Under the Worker Adjustment and Retraining Notification Act (WARN), employers with 100 or more employees must give 60 calendar days advance notice in the case of plant closings or mass layoffs. Otherwise, no law mandates employers or employees to give termination notices. If the employer or the employee gives notice, payment in lieu of notice means that the worker doesn’t have to work out the notice period, but rather receives payment for it. Or the employer may give the employee pay in lieu of notice because it terminated him without notice. Pay in lieu of notice is entirely up to the employer.

Check your state labor board requirements for pay in lieu of notice (see Resources). State law may require that the payment be viewed as in lieu of notice if it’s a clearly defined policy or contract, in which case employees must receive the wages if advance notice is required but none was given. You may be required to pay wages in lieu of notice based on length of service. Or the employer may offer payment at its discretion. In the latter case, the employer offers a certain amount of payment because it didn’t give notice. This is to aid the employee while he searches for new employment.

Calculate pay in lieu of notice for salaried employees. Suppose the employee gives the employer a two-week notice but the employer decides to let her go immediately. Say she earns $57,000 annually and gets paid biweekly. Calculation: $57,000 / 26 biweekly pay periods = $2,192.31, or two-weeks' pay.

Figure her daily salary if you want to pay her for only a certain amount of days. Calculation: $57,000 / 26 biweekly pay periods / 10 days = $219.23, or daily pay.

Calculate pay in lieu of notice for hourly employees. Multiple the hours you wish to pay the employee by the hourly rate to arrive at the total pay. For example, if you want the pay wages in lieu of notice for a standard 40-hour week and the employee earns $11.50/hour, the calculation would be: 40 hours x $11.50 = $460.

Tip

Since pay in lieu of notice is regarded as wages, it’s generally taxable and subject to tax withholding. Use IRS Circular E to figure federal income tax and Social Security and Medicare taxes, and follow your state’s guidelines for state income tax withholding.

Under the Employee Retirement Income and Security Act of 1974 (ERISA), you may be required to report pay in lieu of notice along with other company benefits (such as retirement benefits) to the Internal Revenue Service via Form 5500. Your state labor board can tell you your requirements.