Before Paying Termination Payments: What Australian Businesses Need To Know

When a team member leaves your business-whether because of resignation, redundancy, or dismissal-finalising their pay isn’t just about transferring money. There are important steps to work through before you pay any termination amounts, and getting them right protects your business legally and financially.

If you’re feeling unsure about what has to be paid, when to pay it, and which rules apply, you’re not alone. The process can feel technical, but with a clear checklist and the right documents, you can handle terminations professionally and move forward with confidence.

This guide walks you through what Australian employers should check before paying termination entitlements: what’s commonly included, how to prepare, the key legal rules, the documents to have ready, and practical answers to common employer questions.

What Are Termination Payments In Australia?

“Termination payments” are the amounts an employee may be owed when their employment ends. What’s payable will depend on how the employment ended, the contract, any applicable Modern Award or Enterprise Agreement, and the minimum standards under the Fair Work framework.

Common components include:

• Final wages: Ordinary hours worked up to the last day, plus any overtime or penalty rates that are still owing.
• Accrued annual leave: Unused annual leave paid at the correct rate (and loading if it applies under the relevant instrument).
• Long service leave: Payouts depend on state or territory laws and your employee’s service history.
• Notice or pay in lieu: Either the employee works out their notice period or you pay pay in lieu of notice if you require an earlier end date.
• Redundancy pay: Payable for genuine redundancies (subject to exceptions, such as some small business exemptions).
• Other amounts: Any contractual entitlements that have vested, such as unpaid commissions, bonuses already earned, or specific allowances.

The exact mix will vary. Always start with the contract and any applicable award or agreement, then check the minimum legal standards. If there’s ever a conflict, the law’s minimums can’t be undercut.

What Should You Do Before You Pay?

Before processing a final payout, work through this practical checklist. It helps minimise mistakes, avoid disputes, and ensure you’ve covered your obligations.

1) Confirm Why The Employment Ended

The reason for termination shapes what you owe.

• Resignation: Confirm the required notice and whether it was worked or should be deducted from final pay in line with the contract or award. For context on timing, see typical resignation notice periods.
• Genuine redundancy: Check eligibility for redundancy pay, consultation obligations, and redeployment considerations. If redundancy pay applies, estimate it carefully using a trusted approach, such as a redundancy calculator.
• Termination for conduct or performance: Ensure you’ve followed any required process under the contract, policy, and applicable industrial instrument, and that reasons are properly documented.

2) Review The Contract And Any Award/Agreement

Pull the employment contract and check any Modern Award or Enterprise Agreement that might apply. These documents can affect notice, redundancy, leave loading, set-off clauses, incentive or commission treatment, and payout rules.

Also consider company property returns (laptops, keys, vehicles), confidentiality obligations, and any post-employment restraints. If restraints or confidentiality are important to you, make sure they’re clearly set out in the contract and supported by your policies.

3) Calculate All Outstanding Entitlements

List each item you owe and calculate it methodically, including:

• Final wages (ordinary time, plus any unpaid overtime/penalties if they apply)
• Accrued but unused annual leave (and any loading if applicable)
• Long service leave (based on jurisdictional rules)
• Redundancy pay (if applicable)
• Notice or payment in lieu if the notice period won’t be worked
• Any owed commissions, allowances, or vested bonuses

If the situation is complex-mixed duties, varying hours, multiple allowances, or disputed entitlements-consider getting legal guidance to review your approach. Many employers also sense-check timing and inclusions against a clear guide to calculating final pay.

4) Check Super And Tax Treatment

Superannuation and tax treatment can vary by component of the payout. For example, super is generally payable on ordinary time earnings up to termination but not typically on some termination components. Review how super applies to your scenario and confirm treatment of Employment Termination Payments (ETPs), if relevant.

For clarity on super obligations across common components, many employers refer to guidance about super on termination payments. Because PAYG withholding, ETP caps, and tax concessions are fact-specific, it’s best to confirm the correct treatment with your accountant or tax adviser before you process payment.

5) Confirm Timing Of Payment

Payment timeframes can be set by an award, an enterprise agreement, the employment contract, or your usual payroll cycle. In practice, many employers pay on the next regular payday or within a short, stated period.

Delays can create risk-particularly if your instrument or contract sets a deadline-so aim to finalise promptly once calculations and approvals are complete.

6) Prepare The Right Documentation

Keep your records in order and provide the documents that are required in your circumstances. Typically this will include a final payslip with a clear breakdown of amounts and deductions. A separation certificate is not automatically required in every termination; it’s usually provided if requested by the employee or Services Australia.

For sensitive exits (for example, a redundancy or a dispute), some employers also use a deed to confirm settlement terms and reduce the risk of later claims.

7) Keep A Clear Paper Trail

File the contract, award or agreement reference, your calculation worksheet, communications about notice and end dates, property returns, and the final payslip. Good records help resolve questions quickly and protect your business if an underpayment allegation arises.

Key Legal Rules To Check First

Before you hit “pay,” step back and make sure your approach aligns with the main legal frameworks that apply to most Australian employers.

National Employment Standards (NES) And The Fair Work Act

The National Employment Standards set minimum rules for notice, redundancy pay (in eligible cases), and leave entitlements. An employment contract cannot offer less than these minimums. If a policy or contract conflicts with the NES, the NES prevails.

Modern Awards And Enterprise Agreements

Where an award or enterprise agreement applies, it can add rules about minimum classifications, loadings, notice, redundancy, allowances, and when final pay must be made. Always check the most recent version of the relevant instrument and follow its timing and calculation rules.

Small Business Redundancy Exemptions

Some small businesses (generally fewer than 15 employees) are exempt from statutory redundancy pay, but the counting rules and exceptions can be technical. Confirm your headcount and structure carefully before you assume an exemption applies.

ATO Guidance, Superannuation, And Payroll Systems

Tax treatment of termination amounts (including ETPs), PAYG withholding, and superannuation obligations depend on the components being paid and the employee’s circumstances. Ensure your payroll system is set up to withhold and report correctly, and check the tax position with your accountant. This article provides general legal information-always obtain specific tax advice for your situation.

Documents And Processes To Have In Place

The right documents and workflows make terminations less stressful and help you stay compliant.

• Employment Contract: Clear terms for notice, termination processes, confidentiality, and post-employment restraints reduce uncertainty. If you’re hiring, a tailored Employment Contract helps set expectations from day one.
• Workplace Policies: Policies around performance management, resignation, property returns, and payroll cut-offs support consistent decision-making.
• Deed Of Release/Settlement: For higher-risk or sensitive exits, a deed can document settlement terms and provide certainty for both parties. Many employers rely on a practical guide when preparing a deed of release and settlement.
• Separation Certificates And Final Payslips: Provide a detailed payslip. If requested by the employee or Services Australia, issue the separation certificate.
• Internal Checklist And Approvals: A simple checklist (notice verified, entitlements calculated, payroll booked, equipment returned, system access revoked) helps you close out the file cleanly.

If you’re navigating multiple terminations or a restructure, consider getting early advice from an employment lawyer to reduce risk and align your process with your legal obligations.

Common Questions From Employers

When is superannuation payable on termination amounts?

Generally, super is payable on ordinary time earnings up to the final day. It’s not usually payable on some termination-specific components (like unused annual leave or redundancy pay), but always confirm the treatment for each line item. For a quick orientation, many employers refer to guidance on super on termination payments and then confirm specifics with their accountant.

Do I have to give a reason for termination?

While a written reason isn’t always legally required, providing a brief written explanation-especially for redundancy, performance, or conduct-related dismissals-supports transparency and can help manage risk of disputes. Keep your records factual and consistent with any process you followed.

How quickly do I need to pay?

Timeframes are commonly set by the relevant award, agreement, or contract, or default to your normal payroll cycle. Aim to pay promptly once calculations are finalised. Undue delays may create compliance risks and erode trust-build internal steps so payouts can be approved and processed without unnecessary hold-ups.

What if the employee disputes my calculations?

Start by sharing a clear breakdown of how you calculated each component and which contract/award provisions you relied on. Invite the employee to identify any specific errors. If needed, seek advice and consider issuing a corrected payment quickly to minimise risk. A structured approach to final pay calculations and good records are your best defence.

Can I require an employee to work their notice?

Often you can direct an employee to work their notice or place them on garden leave, subject to the contract and any applicable industrial instrument. If you’d prefer to end the employment earlier, you can usually make a lawful payment in lieu, as outlined in the rules for pay in lieu of notice.

Should I use a deed when paying redundancy?

A deed of release isn’t mandatory, but it is commonly used in redundancies or where there’s potential for dispute. It can provide clarity about what’s being paid and help both sides move forward. If you decide to use one, ensure it’s tailored to your circumstances and consistent with your legal obligations.

Key Takeaways

• Before paying termination payments, confirm why the employment ended, check the contract and any award or agreement, and calculate each entitlement carefully.
• Make sure your approach aligns with the National Employment Standards, any applicable Modern Award or Enterprise Agreement, and your contract terms.
• Super, PAYG withholding, and any ETP treatment depend on the components being paid-set up payroll correctly and confirm the tax position with your accountant.
• Provide a detailed final payslip and only issue a separation certificate if requested by the employee or Services Australia.
• Use strong documents (Employment Contract, policies, and where appropriate a deed of release) and keep a clear paper trail to prevent or resolve disputes.
• If you’re unsure, get advice early-especially for redundancies, complex calculations, or contested exits-to protect your business and pay correctly the first time.

If you’d like a consultation about handling termination payments or managing employee exits in your business, contact us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.