How to Calculate Termination Pay

Ending an employment relationship can be a very challenging time for both workers and business owners alike. This is especially so when it involves a termination, which is often the result of a long and drawn out process requiring detailed meetings and meticulous documentation.

Once this decision is made you still have one final hurdle to overcome: ensuring you have correctly calculated termination pay. The number of variables that need to be considered can often make this calculation quite challenging.

Thankfully, following a methodical approach when calculating a worker’s remaining entitlements will ensure you don’t find yourself in a costly or embarrassing situation. The following checklist will assist you in calculating what is owed when a worker is terminated.

Outstanding Wages

The first consideration when calculating termination pay is the payment of any outstanding wages. If an employee has performed any work they must be paid for their hours worked and all outstanding payments should be processed in accordance with any applicable award or enterprise agreement.

Notice Period

In order to terminate an employee, an employer must give written notice of the day of termination. The National Employment Standards (NES) set out in the Fair Work Act 2009 (Cth) establish the minimum period of notice for termination of employment in accordance with the table below:

Period of Continuous Service Minimum notice period
Not more than 1 year 1 week
More than 1 year but not more than 3 years 2 weeks
More than 3 years but not more than 5 years 3 weeks
More than  5 years 4 weeks

Where the worker is over 45 years of age and has completed at least 2 years of continuous service the employer must increase the period of notice in the table above by 1 week.

However, the NES only specifies minimum periods of notice. An award, enterprise agreement or employment contract may specify a higher period of notice, for example 1 months’ notice. Where this is the case the higher period of notice will apply.

Who doesn’t get notice?

Not all employees are entitled to receive notice. Section 123 of Fair Work Act 2009 excludes certain categories of employees from the minimum notice provisions. Employees excluded from notice under section 123 include, however are not limited to, casual employees, employees engaged on a contract for a specified period of time, specified task or season, and employees terminated for serious misconduct.

However, employers should always refer to the applicable award or enterprise agreement which may set different terms requiring the employer to give notice.

Payment in lieu of notice

Under the Fair Work Act 2009, employers are permitted to pay the equivalent period in lieu of notice. Where this is done, however, it must be paid at the employees full rate of pay for the hours the employee would have worked had the employment continued until the end of the notice period. This full rate of pay includes all loadings, penalty and overtime rates, incentive-based payments and monetary allowances.

Annual Leave

Unlike personal/carers leave which is not paid out on termination, any accrued yet unused annual leave will form part of the termination payment.

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

Additional payments:

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

  • was the position made redundant?
  • is there a long service leave entitlement payable? and
  • are there any additional contractual entitlements payable?

Redundancy Pay

A position becomes redundant where an employee is terminated because the position is no longer required to be performed by anyone due to changes in the operational requirements of the business. In these circumstances a business will need to consider whether this means the employee is entitled to redundancy pay.

Generally speaking redundancy pay is payable in accordance with the NES based on an employee’s length of continuous service as set out in the table below. However, the entitlement can be industry specific and vary between industrial instruments. It is therefore important employers check the terms of the applicable award or enterprise agreement first.

Period of continuous service Redundancy pay
At least 1 year but less than 2 years 4 weeks
At least 2 years but less than 3 years 6 weeks
At least 3 years but less than 4 years 7 weeks
At least 4 years but less than 5 years 8 weeks
At least 5 years but less than 6 years 10 weeks
At least 6 years but less than 7 years 11 weeks
At least 7 years but less than 8 years 13 weeks
At least 8 years but less than 9 years 14 weeks
At least 9 years but less than 10 years 16 weeks
At least 10 years 12 weeks

 Long Service Leave

Any accrued yet untaken entitlement to long service leave is payable on termination. However, as long service leave varies based on the relevant state or territory legislation, determining whether a pro rata entitlement is payable often depends on the reasons for the termination along with the employee’s length of service.

For example, in NSW an employee has a pro rata entitlement to long service leave after 5 years of continuous employment where the employee is terminated for reasons other than serious misconduct. In Queensland, on the other hand, an employee who has completed 7 years of continuous service is entitled to pro rata long service leave only if the employer dismisses the employee for a reason other than the employee’s conduct, capacity or performance, or unfairly dismisses the employee.

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

Contractual Entitlements

In addition to payments required under the Fair Work Act 2009 an employment contract may require additional payments to be made when employment has come to an end. In these circumstances this will be a matter of interpretation and will generally require specific advice.

What next?

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