Article updated for 2024
In this article, I want to talk about a question that often gets asked at the NZPPA PayTech Adviceline. If an employee is getting paid in lieu of notice, does the notice extend forward from the termination date and if there are any public holidays in that period, would they also get paid for those days? The short answer is “No”, but I wanted to provide some background. At the same time, I thought I would cover a range of situations when notice is paid and how payroll should action it, so this post will be a bit of a mixed bag.
As always, I am writing in plain language for payroll, so I won’t cover all the ins and outs, just the situations commonly seen impacting payroll from the questions we receive through the NZPPA PayTech Adviceline.
What is notice?
Notice is a time period agreed between the employer and employee (usually found in the employee’s employment agreement) to advise that one party wants the employment relationship to end. Currently, there is no standard notice period in law (this may change with the government’s proposed employee insurance scheme).
In payroll, we can see a wide range of notice periods that have been agreed, and we administer them when the employee decides to leave or when they are terminated for a range of other reasons (I will discuss this later). If there is no period of notice in the employee’s employment agreement or the parties (employer and employee) cannot agree, case law implies a term of reasonable notice. While out of payroll’s scope, hopefully, we will get the outcome of any process to resolve this.
In this post, I will cover a range of notice situations, including:
- Notice when worked
- When an employee tries to set a longer notice period than what has been agreed
- Pay notice in lieu
- How notice in lieu is calculated and taxed
- How notice impacts leave
- Termination based on a disciplinary
Notice when worked
So, the notice when worked situation for payroll is when an employee informs their employer that they are moving on from their present position with their employer (for whatever reason, nothing to do with payroll). The employee provides notice based on what was agreed in their employment agreement. This allows their present employer to get coverage for the soon-to-be-vacated position (recruiting for a replacement or using internal resources). This should be seen as a standard part of the employee life cycle and not be viewed as a negative situation (unless all staff have resigned at once, as that is saying something totally different to the business!).
An important first point for payroll is to understand the notice periods that are present within your business.
When an employee tries to set a longer notice period than what was agreed
Notice is agreed, and I see many questions coming through about an employee resigning and giving a longer notice period than what was agreed. For example, the employee agreed to four weeks’ notice in their employment agreement when starting the position, but later on, they give six weeks’ notice that they are leaving (to suit their circumstances). The employer is under no obligation to accept this longer notice period provided by the employee as the four weeks was an agreed term. Of course, if the employer wants to allow six weeks’ notice, that is all good, as the employer can do so.
So, what is notice in lieu?
In some cases, an employer will include a clause in the employee’s employment agreement or in a policy agreed by the employee that the employer can choose to pay in lieu of notice at their discretion. What this means in plain language is that if applied, the employer will pay out the obligation of notice, so the employee won’t need to actually work the agreed notice period. The notice period will instead be paid out. The termination date is the employee’s final date and not the notice period that has not been worked. This is the whole point of an agreed term. It is agreed between the parties, and it is not for one of the parties to change it to suit themselves at a later date (unless the other party agrees).
Going back to the previous section, when the employee wants a longer notice period than what was agreed, if the employer does not want the employee to work their notice and pay notice in lieu, then payroll would only need to pay the agreed notice period in lieu. So, for the example used previously, only four weeks would be paid and not the six weeks the employee provided.
How notice is calculated and taxed
The parties agree on how much notice is to be given or provided. What is paid is also a matter of agreement, but usually, it would be based on the ordinary working week for the employee (base rate). However, payroll needs to ask the question and, if you get a chance, ask for it to be clearly stated in the employee’s employment agreement. It would also be beneficial to have the notice period standardised across the business (based on the type of role). For payroll, you must check the wording in the employment agreement or, if this was agreed outside the employment agreement, see what was offered at the time (hopefully, it was discussed and put in writing for payroll to act on). Also, hopefully, management or HR would seek payroll’s advice before offering additional notice to an employee so any issues can be discovered and resolved. If the employee works the notice, it is taxed normally, just like salary and wage, as the employee is getting paid for working their week as part of the pay period. If the employee is paid in lieu of notice, then this is an extra pay (lump sum payment) under section RD7 of the Income Tax Act 2007.
How notice impacts leave
As stated, notice is an agreed term, so on termination, either if worked or paid in lieu, it will impact leave being paid in the employee’s termination pay. In the final pay period, both notice worked and notice paid in lieu will be part of the 8% for holiday pay. Depending on how long the employee is working, notice can mean part of the notice period will form part of AWE and OWP. For example, the employee works a three-month notice period, so earnings over this period would become part of gross earnings for leave and are included in at least AWE, if not OWP as well.
So, going back to the initial question at the start of this post on if notice extends forward from the termination date when paid in lieu and if there is a public holiday in this period, would the employee get this paid as well, as stated this is a no. The reason for this is if notice is paid in lieu, you have paid out the obligation (the time) as the employee will not work the notice period, so the termination date is their final day of work. The options are to work the notice or pay notice in lieu. If they work the notice, then they will get the benefits of a public holiday (as long as they meet the requirements as per the Holidays Act).
Once a redundancy process has been undertaken with the employee, the employer may decide that the employee’s position no longer exists within the business. It may mean the employee gets paid redundancy compensation if that had been agreed in the employee’s employment agreement or was agreed as part of the redundancy process (as an agreed term and payroll will need to follow what has been agreed). But the bottom line for payroll is redundancy is on notice, so this will always be part of the employee’s termination pay (the employee will work the notice or get paid in lieu). Usually, when an employee has been made redundant, they get payment in lieu of their notice period, so they don’t work notice. It does not disadvantage the employee as they get notice paid out, giving them more time to look for another position.
Termination based on a disciplinary
In general terms, you can have an employee terminated on notice or termination without notice (general and serious misconduct). Payroll acts on the direction of management or HR on the type and whether we need to pay the employee notice (and what to pay). This would be with any other minimum entitlements and other agreed payments.
Some other points on notice
One of the issues I see with long notice periods is that it has not been clearly thought through regarding notice in lieu, which ends up costing the business.
For example, the employee gets an agreed three-month notice period, which was put in place because the business thinks it could take three months to find a replacement. I have always seen this as a flawed argument because the employee could be hit by a bus tomorrow. The business should have other options to cover any position in the short term, which is why we have succession planning, higher duties (with existing staff), contractors and temps. If the employer decides to pay notice in lieu, then it means (using the above example) payroll will pay in lieu three months to the employee. This is why the business may want to review notice periods and look at shortening them (not for an existing employee unless they agree to the change) but for new employees joining the business going forward. In general, one to two weeks for a waged employee and up to four weeks for salaried employees is realistic. A longer period of notice for senior or specialised staff may be valid because the business wants to keep them out of the hands of competitors (garden leave).
In conclusion, payroll needs a clear understanding of what notice periods are present in the workplace and at what rate notice should be paid. Notice will always be part of the 8% on termination for annual holidays, with longer notice periods also included in AWE and OWP. If you get the opportunity to provide feedback to the business, try to standardise company notice periods, so it becomes a straightforward activity in the overall termination pay process.
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