What to Consider When Making Employee Termination Payments

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employee termination payment

When an employee’s contract is terminated, an employer’s obligations to the worker do not end. Even when an employee decides to leave voluntarily, is underperforming or not fulfilling employment duties, the employer will typically still be required to pay an employee termination payment (ETP).

This employee termination payment includes all monetary entitlements that are due to the worker when the employment relationship ended. The amount will be different for each worker, and it is important that you understand how to calculate it.

Keep reading to learn how to calculate termination pay when you let an employee go. You can also get in contact with one of our experienced employment lawyers if you have further questions.


What is an employee termination payment?

ETP’s are lump sum payments made after the termination of a person’s employment.

6 factors that affect employee termination payments

When determining the appropriate employee termination payment to be paid when an employee leaves a position, it is important to consider these legal issues.

1. Was there an actual termination of employment?

Termination of employment may occur at the request of an employer, at the request of an employee, or by mutual agreement.

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.

2. Special taxation rules

The following payments are subject to special tax treatment because they are considered part of an employment termination payment:

When a payment is an ETP, it must be made within 12 months of the termination to qualify for special taxation treatment.

3. 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 in 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.

4. 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 National Employment Standards (NES) outlines how employees should be paid. 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.

5. Has the employee accrued annual leave?

An employee should be paid for any outstanding annual leave, 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. It must also be paid regardless of who initiated the termination.

6. 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
  • 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).

What else is included in employment termination payments (ETP)?

  • Compensation for wrongful or unfair dismissal or compensation for job loss
  • Payments made in lieu of notice or as a result of genuine redundancy or early retirement scheme payments
  • 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.

Our employment lawyers are here to help

At Owen Hodge Lawyers, our team of commercial lawyers has extensive experience in helping businesses with termination payments in Australia. We can help to ensure you calculate employment termination payments correctly and comply with all laws and tax requirements associated with them.

We can also provide advice and guidance on providing notice, employment contracts and awards, 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 [email protected] to schedule a consultation with a legal professional who can assist you.

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