So you’ve come to the decision to dismiss an employee? Of course, you followed our sage advice to have fastidiously applied procedural fairness and maintain detailed records along the way to reaching that decision, right?! Right. Now you need to work out their final pay. This will require you to calculate annual leave payout amounts. It is very important to make sure you get it right. Otherwise, you could end up with embarrassing and costly claims of withholding pay, that damages your company’s reputation.
What’s included in an employee’s final pay?
The following entitlements need to be included in an employee’s final pay:
- Outstanding wages for hours they have worked, including penalty rates and allowances
- Any accumulated annual leave
Plus, if it applies:
- Annual leave loading
- Accrued or pro rata long service leave
- Redundancy pay
When does an employee’s final pay need to be made?
Some awards and agreements set out specific rules about when final pay must be paid. So be sure to read your fine print.
If it doesn’t, then it’s best practice to pay an employee on their last day of work or at the very latest, as part of the next regular pay run.
How to calculate annual leave payout requirements?
Now get your calculator. You need to consider a number of variables to calculate annual leave payout requirements owed to your employee, including:
- specific awards or enterprise agreements
- whether annual leave loading applies (see below!)
- whether he or she is an apprentice or trainee
- the employee’s classification in terms of their level of seniority and experience
- whether they’re full-time or part-time workers
As a side note, you can simplify this typically complicated process by syncing Employment Hero with your payroll system. This will allow you to automatically calculate annual leave payouts which incorporate the annual leave loading, if applicable. With this handy tool, you can also predict future annual leave entitlements, which is a bonus when your employees want to cash out their annual leave.
Annual leave loading
Remember, if an employee is entitled to annual leave loading during their employment then it also has to be paid out as part of the annual leave calculation when employment ends.
Now, watch out because here’s where it can get tricky. Annual leave loading must also be paid out on termination even where an award, registered agreement or employment contract says otherwise!
And furthermore, termination payments are taxed at different rates depending on your employee’s age, and how long they’ve been employed with you. If the dismissal was due to a redundancy or retirement, again, different tax rates come into play. So be very careful here.
Employment termination payments
Of course, how to calculate annual leave payout requirements is just part of the employment termination payment (ETP). Working out the ETP can get really complicated as specific awards, enterprise agreements, or individual employment contract provisions determine what needs to be paid.
So, before you begin, check the relevant award or employment contract for exact details of what needs to be paid to the employee on termination. And check with the Australian Taxation Office for calculating and reporting the tax on any termination payments.
The ATO provides steps to help you work out which payments to include in the employee’s ETP, and payments for accrued annual and long service leave which are not part of the employee’s ETP but may receive concessional tax treatment as well.
Now you are ready for the termination meeting
Prior to the termination meeting, notify your IT department so they can revoke the employee’s access to the company’s systems while the meeting is taking place.
At the meeting, ensure you have all the employee’s ETP and leave calculations available to give to the employee. Ask your employee to turn over all company property. This includes keys and access cards, company-owned computers and devices as well as any other company property that he or she may have at their home or work space.
Whether it’s for behavioural of performance reasons, there’s no easy way to dismiss an employee, but doing it by the book, makes it less painful for everyone concerned. And if it’s a matter of toxic employees, it’s better to weed them out before they infect your entire workforce and sometimes you can even avoid termination all together if you manage them properly right from the start.
There are corrective measures you can take to improve an employee’s conduct and performance. Find out more from our report on how to manage toxic employees.
Want to know more about being compliant?
Calculating annual leave correctly is just one way Employment Hero can help make sure your business is being compliant. Fill out the form below to download our Essential Guide to HR Compliance. 👇
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