly claimed).

If you’re unsure about what to include, it’s worth treating this like a checklist exercise, because final pay disputes are a common trigger for employment claims.

5. Confirm The Employee’s End Date (And Put It In Writing)

When you pay in lieu of notice, you need to be crystal clear about the employee’s:

• termination date (their last day of employment), and
• final pay date (when you’ll pay everything owed).

If you don’t put this in writing, you risk misunderstandings like:

• the employee thinking they’re still employed during the “notice period”;
• arguments about ongoing benefits (for example, use of a vehicle); or
• disputes about whether they were entitled to be rostered (and therefore earn more) during that period.

This is also where good documentation matters. Even if the exit is amicable, clear letters and clean records protect you if memories change later.

Special Scenarios: Redundancy, Resignation, And Serious Misconduct

The reason employment is tricky is that “payment in lieu of notice” can show up in very different situations - and the rules and risks can shift depending on why the employment is ending.

Redundancy: Paying Notice While Running A Fair Process

If you’re making a position redundant, you may be able to pay in lieu of notice - but you still need to follow a proper redundancy process (including genuine business reasons, consultation, and considering feedback).

Also, be careful not to confuse:

• notice pay (or payment in lieu of notice), with
• redundancy compensation (which isn’t automatically required unless the employment agreement provides for it).

If redundancy is on the table and you want to reduce your risk, getting tailored advice early is usually the smart move. This is exactly the kind of issue where Redundancy Advice can help you map the process and documents properly before you push “go”.

Resignation: Can You Still Pay In Lieu?

Sometimes an employee resigns and you’d rather they don’t work out their notice (for example, where there’s a risk they’ll take client relationships, create tension, or disrupt operations).

In that situation, you can often agree to an earlier end date and pay out the notice period instead - but make sure it’s documented, and make sure your approach is consistent across staff so you don’t accidentally create discrimination or fairness issues.

Serious Misconduct: Don’t Assume You Can Skip Notice Automatically

In cases of serious misconduct, employers sometimes believe they can always terminate immediately with no notice and no payment.

While summary dismissal can be lawful in some serious misconduct cases, it’s high-risk if you haven’t followed a fair investigation and process. If you get it wrong, you could face a personal grievance, and you may end up paying what you tried to avoid (plus potentially compensation).

If you’re considering immediate termination, it’s worth getting legal help before you take action, not after.

How To Manage Payment In Lieu Of Notice Without Creating Legal Risk

Even if you’re confident you can pay in lieu of notice, how you communicate and document it matters.

Here’s a practical approach small businesses can follow.

1. Treat It As Part Of The Exit Plan (Not A Quick Fix)

Before you confirm payment in lieu of notice, check:

• what the employment agreement says about notice and termination (including whether payment in lieu is permitted or needs agreement);
• whether you’re following a fair process for the underlying reason (performance, misconduct, redundancy, etc.);
• what the final pay should include (notice, holidays, allowances, commission); and
• whether there are any disputes brewing that could escalate.

2. Put The Key Terms In Writing

At minimum, your written confirmation should cover:

• the employee’s last day of employment;
• that you’re making payment in lieu of notice (and what period it covers);
• when final pay will be processed;
• what will happen with company property (return dates, access removal); and
• any restraints, confidentiality, or handover obligations (if these exist in the contract).

Clear writing reduces the chance of later arguments like “I didn’t agree to that” or “I thought I was still employed for another month”.

3. Consider Whether You Need A Settlement Document

Sometimes the relationship ends cleanly. Other times, there are allegations, disputed facts, or a risk of a personal grievance.

Where both sides want certainty, a formal Deed Of Settlement can be a practical way to resolve matters (usually involving agreed payments and terms, and wrapping up claims properly).

This is especially relevant if you’re offering an extra payment beyond minimum obligations, and you want confidence that the matter is actually resolved.

4. Make Sure Your Policies And Processes Support You

A lot of termination headaches come from inconsistent decision-making and patchy internal processes.

If you’ve grown quickly (or you’ve hired casually and “figured it out as you go”), it might be time to tighten up your HR foundations - including having a workable Workplace Policy framework that matches how you actually run your business.

5. Get Advice Early If Something Feels Off

If the employee is already unhappy, has raised complaints, or you suspect they’ll challenge the exit, it’s worth getting advice before you confirm the termination details or make a payment you later regret.

Even small wording choices in termination letters and communications can matter, especially if the situation ends up being reviewed later.

Key Takeaways

• Payment in lieu of notice means paying an employee for their notice period instead of requiring them to work it.
• You should check the employment agreement first - ideally it includes a clear clause allowing payment in lieu of notice and explains how it’s calculated (otherwise you may need the employee’s agreement).
• Payment in lieu of notice is usually only one part of the employee’s final pay; you may also need to pay annual leave and other outstanding entitlements.
• Employers should calculate notice pay carefully, including any components the employee would normally earn during that period (depending on the agreement and usual earnings).
• You still need to follow a fair process for termination (performance, misconduct, redundancy, etc.) - paying in lieu doesn’t “fix” an unfair dismissal.
• Put the termination date, payment in lieu period, and final pay details in writing to avoid misunderstandings and disputes.
• If there’s a dispute risk or you’re offering an additional payment, consider documenting terms properly (for example, with a deed) to protect your business.

If you’d like help managing an employee exit, reviewing your termination wording, or confirming your obligations around payment in lieu of notice, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.