One of the last things to do when ending a worker’s employment is calculating and paying them their final pay.
Just what that pay should contain and when you need to pay it can cause employers headaches, but you need to get this right.
Two recent Federal Court decisions have highlighted the risks of delaying payments. So let’s have a close look at what to pay a departing employee and when to pay it.
What to include in final pay
When employment ends, any departing employee is entitled to payment for:
- Outstanding wages for hours worked - this includes penalty rates and allowances.
- Unused annual leave - this includes any annual leave loading if it would have been paid during employment.
- If applicable:
- Long service leave (accrued or pro rata).
- Payment in lieu of notice.
- Redundancy pay.
When to pay
Most modern awards contain a "payment on termination of employment" clause, which typically requires that an employee be paid any outstanding wages and other entitlements no later than 7 days after the day their employment ends.
Employment contracts, enterprise or other registered agreements can also specify when an employer must pay final pay must be paid.
The Fair Work Act does not contain a timeframe or deadline for making final payments, but it's been established as best practice to pay an employee within 7 days of their employment ending.
However, rulings in the Federal Court have established that an employer who delays final payment could be in contravention of certain sections of the Act.
Recent rulings clarify payment dates
Payment in lieu of notice
Section 117(2) of the Fair Work Act covers the requirement for notice of termination or payment in lieu of notice and states that an employer cannot terminate an employee's employment unless they’ve:
- Given at least the minimum notice period, or
- Paid the employee in lieu of notice.
A recent judgement in the federal court determined that for a dismissal to be lawful, an employer must pay an employee any payment in lieu of notice on or before the last day of their employment.
The employer in the case had made the payment in lieu of notice after the departing employee’s termination date, which the court found was a contravention of Section 117 of the Fair Work Act.
We understand that it’s common for employers to provide payments in lieu of notice after the termination date, usually in line with established pay cycles. However, paying a person in lieu of notice should be done before they leave the business.
Remember that payment in lieu of notice must be at the full rate of pay for the hours the employee would have worked had their employment continued until the end of the notice period. This includes any loadings, penalty rates or incentive payments that the employee would’ve been paid had they worked their notice period.
Accrued annual leave
Section 90(2) of the Fair Work Act states that on termination, employers must pay employees any unused annual leave at the "amount payable to the employee had the employee taken that period of leave". However, it does not say when it should be paid.
An employer was recently fined $17,000 (plus damages) for paying an employee's unused annual leave 3 months after their termination took place. The employer’s defence was that the delay was because they lacked employment law knowledge, and had doubts about the accuracy of the leave records.
The court held the delay was in contravention of section 90(2) of the Act and fined the employer $17,000, as well as awarding the applicant $10,000 in general damages for the distress and financial strain the delay had caused.
Obviously, 3 months is a long time to put off settling final pay with a former employee, but any delay in payment could put you at risk of legal action. As this case illustrates, a lack of awareness of your obligations or poor record-keeping won’t hold water as a defence.
Remember, too, that employees who are paid annual leave loading on annual leave taken during their employment should also receive leave loading payments on leave paid out on termination.
Annual leave loading must be paid out even if the person’s award, enterprise agreement or employment contract says it is not payable.
Our advice
Paying an employee any unused entitlements or payment in lieu of notice after they leave your business could put you at risk of adverse action claims and significant penalties under the Fair Work Act.
To be on the right side of the law, always make sure you closely check any final payments to be sure the outgoing employee receives their correct entitlements, and pay them on the day they leave your employment.
