Garden leave and payment in lieu of notice

The Fair Work Ombudsman lists both as options when an employer doesn’t want an employee to work out their notice: directing the employee not to attend work while they remain employed and paid (often called ‘gardening leave’), or ending the employment with payment in lieu (FWO library article K600628). You can also combine the two: some notice worked, the rest paid out.

An award, enterprise agreement or contract can require more notice but not less. Notice must be given in writing. Casual employees, employees on a fixed-term or seasonal contract and employees dismissed for serious misconduct are not entitled to NES notice (Fair Work Ombudsman fact sheet). If the contract gives a longer period, garden leave or payment in lieu should cover the contractual period, not just the minimum.

This is wider than the base rate of pay used for redundancy pay. If the employee regularly works rostered penalty-rate shifts or receives an allowance, work out what they would actually have earned over the notice period, not just their base hourly rate multiplied by 38.

• Use the roster or pattern of hours the employee would have worked.
• Include loadings and allowances that would have been paid for those hours.
• Pay out unused annual leave (and loading where it would have been paid on leave) separately, as required by s 90(2).

Garden leave is used when you want the employee away from clients, systems and confidential information before they leave, often because they are joining a competitor. While on garden leave the employee is still your employee: they continue to accrue leave and are paid until the end date, they keep their protections under the Fair Work Act, and their obligations under the employment contract continue until the employment ends.

• Confirm the start date, end date and any obligations (stay contactable, return property, no client contact) in writing.
• Keep paying their normal pay, including any allowances they would ordinarily receive, on normal pay days.
• Treat post-employment restraint clauses as a separate question and get advice before relying on one.

The ATO lists amounts in lieu of notice among the payments that make up an employment termination payment. The ETP cap for life benefit termination payments is $270,000 for 2026–27. Unused annual leave and long service leave are not ETPs and are taxed separately.

For super, the ATO’s qualifying earnings list treats both gardening leave and payment in lieu of notice (for all termination reasons) as ordinary time earnings and qualifying earnings. Unused leave paid on termination is neither. The ATO’s worked example for a payment made in October 2026 calculates super guarantee on the payment in lieu at 12%, under the Payday Super rules that apply to earnings paid from 1 July 2026.

The ATO says a business can generally claim a deduction for the salaries and wages it pays employees, and its business schedule instructions include lump sum payments in salary and wage expenses. To claim the deduction you must first comply with PAYG withholding and reporting for each payment (ATO: deductions for salaries and wages).

The real trade-off is protection against cost. Garden leave keeps the employee bound by their employment duties for longer, which matters when client relationships or confidential information are at stake. Payment in lieu gives a clean break and stops further accrual. Payroll tax treatment of termination payments is set by each state and territory, so check your revenue office’s guidance. To see the full cost of replacing the role, use the hiring cost calculator.