The top five mistakes employers make when terminating employment: No.2 Incorrect termination pay
The rules on termination pay are extremely complex and it is no surprise that this is an area where errors often occur.
Frequent areas of confusion include: is annual leave paid out on termination? (Yes); what about personal leave? (No); what about long service leave? (It depends!).
For some time there was uncertainty as to whether annual leave loading was paid on annual leave paid out on termination, but now that appears to be settled (it is paid, so long as the employee was entitled to annual leave loading when they took annual leave during employment).
Confusion also surrounds the treatment of notice, redundancy pay and payment in lieu of notice. The important point to note is that under the Fair Work Act 2009 notice is a completely separate entitlement to redundancy pay and so the fact that an employee might be entitled to redundancy pay will have no bearing on their entitlement to and amount of notice.
Payment in lieu of notice is also a tricky area, but the general position is that where an employer determines to end employment immediately (or part way through a notice period), the employee must be paid an amount in lieu of their notice period entitlement (or the part of the notice period which they did not work). Of course there may be circumstances where an employee is not entitled to any period of notice or payment in lieu (termination for serious misconduct, etc).
This is, however, not the end of the story. Superannuation entitlements vary depending on the type of termination payment. For example, super is not paid where annual leave is paid out on termination, but is paid where a payment is made in lieu of notice.
And then, of course, there is the question of tax!
Finally, there is often confusion about when the termination payment should be made, partly because the Fair Work Act 2009 does not deal with this point specifically. Best practice would dictate that payment is made concurrently with the termination of employment or on the next pay day. Some modern awards, however, are explicit about the timing of termination pay. For example, clause 31.4 of the Building and Construction General Onsite Award 2010 states: “When notice is given, all monies due to the employee must be paid at the time of termination of employment. Where this is not practicable, the employer will have two working days to send monies due to the employee by registered post (or where paid by EFT the monies are transferred into the employee’s account).”
Given the financial penalties employers can face for contravening the Fair Work Act 2009 or an enterprise agreement or award, it is always best to seek legal advice when calculating termination pay.