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.
It may also include, if applicable:
- long service leave payout
- payment in lieu of notice
- redundancy pay.
How to calculate final pay
Here’s a breakdown showing you how to calculate the items that you need to include in your employee’s final pay.
Regular pay
Employees must receive their regular pay for all time worked up to and including their final day, including their ordinary hours, any overtime and additional hours as required by their role. This payment must be at the base rate of pay and include any applicable penalty rates, loadings or bonuses as set out in the relevant award, agreement or employment contract. Carefully review the timesheets and payroll records to ensure that every hour worked is accurately paid. This can help you to maintain compliance and avoid any underpayment issues.
Annual leave loading
Annual leave loading is an entitlement that employees receive under most modern awards. It is an extra payment that employees receive while on annual leave. The amount varies, but it is usually 17.5% 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.
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. This payout is based on the employee’s statutory and contractual annual leave entitlement. 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.
Employees are entitled to have their annual leave paid at the correct rate under relevant legislation. 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.
Annual leave is generally paid at the base rate unless otherwise specified in an award or agreement. Some awards might say that the employer needs to pay out the ordinary rate instead of the base rate of pay. Some awards or agreements may specify a different method for calculating or paying annual leave payout.
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. Annual leave accrues after each completed week of employment.
How to calculate accrued annual leave
To work out your employee’s annual leave payout, you first need to calculate their accrued annual leave. Here are two examples you can follow to calculate the accrued annual leave for a full-time and part-time employee.
Full-time employee
Example: Charlotte 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 Charlotte will accrue per week, simply divide her total annual leave for the year by 52 weeks to get 2.923 hours per week (152 hours of annual leave ÷ 52 weeks = 2.923 hours of annual leave per week).
Divide this by 5 to get 0.5846 hours of annual leave per working day.
Part-time employee
Example: Charles 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 Charles will accrue per week of work, simply divide his total annual leave for the year by 52 weeks to get 1.385 hours of annual leave per week (72 hours of annual leave ÷ 52 weeks = 1.385 hours per week).
Divide this by 5 to get 0.277 hours of annual leave per working day.
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. For example, let’s assume Charlotte has worked for you for three years. She has accumulated 456 hours of annual leave (156 weeks x 2.923 hours = 456 hours).
- 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. Let’s say that Charlotte has taken 266 hours of annual leave. She currently has 190 hours of annual leave available (456 hours – 266 hours = 190 hours).
- Calculate the total annual leave payout (including annual leave loading)
Multiply the total hours of accrued annual leave by your employee’s hourly pay rate. Most employees receive 17.5% annual leave loading on top of their base rate of pay, so this should be included. Assuming Charlotte earns $30 per hour, her total annual leave payment will be $6,697.50 before tax (190 hours x $30 = $5,700, then $5,700 x 1.175 annual leave loading = $6,697.50).
Tax and super on annual leave payouts
The tax payable on unused annual leave depends on the reason for the termination of employment and when the leave was accrued. If the employee left due to genuine redundancy, invalidity or early retirement, all unused annual leave is taxed at a flat rate of 32%. If the reason was resignation or retirement, leave accrued before 18 August 1993 is taxed at 32%. Leave accrued on or after this date is taxed at the marginal tax rates, potentially resulting in higher tax withholding amounts depending on your employee’s income.
While super is paid on annual leave, it generally isn’t payable on annual leave payouts on termination. This is because the payout relates to a future period when your employee is no longer employed, and not to their ordinary hours of work, as it would if they were still employed.
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.
Sick leave payout
Personal leave (also known as sick and carer’s leave) covers both paid sick leave and carer’s leave entitlements for full-time and part-time employees. In most cases, you are not required to pay out your employee’s personal 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 and carer’s 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 personal leave (sick and carer’s leave) after cashing out their leave
- the employee receives the full amount that they would have been paid had they actually taken the leave.
If your employee doesn’t meet these criteria, you don’t have to pay out their personal leave or sick and carer’s leave. However, there may be exceptions under 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.
Allowances and final pay
Allowances are additional payments made to employees to cover specific work-related expenses, such as uniforms, travel or special duties. The types and amounts of allowances an employee may receive are usually set out in their employment contract, award or agreement.
When employment ends, any accrued or outstanding allowances that are owed should be included in the employee’s final pay. Review the relevant award or agreement and the employment contract to determine which extra payments apply and ensure these are paid out correctly. Failing to include applicable allowances in final pay can lead to disputes or penalties, so it’s important to be thorough and transparent when calculating these payments.
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 standard minimum notice period rules apply, and these are different depending on how long the employee has worked for you. 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.
Under the Fair Work Act, casual employees are generally not entitled to redundancy pay.
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.
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, include the following:
- overtime worked
- penalty rates
- long service (if applicable)
- loadings such as leave loading
- monetary allowances
- incentive-based payments and bonuses.
Record keeping and final pay
Accurate record keeping is a legal requirement for all employers and plays a vital role in ensuring employees receive the correct final pay when their employment ends. You are required to keep detailed records of each employee’s pay, annual leave, accrued annual leave, sick leave and other entitlements for at least seven years. These records help you calculate final pay, as they provide a clear history of all payments, leave taken and entitlements accrued during employment.
When an employee leaves your business, you should use these records to determine the correct amount of final pay, including any outstanding annual leave, accrued annual leave, sick leave (where applicable), bonuses and other payments. Compliance with the National Employment Standards, relevant awards and agreements allows you to ensure all entitlements are paid correctly.
In addition to maintaining accurate records, you are required to provide employees with a payslip within one working day of payment. This payslip should clearly outline all payments, including allowances, bonuses and any other entitlements, so employees can easily understand how their final pay has been calculated.
