More and more New Zealand businesses are choosing to include payment in lieu of notice in their employment agreements.
This means instead of working the usual notice period outlined in the employment agreement (for example four weeks), you can choose to pay out the employee’s notice period and end their employment immediately.
If an employee resigns, is made redundant, is terminated in terms of a valid 90 day trial period or because of poor performance or misconduct, you may, as the business owner, opt for the payment in lieu of notice clause.
If payment in lieu of notice is not in the employment agreement, then both parties must agree to this term. If the employment agreement does not have this option or your employee does not agree, they are entitled to work their full notice period. As an employer, you cannot force an employee to accept payment in lieu of notice in such case.
Final pay
If you choose to pay and employee in lieu of notice, they are still entitled to be paid the same amount they would have earned had they worked the full notice period.
Their final pay must include:
- The employee’s pay for normal hours worked since their last pay until their final day of employment plus the value of their notice period.
- Any accrued unused annual leave up to the final day of employment.
- Allowances, overtime, penalty rates, or earned commissions.
Payment in lieu of notice enables you to quickly manage your workforce. Employees that have been made redundant only receive redundancy compensation if it has been included in their employment agreement.
Why do businesses include a payment in lieu of notice clause?
There are many reasons why you may choose to include payment in lieu of notice in your employment agreement. These can include:
- To protect sensitive client information from being purposely deleted or compromised.
- Prevent the theft of business-critical data by a disgruntled employee.
- Your business is restructuring and you need to end the employment relationship immediately.
- If your employee deals directly with customers, guests or clients. Either in a call centre or face-to-face interaction.
Garden leave as an alternative
Unlike payment in lieu of notice, garden leave is when your employee is still on your active payroll and employed until the notice period ends. They just do not physically attend work.
This means your employee still receives all their normal benefits, terms and conditions of their employment while staying at home, including the accrual of annual leave.
You can only choose to use garden leave if it too is included in the employment agreement.
Termination should be in writing
You must not terminate an employee without providing the minimum notice period in writing, unless the employee is summarily dismissed for serious misconduct. Termination must be appropriate and based on a fair reason recognised by law, such as medical incapacity, misconduct or redundancy. You must methodically document everything and follow a fair process to mitigate any dispute or the potential of an unjustified dismissal claim.
Do employees have a right to payment in lieu of notice?
If there is no provision for payment in lieu of notice included in the employment agreement, the employee cannot demand to be paid out for the notice period without attending work. When this provision is included in the employment agreement, it usually specifies that payment in lieu of notice or garden leave is at the discretion of the employer and thus an employee is not entitled to choose this option.
The specialist team at Peninsula can help you navigate the process of ending employment and offer advice on employee entitlements.
This article is for general information purposes only and does not constitute as business or legal advice and should not be relied upon as such. It does not take into consideration your specific business, industry or circumstances. You should seek legal or other professional advice regarding matters as they relate to you or your business. To the maximum extent permitted by law, Peninsula Group disclaim all liability for any errors or omissions contained in this information or any failure to update or correct this information. It is your responsibility to assess and verify the accuracy, completeness, and reliability of the information in this article.