Notice Periods And Pay In Lieu: Employer Obligations In New Zealand

Ending an employment relationship is one of those moments where small business owners often feel the pressure. You’re trying to keep things fair, protect your business, and make sure you don’t accidentally create a personal grievance risk - all while running day-to-day operations.

Notice periods and pay in lieu sit right at the centre of that. Get them right, and you’ll usually have a cleaner, lower-risk exit. Get them wrong, and you could be looking at disputes, backpay claims, penalties, or an allegation of unjustified dismissal.

This guide breaks down how notice periods and pay in lieu work in New Zealand, what your key legal obligations are as an employer, and practical steps you can follow to manage exits properly.

What Is A Notice Period (And Where Does It Come From)?

A notice period is the amount of time that must pass between when an employee is told their employment will end and their final day of work.

In most cases, the notice period is set out in the employee’s employment agreement. That’s why having a clear, tailored Employment Contract from day one matters - it’s the document that usually dictates what notice looks like when things don’t work out.

Is There A “Standard” Notice Period In NZ?

There’s no single “standard” notice period under New Zealand law that applies to every job. Notice is usually a contractual issue, meaning it depends on what you and the employee agreed to in writing.

That said, common notice periods in NZ include:

• 1 week (sometimes seen for true casual arrangements or some junior roles, depending on the agreement)
• 2 weeks (very common for many permanent roles)
• 4 weeks (common for more senior roles)
• Longer periods (sometimes for executives or highly specialised roles)

If the agreement is silent or unclear on notice, things can get messy quickly. A court or the Employment Relations Authority may look at what was “reasonable” in the circumstances - which is not where you want to be as an employer, because it becomes harder to predict and manage risk.

Notice Periods vs Termination Process

Even if your employment agreement clearly sets a notice period, you still need a fair process before you terminate in most situations.

In practice, notice is only one piece of the puzzle. Your obligations as an employer often also include:

• acting in good faith (under the Employment Relations Act 2000)
• having substantively justified reasons (e.g. misconduct, performance issues, redundancy)
• following a procedurally fair process (e.g. investigation, meeting, chance to respond)

This is why termination is often managed alongside a proper performance or misconduct pathway, like a Performance Management Process, rather than being treated as “we’ll just give notice and move on”.

When Do Notice Periods Apply (And When Don’t They)?

Notice periods commonly apply in these situations:

• Employee resigns (they must usually give the notice set out in the agreement)
• Employer terminates with notice (after following a fair process)
• Redundancy (notice generally applies, but redundancy has its own rules and risk points)

But notice periods don’t always apply in the same way, and some scenarios require special care.

Fixed-Term Agreements

If someone is employed on a genuine fixed-term agreement, the agreement may end on the end date (or on completion of a project) without “notice” in the ordinary sense - as long as the fixed term is valid and properly documented.

However, fixed-term arrangements are often challenged if the reason for the fixed term wasn’t genuine or the paperwork wasn’t done properly. If you’re relying on a fixed-term end date rather than a normal notice period, it’s worth getting advice first.

Serious Misconduct And Summary Dismissal

In cases of serious misconduct, an employer may be able to dismiss without notice (sometimes called summary dismissal). But this is high risk if it’s not handled correctly.

Two important points:

• You still need a fair process (e.g. investigate, put allegations to the employee, allow representation/support person, genuinely consider their response).
• You must be able to justify that the conduct was serious enough to warrant dismissal without notice.

If you’re unsure whether the situation meets the threshold, it’s safer to pause and get advice than to assume you can end employment immediately.

Redundancy (A Common “Notice + Process” Trap)

Redundancy is one of the most common areas where employers get tripped up - because it’s not just about providing a notice period.

A redundancy must be:

• Genuine (real business reasons), and
• Handled with a fair consultation process (including providing relevant information and considering feedback)

Notice generally still applies, but you also need to think about selection criteria (if not everyone is affected), redeployment options, and the timing of communication. If redundancy is on your radar, Redundancy planning and documentation is crucial.

What Is Pay In Lieu Of Notice (And When Can You Use It)?

Pay in lieu of notice is when employment ends immediately (or earlier than the notice period), and you pay the employee what they would have earned if they had worked through the notice period.

For example, if the contract requires 4 weeks’ notice and you want the employee to leave today, you might pay 4 weeks’ wages (plus any other contractual entitlements) instead of having them work those 4 weeks.

Pay in lieu can be helpful when:

• there’s a risk of disruption, client poaching, or damage to workplace culture if the employee stays
• you want a clean handover and exit date
• the relationship has broken down and continuing employment is impractical

However, the key thing to understand is that you can’t always unilaterally decide to do it.

Do You Need A Contract Clause To Pay In Lieu?

In most cases, yes - the safest position is that your employment agreement should expressly allow you to make a payment in lieu of notice.

If you terminate employment immediately without contractual authority (or without the employee’s agreement), you could be breaching the employment agreement and increasing the risk of an unjustified dismissal claim.

Also, pay in lieu is separate from whether the termination itself is justified and the process was fair - those still need to stand on their own.

If you’re looking for a deeper breakdown of how this works in practice, Payment In Lieu Of Notice is a useful starting point.

Is Pay In Lieu The Same As Garden Leave?

Not quite.

• Pay in lieu ends employment early and pays out the notice period instead.
• Garden leave keeps the employee employed during the notice period, but requires them not to attend work (usually while still being paid and remaining bound by duties like confidentiality and good faith).

Both options should be supported by your contract terms, and both should be used carefully (particularly if you’re trying to restrict what an employee can do after they leave).

How To Calculate Notice Pay And Pay In Lieu (What Must Be Included?)

When you’re working out notice pay or pay in lieu, the goal is usually to put the employee in the financial position they would have been in had they worked their notice (unless the employment agreement says otherwise).

What should be included depends on the employment agreement and how the employee is normally paid, but commonly includes:

• base wages or salary for the notice period
• regular allowances (where they are contractual and would have been paid during the notice period)
• commission (this can be complex - it often depends on when commission is “earned” under the contract and whether it would have fallen due during the notice period)
• KiwiSaver (this depends on how the payment is treated for KiwiSaver purposes and your payroll setup, so it’s worth double-checking)

What About Annual Holidays And Final Pay?

Notice and pay in lieu are only part of the final pay picture. On termination, you’ll usually also need to calculate and pay:

• any outstanding wages up to the last day of employment
• any unused annual holidays (paid out in line with the Holidays Act 2003)
• any alternative holidays / public holiday entitlements (if applicable)

Final pay errors are a common source of disputes, especially where payroll systems don’t handle Holidays Act calculations cleanly. If you’re unsure, it’s worth checking the numbers carefully before you confirm anything in writing.

Can You Deduct Money If An Employee Doesn’t Work Their Notice?

This is where employers need to be particularly careful.

If an employee resigns and doesn’t work their required notice, you might feel like you should be able to “deduct” the notice period from their final pay. But deductions from wages in New Zealand are regulated (including under the Wages Protection Act 1983), and you generally need proper authority to deduct.

Depending on the situation, that authority might come from:

• a specific clause in the employment agreement allowing a deduction, and/or
• the employee’s written consent to the deduction (often obtained at the time)

Because the facts matter a lot here, it’s best to get advice before making deductions - especially if the employee disputes it.

Common Employer Mistakes With Notice Periods And Pay In Lieu (And How To Avoid Them)

When you’re busy, it’s easy to treat notice periods and pay in lieu as an admin issue. But the legal risk usually comes from how you get to the end date, and what you communicate along the way.

Here are some common mistakes we see small businesses make, and what you can do instead.

1. Ending Employment Immediately Without A Contractual Right

If the agreement doesn’t allow pay in lieu (or garden leave), and you terminate immediately anyway, you may be in breach.

What to do instead: check the contract first, and if you need an immediate exit, get the employee’s agreement documented (or get legal advice on your options).

2. Using Notice As A Substitute For A Fair Process

Giving notice doesn’t automatically make a dismissal lawful. Even with a notice period, an employee may claim the termination was unjustified if there wasn’t a real reason or the process wasn’t fair.

What to do instead: treat notice as the final step after you’ve followed a proper process (particularly for performance and misconduct).

3. “Redundancy” When The Real Issue Is Performance

Sometimes employers try to use redundancy as a faster way to exit an underperforming team member. This is a red flag, and it can backfire if challenged.

What to do instead: if it’s performance, follow a proper process. If it’s genuinely business change, make sure your redundancy process is robust - and consider getting Redundancy Advice before you consult.

4. Trying To “Reduce Hours” As An Alternative To Termination Without Agreement

When times are tough, you might consider reducing staff hours instead of terminating. But if you cut hours without agreement (or without a lawful process to vary the contract), you can create legal exposure.

What to do instead: treat changes to hours as a variation to the employment agreement and manage it carefully. Reducing Staff Hours should be approached as a legal change process, not just an operational change.

5. Poor Communication About The End Date And Payments

Misunderstandings about the last day of employment, whether the employee is expected to work out notice, and what will be paid can cause disputes quickly.

What to do instead: confirm in writing:

• the reason for termination (where appropriate)
• the notice period and last day (or that you’re paying in lieu)
• what the final pay will include (high level)
• the return of property and handover expectations

A Practical Checklist For Managing Notice Periods And Pay In Lieu

If you want a straightforward way to reduce risk, here’s a practical checklist you can run through before taking action.

Step 1: Check The Employment Agreement

• What is the notice period?
• Does the contract allow pay in lieu of notice?
• Does it allow garden leave?
• Are there any special termination clauses (e.g. a valid trial period clause, probationary arrangements, fixed-term end date, commission rules)?

Step 2: Confirm The Reason And The Process

• Are you terminating for performance, misconduct, medical incapacity, or redundancy?
• Have you followed a fair process appropriate to the situation?
• Have you met your good faith obligations (including consultation where required)?

Step 3: Decide Whether The Employee Will Work The Notice

• If they will work it: confirm expectations, duties, and handover.
• If they won’t work it: confirm whether you have a contractual right to pay in lieu (or get agreement).

Step 4: Calculate Final Pay Carefully

• Outstanding wages/salary to last day
• Pay in lieu amount (if applicable)
• Holiday pay and other leave entitlements
• Deductions (only if lawful and properly authorised)

Step 5: Put Everything In Writing

A clear termination letter (or resignation acceptance letter) can prevent a lot of confusion later.

If you’re not sure what you should be including (or what you should avoid saying), it’s worth getting help before the letter goes out.

Key Takeaways

• Notice periods and pay in lieu usually depend on what’s in the employment agreement, so having a clear Employment Contract is one of your best protections as an employer.
• There’s no universal “standard” notice period in New Zealand - what applies will often be contractual, and if it’s unclear you may end up arguing about what’s “reasonable”.
• Pay in lieu of notice can be a practical tool, but it’s safest when your contract clearly allows it (or the employee agrees), and you still need a fair termination process.
• Notice isn’t a shortcut around fairness - termination decisions must be substantively justified and procedurally fair under NZ employment law.
• Redundancy and restructures require genuine business reasons and proper consultation, not just the payment of notice.
• Final pay needs careful calculation, especially around holidays and any deductions (which may require specific authority or consent).

If you’d like help reviewing a termination approach, updating your employment agreements, or working out whether pay in lieu is the right option in your situation, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.