How is notice pay calculated?

Take the wage the contract specifies for notice, often monthly gross or basic, divide it by the days the policy uses for a month, and multiply by the unserved notice days. Check the contract wording, because the wage base varies between employers.

Can an employer recover notice pay from the final settlement?

If the contract provides for it, a shortfall in notice served is usually adjusted against the dues in the full and final settlement. Show the recovery as a separate line so the employee can see how it was computed.

Can leave balance be adjusted against the notice period?

Only if the leave policy allows it. Many policies do not let earned leave be set off against notice, so the shortfall is recovered and the leave is encashed separately.

Is notice pay received by an employee taxable?

Notice pay received in lieu of notice is generally treated as part of salary income and taxed through payroll. Confirm the current treatment with a tax adviser for unusual cases.

HR & payroll glossary

Notice pay

Companies on HRMagix: 120+
Employees managed: 9,000+
Integrated modules: 12
Free trial, no card: 14-day

Definition

Payment in place of the notice period, either by the employer to release an employee early or by the employee to leave without serving it. It is computed on the wage the contract specifies for the unserved days and settled through the full and final settlement.

Often confused

Not the notice period itself. The period is the time owed; notice pay is money paid instead of that time.

In practice

Notice pay comes up in the full and final settlement. When an employee leaves without serving the full notice, HR calculates the shortfall days and payroll either recovers the amount from final dues or, where the company releases someone early, pays it out.

Example: an employee with a 60-day notice clause serves 40 days. If the contract defines notice pay on gross monthly salary, the recovery is 20 days of gross. If it defines it on basic, the figure is far smaller, so the contract wording decides the amount.

Two errors recur. One is recovering more than the final dues and then chasing the former employee without a clear contractual basis. The other is ignoring GST: the treatment of notice pay recovery has been the subject of rulings, so confirm the current position with your tax adviser.

Treated in depthNotice Pay Calculator

Questions that involve Notice pay

What goes into a full and final settlement?Answered on Payroll

FAQs

Notice pay: common questions

Take the wage the contract specifies for notice, often monthly gross or basic, divide it by the days the policy uses for a month, and multiply by the unserved notice days. Check the contract wording, because the wage base varies between employers.
If the contract provides for it, a shortfall in notice served is usually adjusted against the dues in the full and final settlement. Show the recovery as a separate line so the employee can see how it was computed.
Only if the leave policy allows it. Many policies do not let earned leave be set off against notice, so the shortfall is recovered and the leave is encashed separately.
Notice pay received in lieu of notice is generally treated as part of salary income and taxed through payroll. Confirm the current treatment with a tax adviser for unusual cases.

HR & Payroll Glossary

Book a demo

See HRMagix run on your own payroll month

Book a demo See pricing

14-day free trial · Full access to all 12 modules · Zero implementation fee · Cancel anytime

Keep exploring

Where to go next

In practice