Pay in lieu of notice is the financial compensation that employers may give dismissed employees instead of giving advanced notice of termination.
Pay in lieu of notice is sometimes also referred to as termination pay or severance pay. However, in some Canadian jurisdiction “severance pay” has a different meaning, particularly under legislation, including in Ontario.
Employers can dismiss workers without just cause, if they provide adequate advanced notice of termination, or if they provide pay in lieu of advanced notice. Pay in lieu means the employer is giving the employee the same financial compensation that they would have received, had they been employed through to the end of the relevant notice period. It may include compensation for the loss of salary, benefits, bonus (unless the bonus policy has an enforceable provision saying otherwise), allowances, and even perks like an employer-paid phone plan.
(For more, see What is notice of termination? and How much severance pay am I entitled to?.)
Structuring the payment
Pay in lieu of notice can be given as a lump sum payment or salary continuance (among other possibilities). It can also be combined with working notice, as long as together they amount to the financial equivalent of adequate notice of termination. It is also permissible to provide for a reduced payment or cessation of salary continuance, to take effect if the employee gets new employment within a specified notice period.