What is a Termination Letter (payment in lieu)

A Termination Letter (On notice or payment in lieu) is issued to terminate the services of an employee, foregoing their notice period by paying salary in lieu of notice.

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Typically, you’ll use a termination letter payment in lieu when  you want to end the term of employment with an employee. Generally, terminating an employee is among the least favorite processes in human resources.  Additionally, it is even more fraught with risk if it is due to poor performance. Essentially, you should write a simple termination letter to ensure that you protect the employer from any risk of legal action.  Therefore, the less specifics that you provide in the letter, the less likely that a distraught employee can use that specific reason to challenge the termination. Basically, by not supplying a reason for termination, the company can use any and all evidence to defend itself. 

What is in a Termination Letter

In general, you should keep a termination letter short.

Date – Specify the date when this letter was delivered.

Last Date of Employment – Provide information on the last working day for the employee.  Ensure that the last date of formal employment adheres to both the applicable employment laws and the actual employment contract signed by the employee.

Employee Responsibilities

In many companies, the employer will provide the employee with various company resources to perform their daily duties. Usually, these may include laptops and cell phones; access to online accounts and resources; and other IP that belongs to the company that needs to be returned.

Employer Responsibilities for Termination Letter

Essentially, the company will also need to list out any liabilities owed to the employee. Such as paying out remaining holidays and meeting other statutory requirements.

When terminating an employee’s term of employment, you must provide them with the amount of notice they are entitled to under the Fair Work Act 2009 (Cth), which depends on the amount of time they have been working for the business. Notice periods may also be set out in employment agreements.

In some circumstances, instead of providing notice and having the employee work in the business for the period of time leading up to termination, the employer will provide the pay that the employee would have earned in that period of time in exchange for the employee discontinuing work immediately. This is known as payment in lieu of notice.

It is important to choose carefully between the Termination of Employment Letter and the Redundancy Notice, depending on the circumstances under which you wish to end the employment of a particular employee.

When Should You Use a Termination Letter?

Ideally, you should always use a termination letter as a formal method of documenting a dismissal.  Whether it’s for poor performance or other reasons, ensuring you protect the company’s interests is the most important priority.  In essence, a formal termination or dismissal letter serves as a formal notice and historical record of the termination.

If the termination is because of the cause or poor performance, make sure to follow proper procedures.

What is the meaning of payment in lieu of notice?

PILON or Payment in lieu of notice means that during a notice period, an employer will pay an employees’ salary and at times benefits too, but the employees are not required to work during the particular time period.

It is also known as wages in lieu of notice. In lieu’ means ‘in place of” or ‘instead of” and so employees receive notice pay instead of working during your notice period.

Make Sure to Follow Procedures for a Smooth Transition

Before dismissing an employee, it is important to follow proper procedures.  Firstly, ensure that you issue the proper warnings before the employee is formally terminated.  In most jurisdictions, an employee must be given adequate notice of poor performance and the chance to rectify the behavFior before termination. However, if attempts have been made but with no improvement, make sure that you collect proper documentation before holding a meeting to dismiss the employee.

Secondly, always perform the dismissal in person.  And then either send the letter via email or hand it to the employee at the meeting.  Having a signed version of the letter ensures that there is written proof that the employee has read and understood the termination.


In summary, always use a termination letter payment in lieu as a formal means of dismissing an employee.  Keep the letter short and simple. Ensure there are not a lot of specifics so the company can provide broad enough evidence in case the employee files legal action. Finally, termination is never easy.  Be cordial and offer to help the employee during the transition process.

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