When an employee resigns, they are generally required to give their employer a notice period. During this time, their employment continues as usual, with entitlements to salary, benefits, and leave accruals remaining intact. However, employers have some flexibility in managing this period.
Before making any decisions, employers should review the terms of any applicable award, registered agreement, or employment contract.
In this article, we’ll clarify the key differences between pay in lieu of notice and gardening leave, and outline employers’ obligations for each option.
Managing the Notice Period
Employers can approach the notice period in several ways:
- Allow the employee to work through the notice period
- Opt to pay out the notice period (pay in lieu of notice), or
- Use a combination of both.
Pay in Lieu of Notice
When an employer chooses to terminate employment immediately without requiring the employee to work through their notice period, this is called pay in lieu of notice. The employer must pay the employee the full amount they would have received if they had worked until the end of the notice period. This amount includes:
- Incentive-based payments and bonuses
- Loadings
- Monetary allowances
- Overtime and penalty rates
- Any other identifiable payments.
It’s important to note that the employee’s employment officially ends on the date payment is made, and they no longer accrue entitlements, such as annual leave. If no part of the notice period is paid out, the employee remains employed until the notice period expires. Employment cannot end earlier than the date notice is provided.
Payments made in lieu of notice are classified as Employment Termination Payments (ETPs) and are subject to superannuation.
Gardening Leave
Gardening leave, by contrast, occurs when the employer keeps the employee on payroll during the notice period but directs them not to work. This is often used to protect sensitive business information or prevent the employee from starting a new role with a competitor. Gardening leave must be outlined in the employee’s contract to be enforceable.
During gardening leave:
- The employee remains employed but is not required to attend the workplace.
- They continue to receive their usual salary, superannuation, and other benefits, and accrue leave entitlements.
- Payments are treated as regular salary and wages, not as termination payments, and are taxed accordingly.
Even though the employee doesn’t perform work during gardening leave, they are still bound by their employment contract, including any confidentiality obligations or restrictions on taking up new employment. Gardening leave is reported in STP2 as “Other paid leave” (leave type: O).
Key Differences
- Employment Status: During gardening leave, the employee remains employed until the end of the notice period. With pay in lieu of notice, employment ends as soon as the payment is made.
- Entitlements: Employees on gardening leave continue to accrue leave and entitlements, whereas employees paid in lieu of notice stop accruing entitlements once the termination payment is made.
- Payment Type: Gardening leave payments are treated as salary and wages, while pay in lieu of notice is classified as an ETP.
Understanding the differences between pay in lieu of notice and gardening leave is crucial for employers to meet their obligations. Pay in lieu of notice ends employment immediately, with entitlements paid out in one lump sum, while gardening leave keeps the employee on payroll, with ongoing salary and benefits until the notice period ends. Both options provide flexibility, but each comes with distinct responsibilities in terms of payments, tax treatment, and ongoing obligations.