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

Yes, an employer in New Zealand can often pay an employee in lieu of notice, but only if the employment agreement allows it or the employee agrees. The payment should generally cover what the employee would have earned during the notice period, and it doesn't remove the need for a fair and reasonable termination process.

Payment in lieu of notice, often called PILON, is common when you want a clean end date, need to protect confidential information, or it isn't practical for someone to keep working after notice is given. The key is to treat it as both a contract issue and a final pay issue, not just an admin shortcut.

What Is Payment In Lieu Of Notice?

Payment in lieu of notice means the employee is paid for all or part of their notice period instead of working that period.

In plain terms, it usually looks like this:

• The employment ends now, or earlier than the end of the notice period.
• The employee receives a payment broadly equivalent to what they would have earned if they had worked through the notice period.

Payment in lieu of notice in NZ often comes up when:

• There has been a breakdown in the working relationship and it isn't practical for the employee to stay at work.
• Your business has completed a fair restructure process and wants a clear end date.
• The employee is leaving for a competitor and you want to reduce access to clients, systems or confidential information.
• The employee resigns and both sides agree they don't need to work out the full notice period.

If you want a quick explainer first, this payment in lieu of notice guide is also a handy reference point.

PILON applies to employees. If your business works with contractors, the position is different because contractors don't usually have employment notice entitlements unless their contract says so. From 2026, the Employment Relations Act 2000 changes introduce a contractor gateway test for some worker status questions, so it's worth making sure your contractor arrangements are genuinely contractor arrangements before relying on that distinction.

When Can An Employer Pay In Lieu Of Notice?

The starting point is always the employment agreement. New Zealand employment agreements commonly say the employer may either require the employee to work their notice period or pay the employee instead of having them work it.

Check The Employment Agreement First

If the agreement includes a clear PILON clause, that's usually the cleanest path. The clause should set out whether you can pay out all or part of the notice period and whether the employment ends immediately or on another date.

If you aren't sure whether your contract covers this properly, review your Employment Contract wording before you rely on it. A short sentence in a contract can make a big difference to whether paying out notice is straightforward or risky.

If There Is No PILON Clause, Get Agreement

If the agreement is silent, you shouldn't assume you can end employment immediately and simply pay the notice period out. In many cases, you'll need the employee's agreement, ideally in writing.

That written agreement should confirm the employee's final day, the amount of notice being paid out, when final pay will be made and what happens to business property, system access and handover tasks.

PILON Does Not Replace Fair Process

A common mistake is thinking, we are paying the notice period, so we can end things now. Payment in lieu might satisfy a notice obligation, but it doesn't fix an unjustified dismissal or an unfair process.

Under the Employment Relations Act 2000, employers must act fairly and reasonably. You still need a genuine reason for termination, good faith communication where required and a proper opportunity for the employee to respond before a decision is made. If you're working through a termination and want a practical roadmap, How to terminate an employee is a useful starting point.

How Do You Calculate Payment In Lieu Of Notice?

The usual benchmark is simple: what would the employee have received if they worked to the end of the notice period?

For a salaried employee with fixed hours, that may be straightforward. For an employee with variable hours, allowances, commission or benefits, the calculation needs more care.

What Usually Gets Included

A payment in lieu of notice will commonly include:

• Base salary or wages for the notice period.
• Regular hours the employee would normally have worked.
• Regular allowances that form part of ordinary pay, such as a guaranteed tool or phone allowance.
• Contractual benefits that would have continued during the notice period, depending on the agreement.
• PAYE and standard payroll deductions, because PILON is generally treated as employment income.

KiwiSaver can also be relevant. In many cases, a genuine payment in lieu of notice will be processed through payroll like wages, but redundancy compensation and some other termination payments may be treated differently. If the payment has mixed components, check with your payroll provider or accountant before processing it.

What Needs Extra Attention

These items often cause final pay errors:

• Commission: check whether it's earned, discretionary, conditional on being employed on a future date, or payable under a separate commission plan.
• Overtime: if overtime is regular and predictable, consider whether the notice payment should reflect the hours the employee would probably have worked.
• Allowances: regular allowances may be different from reimbursements for actual expenses that are no longer being incurred.
• Benefits: car use, health insurance, phone plans and other benefits should be checked against the employment agreement and any workplace policy.

It's a good idea to give the employee a clear breakdown showing the notice payment separately from wages, annual holidays and other final pay items. That reduces confusion and helps your payroll records if questions come up later.

Do You Get Paid Out Accrued Leave When You Resign In NZ?

Yes, employees are generally paid out their unused annual holiday entitlements and holiday pay when employment ends, including when they resign. This is separate from payment in lieu of notice.

Final pay will commonly include:

• salary or wages up to the final day of employment
• payment in lieu of notice, if notice is being paid out
• unused annual holidays the employee has become entitled to
• holiday pay for the period since the employee's last anniversary
• any alternative holidays owing
• agreed reimbursements or other amounts owed under the contract or policy

Under the Holidays Act 2003, annual holiday calculations can be technical. For entitled annual holidays, the payment is generally based on the greater of ordinary weekly pay and average weekly earnings. For holiday pay since the last anniversary, the 8% gross earnings calculation is commonly relevant, less any annual holidays taken in advance and any pay-as-you-go annual holiday pay already paid for that same current-year entitlement, where applicable.

There's also an important public holiday rule. When unused entitled annual holidays are paid out on termination, those holidays are treated as if they were taken immediately after employment ends. If a public holiday would have fallen during that notional period and it would otherwise have been a working day for the employee, additional payment may be required.

Sick leave is different. Unused sick leave isn't usually paid out on termination unless the employment agreement or workplace policy says it will be.

Can Annual Leave Be Used Instead Of Notice?

Sometimes people ask about leave in lieu of notice. Usually, that means one of two things: using annual holidays during the notice period, or paying out leave instead of having the employee work.

Annual holidays and notice aren't the same thing. Notice is about how employment ends. Annual holidays are a Holidays Act entitlement. You should be careful about swapping one for the other without clear agreement.

An employee can request annual holidays during their notice period, and you can agree. If you agree, the employee remains employed during that time and the notice period continues to run. You'll still need to calculate final pay correctly at the end.

An employer can require an employee to take annual holidays in some circumstances, but only after trying to reach agreement and giving at least 14 days' notice. That rule doesn't mean you should use annual leave as a quick substitute for notice, especially where the employment is ending immediately.

If your goal is for the employee to stop working straight away, payment in lieu of notice is usually the cleaner concept, provided the agreement allows it or the employee agrees. Unused annual holidays should then be paid separately in final pay.

Common Scenarios Where Paying Out A Notice Period Comes Up

Redundancy And Restructures

In a restructure, employers sometimes prefer to pay out the notice period once the consultation process has finished and the decision has been made. That can be practical where the role has been disestablished, there's limited work left to do, or remaining in the workplace would be difficult for everyone.

PILON can be used in a redundancy, but it doesn't replace the need for a genuine business reason, consultation and good faith. If you're planning changes to roles or reporting lines, get advice before making final decisions. Redundancy advice can help you structure the process and communications.

Performance Or Misconduct Processes

Where employment ends after a performance or misconduct process, you still need to separate the decision to dismiss from the decision to pay out notice. Paying notice doesn't make an unfair process fair.

PILON is also different from summary dismissal. Summary dismissal is dismissal without notice, generally for serious misconduct. The threshold is high, and a fair investigation and process are still required. If you aren't confident the conduct justifies summary dismissal, paying notice may be safer, but you still need to handle the process properly.

Employee Resignation

If an employee resigns, they usually need to give the notice required by their employment agreement. If you don't want them to work out the notice period, check whether the agreement lets you pay out the notice period. If it does not, get the employee's written agreement to an earlier end date.

This is common where the employee is moving to a competitor, has access to sensitive information, or no longer needs to be involved in client work. You should still be respectful and clear. Confirm the final day, the payment being made, return of property, confidentiality obligations and any handover expectations.

Worked Example And Employer Checklist

Here is a practical example of how paying out notice can work.

Scenario: Aroha is a full-time employee earning $78,000 per year, paid weekly. Her ordinary weekly pay is $1,500 gross. Her employment agreement requires four weeks' notice and allows the employer to pay in lieu of notice. After a fair restructure process, her role is disestablished and the business decides not to require her to work the notice period.

Notice payment: four weeks x $1,500 = $6,000 gross payment in lieu of notice.

Other final pay: Aroha is also owed one week of wages already worked, 1.5 weeks of unused annual holidays and one alternative holiday worth $300. Her ordinary weekly pay is higher than her average weekly earnings, so the annual holiday component is 1.5 x $1,500 = $2,250. She has earned $20,000 gross since her last anniversary before the final annual holiday payout is added. For the 8% current-year holiday pay calculation, her gross earnings include the $2,250 payout for unused entitled annual holidays, so the calculation is 8% x $22,250 = $1,780, assuming no annual holidays taken in advance and no pay-as-you-go annual holiday pay have already been paid for that same current-year entitlement.

Indicative gross total before PAYE and other deductions: $1,500 wages + $6,000 PILON + $2,250 annual holidays + $1,780 holiday pay since anniversary + $300 alternative holiday = $11,830 gross.

The payroll team should still check whether any public holiday falls in the notional annual holiday period after termination, whether KiwiSaver applies to each component and whether any allowances or benefits need to be included.

Step By Step Checklist For Employers

1. Read the notice clause. Confirm the notice period and whether the agreement allows payment in lieu.
2. Check the reason and process. Make sure the termination reason and process are fair, reasonable and documented.
3. Confirm the final day. Decide whether employment ends immediately or on another agreed date.
4. Calculate PILON. Work out what the employee would have earned during the notice period.
5. Calculate final pay separately. Include wages, annual holidays, holiday pay since anniversary, alternative holidays and agreed reimbursements.
6. Check payroll treatment. Confirm PAYE, KiwiSaver and any other deductions with payroll or your accountant.
7. Confirm access and property. Arrange return of devices, keys, cards and documents, and remove system access at the right time.
8. Put it in writing. Give the employee a clear letter or email setting out the outcome and payment breakdown.

If you're tightening your employment documents and exit process more generally, the Legal Health Check can help you spot gaps across your business compliance.

Payment In Lieu Confirmation Letter Outline

A short written confirmation helps avoid confusion. A lawyer should tailor it to the situation, but the structure often looks like this:

1. Employee and role details: identify the employee, position and relevant employment agreement.
2. Reason for ending employment: state the outcome in a clear, factual and respectful way.
3. Final day of employment: confirm the date employment ends.
4. Notice clause and PILON: refer to the notice period and explain the amount being paid in lieu.
5. Final pay breakdown: list wages, PILON, annual holidays, alternative holidays and other agreed amounts separately.
6. Property, systems and handover: set out return of items, access removal and any handover requirements.
7. Ongoing obligations: remind the employee of confidentiality, restraint or IP obligations that continue after employment.
8. Point of contact: give a contact person for final pay questions or practical offboarding matters.

Key Takeaways

• Payment in lieu of notice means paying the employee for the notice period instead of having them work it.
• The safest path is a clear PILON clause in the employment agreement, or written agreement from the employee.
• PILON should generally reflect what the employee would have earned during the notice period, with PAYE and payroll treatment checked carefully.
• Final pay is separate and may include wages, unused annual holidays, holiday pay since the last anniversary and alternative holidays.
• Paying out notice doesn't replace a fair and reasonable process for dismissal, redundancy or other termination decisions.
• Annual leave shouldn't be casually swapped for notice. If leave, notice and final pay overlap, document the arrangement clearly.

If you'd like help with employment contracts, payment in lieu of notice, final pay calculations or termination processes, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.