termination payments

When an employee is terminated, an employer’s obligations to the worker do not end.  Even when an employee decides to leave voluntarily, is underperforming or is not fulfilling employment duties, the employer will typically still be required to pay a termination payment.  The termination payment should fully compensate the employee for all monetary entitlements that are due to the worker when the employment relationship is ended. The amount of a termination payment will be different for each worker, and it is important to understand how termination payments should be calculated so you can pay the correct amount. You can review the details below to help you get termination payments correctly calculated when you let an employee go.

What to Consider When Making Termination Payments


Termination of employment may occur at the request of an employer, at the request of an employee, or by mutual agreement. When determining the appropriate termination payment to be paid when an employee leaves a position, it is important to consider these legal issues:

  • Was there an actual termination of employment?

Termination may occur by mutual agreement of employee and employer, or at the request of either the employer or employee.  The death of an employee may also be considered a termination, but a death benefit termination payment is taxed differently than a life benefit termination payment.


  • Is any part of the pay provided to an employee upon termination considered an employment termination payment (ETP) subject to special taxation rules?

Payments for unused days off; unused sick leave; golden handshakes or gratuities are subject to special tax treatment because they are considered part of an ETP. Compensation for wrongful dismissal or compensation for job loss are considered part of an employment termination payment as well. Payments made in lieu of notice or as a result of genuine redundancy and approved retirement scheme payments are also considered ETPs. Death benefits paid to another person upon the death of an employee are also considered death benefit termination payments, but are taxed differently than life benefit termination payments.  When a payment is an ETP, it must be made within 12 months of the termination to qualify for special taxation treatment.

  • Is the employee entitled to payment in lieu of notice?


The Fair Work Act requires employers to provide a specific period of notice of termination to an employee or to pay the equivalent amount in lieu of notice. The amount on lieu should be calculated at the full rate of pay for the employee if the employee had worked until the end of the minimum notice period.   An employee may also work out the notice period, rather than receiving payment in lieu of notice.


  • Is the employee entitled to redundancy or severance pay?


An employee may be entitled to severance pay based on the eligible employee’s years of continuous service and the employee’s age. The NES prescribes a scale of severance payments as soon as an employee has provided at least one year of continuous service. An eligible employee with one year of service would receive four weeks pay, while an employee with 10 years of continuous service could receive 12 weeks pay. However, Fair Work Australia can reduce the amount of redundancy pay when an employer finds other acceptable employment for the terminated worker or if the employer is unable to pay the legally prescribed amount.


  • Has the employee accrued annual leave?


An employee should be paid the full balance of outstanding annual leave that is fully accrued unless the employee has taken excessive annual leave in advance under the relevant modern award. Accrued annual leave must always be paid to a terminated worker, even in situations where an employee is terminated as the result of serious employment misconduct, and it must be paid regardless of who initiated the termination.


  • Is the employee entitled to other payments?


 Employees must be paid in full for all work performed at the time of termination.  An employee may also be owed amounts due in relation to overtime payments, personal or carer’s leave, public holidays, pro rata annual leave payments, and long-service leave. In some cases, commission arrangements may also require employees to be paid commission or bonus payments earned prior to the termination of employment but that have not yet been verified at the date of termination.

Owen Hodges Lawyers has experience providing assistance to businesses throughout NSW who are terminating workers. We can help to ensure you calculate correctly and comply with all laws and tax requirements associated with termination payments. We can provide advice and guidance on providing notice, calculating termination pay, and ensuring you comply with all obligations associated with the termination of a worker. Call us today on 1800 770 780 or contact us via ohl@owenhodge.com.au to schedule a consultation with a legal professional who can assist you.