What is Pay in Lieu of Notice?

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Every employee has a right to receive either a working notice or pay in lieu of notice upon the termination of their employment contracts. Employers are legally bound by the Employment Standards Act to provide either of the two.

This article will be reviewing pay in lieu of notice and what it entails in Canada.

What is Pay in lieu of notice in Canada?

Also referred to as termination pay, pay in lieu of notice (PILON) is a form of payment in the place of a termination notice. However, if you resign voluntarily, you do not have a right to claim this payment. 

In this case, if the employee provides notice of resignation in advance, he or she must be allowed to continue to work throughout the notice period. If not, the employer is liable to pay in place of notice.

One thing to note is that if a job was terminated for justifiable reasons, the employee is neither eligible for a working notice of termination nor pay in lieu of notice.

There are exceptions to the types of employees that are entitled to pay in lieu of notice. Employees hired under definite term contracts fall under this category.

Justifiable Termination Reasons

Below are some justifiable reasons for which an employer can terminate an employee’s employment;

  • Breach of the employment contract 
  • Inhumane workplace policy
  • Intentional misconduct
  • Incompetence

Note that it is the responsibility of your employer to prove that your termination was for a just cause by;

  • Showing that they set reasonable indicators of performance (standards) and that the employee is aware of them,
  • Demonstrating that the employee was well aware of the consequences of not meeting the standards
  • Setting a realistic period for the employee to meet the standard, and
  • Have proof that the employee did not meet the standards despite all the above.

As an employee, you must have worked for at least three consecutive months for your employer to be entitled to a working notice or pay in lieu of notice in Canada.

Employment Duration and Notice Length

Calculating pay in lieu of notice in Canada is based on the employee’s length of service. However, you must be sure of your employment duration to get accurate pay in lieu of the notice you are entitled to. 

For employers who have worked for at least three months but less than a year, their employer must give them an average of one week’s notice. However, if the employee’s work period was between a year but less than three years, they have a right to two weeks’ notice.

Nonetheless, if you have worked for three years and above but less than four years, you are entitled to a three weeks notice. While employees who have worked for four years and above but less than five years are eligible for four weeks’ notice. The maximum notice period is eight weeks for employees who have worked for eight years and above.

In some cases, employers usually combine both working notices and pay in lieu of notice. 

Calculating Pay in Lieu of Notice

In calculating pay in lieu of notice in Canada, the total of an employee’s weekly wages in the past eight weeks of work at the regular rate will be calculated and divided by 8. You will then multiply the result by the length of notice.

For example, Mr. Matt Buzz has worked in an establishment for five years, and his employment is about to be terminated. If he receives CA$700 weekly, his employer will calculate his pay in lieu notice thusly:

Regular wage × weekly work duration = CA$700×8 = CA$5600.

Regular wage ÷ total week worked = CA$5600÷8 = CA$700.

Wage Result × Employment duration = CA$700×5 = CA$3500. So, Mr. Matt’s termination pay is CA$3500.

Pay in lieu of notice doesn’t exempt an employer from paying other compulsory payments like vacation pay or overtime. Neither does it restrict you as an employee from gaining alternate employment or source of income in the period of notice.

Nullifiers of Pay in lieu of notice

Notice of termination or termination pay is considered ineffective if;

  • An employee is on leave, vacation or has been temporarily laid off, or
  • The employee is absent from work due to strike or medical reasons, or
  • An employee continues to work after the end of the notice.

Conclusion 

Pay in lieu of notice is an alternative to working notice for termination of employment and is dependent on the length of service of the employee. Remember, pay in lieu of notice must be paid upon employment termination.

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.