What is final pay?
Final pay is the money that you owe your employee when their employment ends. Final pay includes:
- outstanding wages, including penalty rates and allowances
- any accrued entitlements such as annual leave and annual leave loading
- and, if applicable:
- long service leave payout
- payment in lieu of notice
- sick and carer’s leave payout and
- redundancy pay.
How to calculate final pay for Australian employees
Let’s look at how to calculate the items that you need to include in your employee’s final pay.
Annual leave payout
When your employee resigns or you terminate their employment, you are required to pay out all of their unused annual leave as part of their final pay. As a minimum, you must pay your employee at their base rate of pay for the hours they ordinarily would have worked during a period of annual leave up to 38 hours per week. However, they may be entitled to more than this, depending on what’s written in their modern award, registered agreement or employment contract. Generally, the base rate of pay does not include the following payments:
- penalties
- allowances
- overtime rates
- bonuses.
Some awards might say that the employer needs to pay out the ordinary rate instead of the base rate of pay. So, it’s important that you read through your employee’s award carefully to find out exactly what the requirements for the annual leave payout are. However, bear in mind that awards don’t apply if your employee is covered by an enterprise agreement or other registered agreement.
Annual leave entitlements
Full-time and part-time employees are entitled to 4 weeks of annual leave for every year that they work for you. This is the minimum amount of annual leave required by law. Based on the standard 38-hour working week, a full-time employee accrues 2.923 hours of annual leave per week of work.
How to calculate accrued annual leave
Full-time employee
Example: Laura works the standard full-time hours, 38 hours per week. She will accrue 152 hours of annual leave each year (4 weeks x 38 hours = 152 hours of annual leave). To calculate how much annual leave Laura will accrue per week, simply divide her total annual leave for the year by 52 weeks (152 hours of annual leave ÷ 52 weeks = 2.923 hours of annual leave per week).
Part-time employee
Example: Neil works 18 hours per week. He will accrue 72 hours of annual leave each year (4 weeks x 18 hours = 72 hours of annual leave). To work out how much annual leave Neil will accrue per week of work, simply divide his total annual leave for the year by 52 weeks (72 hours of annual leave ÷ 52 weeks = 1.385 hours of annual leave per week).
How to calculate your employee’s annual leave payout
To calculate the annual leave payout for a full-time employee, follow these steps:
- Calculate total annual leave hours
Multiply the number of weeks that your employee has been employed in your business (since the first day they started working for you) by 2.923.
- Deduct any leave already taken
Subtract any annual leave that your employee has already taken. This will give you the total hours of annual leave that your employee has accrued.
- Calculate the total annual leave payout
Multiply the total hours of accrued annual leave by your employee’s hourly pay rate.
Important points to remember about annual leave
- Annual leave accrues from the first day of employment (including any probationary period) and any unused annual leave rolls over to the next year.
- Employees continue to accrue annual leave while they are away on paid annual leave. So, you must include that time in your calculation.
Annual leave loading payout
Annual leave loading is an entitlement that applies to some employees. It is an extra payment that employees receive while on annual leave. The amount varies, but it is usually 17.5 percent of the employee’s base rate or ordinary rate of pay.
If they’re entitled to it, you need to include any annual leave loading accrued during employment in your employee’s final pay. It needs to be paid out even if an award, registered agreement or employment contract states otherwise. However, if your employee receives an annual salary or hourly rate that includes annual leave loading, it doesn’t need to be paid separately.
Sick leave payout
Sick leave is usually one less thing you need to worry about. In most cases, you are not required to pay out your employee’s sick leave when they leave your business. However, there are some exceptions. Again, make sure you check your employee’s award or registered agreement. These documents may say that an employee is entitled to cash out their sick leave during employment if certain conditions are met, such as:
- there is a written agreement outlining the sick leave payout
- the employee has at least 15 days of unused paid sick leave or carer’s leave after cashing out their sick leave
- the employee receives the full amount that they would have been paid had they actually taken the sick leave.
If your employee doesn’t meet these criteria, you don’t have to pay out their sick and carer’s leave. However, there may be exceptions in certain awards.
Long service leave payout
Your employee’s modern award or registered agreement might say whether they are entitled to long service leave. But, generally, state and territory laws determine long service leave entitlement. These laws specify:
- how long an employee needs to work for a business before they can get long service leave
- how much long service leave, if any, employers need to pay when the employment relationship ends
- how to calculate the amount of long service leave and the rate to pay it at.
Check the relevant legislation for your state or territory to find out what the requirements for long service leave are.
Notice period
When you terminate an employee or they resign, a notice period is typically required. A notice period is the length of time after ending the employment relationship that employers and employees give each other so that they can make new arrangements. Notice periods vary, and the rules about how much notice to give are set out in the:
- National Employment Standards (specifies the minimum notice periods)
- employment agreement
- modern award
- industrial instrument or
- registered agreement.
The notice period starts from the day after your employee resigns or is dismissed and ends on their last day of employment. You can choose to either:
- let your employee work until the end of the notice period or
- ask them to leave early and pay them in lieu of notice.
If you decide to pay out the notice period, your employee’s employment will end on the date you make the payment in lieu of notice. This means that your former employee will not continue to be employed during the notice period and that they won’t continue to accrue entitlements such as annual leave. If you choose not to pay out the notice period, they will continue to be employed for the whole notice period.
When you calculate the payment in lieu of notice, make sure you include the following:
- overtime worked
- penalty rates
- long service (if applicable)
- loadings such as leave loading
- monetary allowances
- incentive-based payments and bonuses.
Redundancy pay
An employer might make an employee redundant because:
- the employee’s job is no longer needed or
- the employer has become insolvent or bankrupt.
When you make an employee redundant, you need to give them the minimum notice period based on their length of service. The same minimum notice period rules outlined above apply. To find out the minimum notice period, check the National Employment Standards, the employee’s modern award, registered agreement or employment contract. Your employee can work until the end of the notice period or, if you prefer, you can pay the notice in lieu.
In most cases, small businesses (with less than 15 employees) are exempt from paying redundancy pay. However, if you are required to pay it, the amount depends on how long your employee has worked for you, and it is paid at their base rate of pay for ordinary hours worked.
In addition to the items included in final pay mentioned above (outstanding wages, unused annual leave, annual leave loading and long service leave, if applicable), an employee who is made redundant may also be entitled to redundancy or severance pay. This payment depends on several factors, including:
- the employee’s length of service
- employment type (for example, casual)
- if the employee is a trainee or apprentice
- if they are employed for a limited time or specific purpose
- the number of employees the employer has at the time the redundancy is made and
- the requirements in the applicable modern award, registered agreement or employment contract.
Deductions
Under certain circumstances, you may be allowed to deduct wages from your employee’s final pay. Most awards say that an employer can deduct up to one week’s wages from an employee’s pay if:
- the employee is over 18
- the employee hasn’t given the right amount of notice under their award and
- the deduction isn’t unreasonable.
However, you can only deduct pay from wages owed under the award. You cannot deduct it from other entitlements owed to the employee, such as annual leave.
When is the final pay due?
Again, this varies, but most awards require employers to give employees their final pay within seven days of their employment termination. If this is not specified in the award, employment contract or enterprise agreement, best practice is to make the payment within seven days.
