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 how they manage 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, outline the payroll and tax treatment for each, and help you work out which option is right for your situation.
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 end 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 from that point. 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). Because they represent what the employee would have earned during their ordinary hours of work, they are treated as Ordinary Time Earnings (OTE) and are therefore subject to superannuation at the current Superannuation Guarantee rate of 12%.
Gardening Leave
Gardening leave occurs when the employer keeps the employee on payroll during the notice period but directs them not to attend work. This is commonly used to protect sensitive business information or prevent the employee from immediately commencing a new role with a competitor. For gardening leave to be enforceable, it should be provided for in the employee’s employment contract.
During gardening leave:
- The employee remains employed but is not required to attend the workplace.
- They continue to receive their usual salary, superannuation at 12% on their ordinary wages, 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
|
Pay in Lieu of Notice |
Gardening Leave |
|
|
Employment status |
Employment ends on the date payment is made |
Employee remains employed until the notice period expires |
|
Leave accrual |
Stops accruing from the date of payment |
Continues to accrue throughout the notice period |
|
Payment type |
Classified as an Employment Termination Payment (ETP) |
Treated as regular salary and wages |
|
Superannuation |
Attracts SG at 12% — PILON is treated as OTE |
Continues at 12% on ordinary wages throughout the period |
|
STP2 reporting |
Reported as an ETP (Type O or Type P) |
Reported as ‘Other paid leave’ (leave type: O) |
|
Contract requirement |
Can be applied if contract permits, or by mutual agreement |
Must be provided for in the employment contract to be enforceable |
Which Option Should You Choose?
The right choice depends on your specific situation. As a general guide:
Choose gardening leave when the employee has access to sensitive client information, commercially valuable data, or has signalled they intend to work for a competitor. Gardening leave keeps the employee bound by their contractual obligations including confidentiality and non-solicitation clauses for the full notice period. It also gives you time to manage handovers and protect relationships with clients and colleagues.
Choose pay in lieu of notice when you want a clean, immediate separation and the competitive risk is low. This is often the faster and simpler option. It ends the employment relationship on the day of payment, avoids the ongoing cost of keeping an employee on payroll while not working, and is straightforward to process.
A combination of both is also possible – for example, a short period of gardening leave to manage the handover followed by pay in lieu for the remainder of the notice period. Always check the relevant award, enterprise agreement, or employment contract before deciding, as the terms may affect which options are available to you.
In Summary
Understanding the differences between pay in lieu of notice and gardening leave is essential for meeting your obligations as an employer. Pay in lieu of notice ends employment immediately, with entitlements settled in one payment, while gardening leave keeps the employee on payroll with ongoing salary and benefits until the notice period concludes. Both options offer flexibility but each comes with distinct responsibilities around payment, tax treatment, superannuation, and ongoing obligations.