8 things employers should know when calculating termination pay

Even though Australia’s annual retrenchment rate is at its lowest rate since 1972, businesses must ensure they’re completing the termination process correctly. Ending an employment relationship can be a very challenging time for both employees and business owners, and this is especially true when it involves a termination as opposed to an employee voluntarily deciding to end their employment. 

One way to ensure the cessation process is not made more difficult than it already may be is to ensure an employee’s termination pay is processed correctly. This of course not only provides employees with financial comfort to seek alternative employment, but it is also a legal requirement that businesses ensure employees receive their statutory minimum entitlements. 

However, processing an employee’s termination pay can be a lot harder than it sounds. There are many variables involved in the calculation process and so our experts have helpfully put together a checklist to guide you through this process. 

The number of variables involved in this lengthy and complex process can often make the calculation of an employee’s final pay quite difficult. However, following a clear approach will ensure you don’t find yourself in a costly situation. To help you calculate accurately, our experts have put together the following checklist.

1. Outstanding wages

The first consideration when calculating termination pay is the payment of any outstanding wages. The employee must be paid for all hours worked, and all outstanding payments should be processed in accordance with any applicable modern award or enterprise agreement. 

For example, many modern awards prescribe that final payments must be made to the employee within seven days of ending employment.

2. Notice period

When terminating an employee (other than a casual), an employer must give written notice of the day of termination. Providing an employee with notice of termination is a requirement under the National Employment Standards (NES). The minimum period of notice for termination of employment is set out in the Fair Work Act 2009 (Cth) (FW Act) as highlighted in the table below: 

 Note: for employees who are over 45 years of age and have completed at least two years of continuous service, the notice period in the table above must be increased by one week. 

However, the NES only specifies minimum periods of notice. An award, enterprise agreement, or employment contract may specify a longer period of notice, for example, one months’ notice for any length of service. Where this is the case, whichever period of notice is longer will apply.

3. Who doesn’t get notice?

Did you know that not all employees are entitled to receive notice? Section 123 of the FW Act excludes certain categories of employees from the minimum notice provisions. These categories of employees include: 

• employees who are employed for a specified period of time (ie. an employee employed pursuant to a fixed-term contract); 

• an casual employee; 

• an employee engaged pursuant to a training arrangement and whose employment is limited to the duration of the training; and 

• an employee terminated for serious misconduct. 

A common question our experts receive is what constitutes “serious misconduct” for the purposes of knowing whether notice is payable. Serious misconduct is defined as: 

• wilful or deliberate behaviour by an employee that is inconsistent with the continuation of the contract of employment; and/or 

• conduct that causes serious and imminent risk to the health and safety of a person or the reputation, viability or profitability of the employer’s business. 

Conduct which is generally considered to constitute serious misconduct includes the following: 

• theft; 

• fraud; 

• assault; 

• sexual harassment; 

• an employee being intoxicated at work; or 

• and employee refusing to carry out a lawful and reasonable direction. 

 4. Payment in lieu of notice

Under the FW Act, employers are permitted to pay an employee in lieu of providing notice. Where this is done, however, it must be paid at the employee’s full rate of pay for the hours the employee would have worked had the employment continued until the end of the notice period. This includes all loadings, penalty and overtime rates, incentive-based payments, monetary allowances, and any separately identifiable amounts.

5. Annual leave

Unlike personal/carers leave, which isn’t paid out on termination, any accrued but unused annual leave is required to be paid to an employee upon termination of their employment. 

When paying annual leave on termination, employers must pay the amount that would have been payable had the employee taken the annual leave. This means that if the employee has an entitlement to annual leave loading under an applicable award or enterprise agreement, the leave loading must also be paid on termination.

6. Additional payments

In addition to the above, certain circumstances may trigger additional payments on termination. As an employer you need to ask yourself the following questions: 

• Was the termination the result of a redundancy? 

• Is there a long service leave entitlement payable? 

• Are there any additional contractual entitlements payable?

7. Long service leave

Any accrued yet untaken long service leave is payable on termination. However, in some States and Territories legislation allows for pro rata payment of long service leave if an employee is terminated before becoming entitled to the full amount. 

Determining whether a pro-rata entitlement is payable often depends on: 

• the reasons for the termination; 

• the employee’s length of service; and 

• the long service leave legislation of each State and Territory. 

For more information on long service leave entitlements upon termination, employers should seek advice to ensure they are calculating entitlements correctly.

8. Contractual entitlements

In addition to payments required under the FW Act, an employment contract may require additional payments to be made when an employment has come to an end. In these circumstances, this will be a matter of interpretation and will generally require specific advice. 

So, what’s next? 

The complexity of what constitutes final pay when an employee leaves the business can be quite overwhelming. The last thing you want is to risk damaging your business’ reputation or end up with expensive claims for breaching the minimums under the NES, award, or enterprise agreement. When you are considering terminating an employee, it’s highly recommended to seek expert advice to ensure you don’t find yourself in a sticky situation. 

If I don’t follow the termination procedure correctly, what might be the consequences? 

A failure to follow due process when terminating an employee will cost you, so we want you to understand the legal framework by which employers can minimise their exposure to potential unfair dismissal or general protections claims. 

At the end of the day, to work out precisely when an employment relationship ends and how to calculate termination pay, and what to do next, read Citation HR’s essential guide here.