How Does Payment In Lieu Of Notice Work In New Zealand?

If your employee hands in their notice of resignation, one of your options here is to request that they finish up immediately and take payment in lieu of notice. 

This is quite a common step to take in this situation, but why and when can you do it? 

What Is Payment in Lieu Of Notice?

Payment in lieu of notice is payment ‘in place of’ serving out the notice period specified in a contract of employment. Basically, it means that instead of your employee working for the amount of time that they would normally have to work after being terminated, they would just get paid for that time instead. 

For example, if your employee was resigning but they still had 4 weeks to work, offering payment in lieu would mean you simply pay them the amount of money they would’ve earned within those 4 weeks and the termination of employment would take effect immediately. 

So, why might you decide to provide payment in lieu of notice?

Reasons for Payment in Lieu of Notice

Broadly there are some obvious reasons, including:

• Having your employee stay on might be detrimental to the company (for example, if there’s a dispute or ill-feeling, or you’re concerned they might poach clients or information)
• If your employee is not fulfilling their role to your satisfaction and you need to replace them urgently
• If the position is being terminated and there’s insufficient work for them to fulfil their role, in which case we call this redundancy (a common reason during the COVID pandemic)

Can I Provide Payment In Lieu Of Notice?

The answer is yes, you can. An employer can give notice as per their employment contract with the relevant employee, pay out that notice (payment in lieu of notice) or a combination of the two. However, it must be agreed upon by both the employer and the employee. 

Rules around notice are broadly governed by Employment New Zealand. You should also check your employee’s industry award, any enterprise agreement and their own contract of employment or workplace policy to be sure of their exact notice requirements.

What Is The Process Of Payment In Lieu Of Notice?

Firstly, the amount of payment in lieu will be determined by the notice period they’re entitled to. This should be set out in their contract of employment with you, but minimums are governed by how long they’ve worked for you. 

This ranges from a week’s notice for a year’s employment to 4 week’s notice for service of at least 5 years. Those over 45 who have worked for their employer for more than 2 years are entitled to an extra week’s notice. Contracts often allow for more. 

Casual workers are not entitled to notice.

Assuming there has been no serious misconduct (in which case the employer is only required to pay for work done and entitlements earned so far), the employee is entitled to, not only the pay the employee would have earned during the notice period, but also other entitlements, such as any allowances, loadings, penalty rates, bonuses or overtime. 

Timing of Final Payment

Final payment would normally be included with their final pay, and is normally specified by awards as within 7 days unless otherwise specified in their contract or award agreement.

Redundancy

When an employee is made redundant, it carries specific entitlements. It’s worth reassuring your employees that it doesn’t specifically relate to their performance in the role, but mostly, it has to do with the inability to keep them on board. For example, a project may have come to an end or a branch is closing down.

So, it’s always worth knowing the difference between redundancy and termination. Alternatively, you can always speak with an Employment Lawyer. 

Is Annual Leave Accrued On Payment In Lieu?

No, during the notice period that is being paid out, the employee’s employment is officially terminated. This means they do not accrue entitlements, such as annual leave, during this time. 

Is Superannuation Payable On Payment In Lieu?

The answer here is yes. This is because payment in lieu of notice is still considered regular earnings for an employee. 

So, in the same way, superannuation contributions can be made for payment in lieu. 

Is Payment In Lieu Of Notice Tax-Free?

If your income is taxable, then you will need to make sure the correct taxes are applied to your payment (even final employment pay slips) in order to be compliant with your tax obligations. 

For example, if you have student loans or child support payments and have previously agreed to deductions of your pay, your employer can still tax the ordinary amount on their final payment to you.  

Generally speaking, your payment in lieu of notice should be taxed as extra pay. 

If you’re unsure about your tax obligations, visit Inland Revenue for more information. 

What If My Employee Raises A Dispute?

The first thing to do is check the contract of employment. Most contracts have what we call boilerplate clauses that cover the fundamentals of your contract, and this is where you’ll probably find the terms relating to notice. 

Your employee may try to resolve the issue with you, and if this doesn’t work out, they could also contact Employment New Zealand. 

So, it’s important that you try to resolve the issue as much as you can in the early stages of a dispute before things get messy. 

What Is A Boilerplate Clause?

Boilerplate clauses, or miscellaneous clauses, are standardised clauses that set out some of the general terms of the contract, and are usually at the end of the contract. They specify some key aspects of how employees can fulfil their obligations and enforce your obligations as their employer. Just because they’re not specifically about the workings of the business relationship, don’t be tricked into thinking they’re insignificant – there are some very important boilerplate clauses in almost all contracts. It is important you read them carefully. 

They might cover such matters as:

• Confidentiality
• Jurisdiction
• How to make amendments
• Limitations on liability
• Indemnity
• Notice requirements
• Assignment to another party
• Dispute resolution
• Force majeure (unforeseen circumstances forcing non-fulfillment of the contract)

Many contracts contain a boilerplate clause that allows agreement between the parties to a payment in lieu of notice. It makes a lot of sense for an employee to take the money owed and spend the time job-hunting or earning elsewhere rather than sitting in an office twiddling their thumbs!

The last example in the list above is an interesting one in relation to notice and payment in lieu of notice, as COVID-19 has thrown up the question as to whether it can be used as the basis for inciting a force majeure clause (for example, when the contractual obligations can’t be fulfilled due to COVID restrictions). 

Many employers have found themselves unable to continue employing staff due to restrictions put in place or reticence on the part of consumers.

What If COVID Is To Blame For Termination?

Not all contracts contain a force majeure clause and even if they do, they won’t always be written in such a way that it covers the failing of a contract due to COVID. Essentially, force majeure clauses relate to events that are unforeseeable and outside the parties’ control, like acts of God or war, natural disasters and government intervention. 

Whether COVID would fall under the interpretation depends on the definition in that contract. If the wording includes ‘pandemic’, ‘government action’ or ‘labour shortages’, for example, then it might enable one party to cite COVID as the reason they couldn’t fulfil their obligations. It may also depend on the effect COVID had. Did it ‘prevent’ or ‘impair’ fulfilment?Wording in a contract is key and why it’s always advisable to engage contract lawyers at the outset.

Another issue regarding COVID and notice is when the notice period starts. What specific occasion gave rise to the problem: when a COVID wave hit or when the government announced restrictions? 

COVID is just one example of when the employer is likely to give payment in lieu of notice, as many employers may simply have no work for the employee. The notice period is contractual and would be calculated from when the employer decides they can no longer fulfil his obligations. Of course, this doesn’t apply to casual workers.

Key Takeaways

• Employment contracts usually specify the amount of notice required to terminate employment. Check the boilerplate clauses.
• If an employer asks an employee to leave earlier than what the notice period specifies, they can pay them the amount you would have earned during that period, including all entitlements.
• Employees should receive all final payments in their last paycheck, normally within 7 days of finishing employment.

If you would like a consultation on your options as an employer, you can reach us at 0800 002 184 or [email protected] for a free, no-obligations chat.

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