How To Calculate Annual Leave On Termination

Sarah runs a cafe in Brisbane. One of her full-time supervisors resigns after a busy summer, and Sarah can see 80 hours of annual leave sitting in payroll. She knows she needs to pay it out, but she isn't sure whether leave loading applies, whether super is payable, or what can be deducted for an unreturned uniform.

If you're preparing a final pay, it can feel like a lot to get right at once. The good news is that calculating annual leave on termination is usually manageable once you break it into steps and check the right documents.

Here is how to approach unused annual leave, final pay items, lawful deductions and the paperwork you should prepare when employment ends.

How Do You Calculate Annual Leave On Termination?

You calculate annual leave on termination by paying out the employee's unused accrued annual leave as if they had taken that leave while still employed.

Under the Fair Work Act 2009, full-time and part-time employees accrue paid annual leave progressively. The National Employment Standards give most employees 4 weeks of annual leave per year, while some shiftworkers are entitled to 5 weeks. Casual employees usually don't accrue paid annual leave because their casual loading is meant to compensate for that and other paid entitlements.

The basic formula is:

Unused annual leave hours x the employee's ordinary hourly rate, plus any annual leave loading or other amounts they would have received if they had taken the leave.

Start by confirming:

• The employee's final accrued annual leave balance in hours or days
• Their ordinary hourly rate at the termination date
• Whether their award, enterprise agreement or employment contract gives them annual leave loading
• Whether they're a shiftworker with a higher annual leave entitlement
• Whether any leave has been taken but not yet entered into payroll

A final pay calculator in Australia can be useful, but it's only as accurate as the information you put into it. Before relying on one, check the employee's award classification, ordinary hours, leave balance and any agreement terms. The Fair Work Ombudsman's tools can help you check minimum rates and entitlements, but your payroll records and employment documents still matter.

Does Annual Leave Loading Apply When Employment Ends?

Yes, annual leave loading applies on termination if the employee would have been entitled to that loading when taking annual leave during employment.

This point is often missed. Section 90(2) of the Fair Work Act 2009 says that when employment ends and annual leave is paid out, the employee must receive the amount they would have been paid if they had taken the leave. So, if their award, enterprise agreement or contract says they receive 17.5% annual leave loading when taking leave, you usually need to include that loading in the termination payout.

For example, say Mike runs a cleaning business and a part-time supervisor leaves with:

• 80 hours of unused annual leave
• An ordinary hourly rate of $30
• A modern award entitlement to 17.5% annual leave loading

Mike's annual leave payout calculation would be:

• Annual leave: 80 hours x $30 = $2,400
• Annual leave loading: $2,400 x 17.5% = $420
• Total unused annual leave payout before tax withholding = $2,820

Annual leave loading isn't always 17.5%, and some employees may receive a different loading or shift-related entitlement. Check the applicable modern award, enterprise agreement or employment contract before finalising the payment.

As a payroll point, unused annual leave paid out on termination is generally not ordinary time earnings for superannuation guarantee purposes. Other final pay items, such as payment in lieu of notice, can be treated differently. Your payroll provider or accountant can help you process the PAYG withholding and super treatment correctly.

What Else Should Be Included In Final Pay?

Your final pay should include all amounts owed up to the employee's last day, not just their unused annual leave.

Depending on the employee's role, contract and reason for leaving, final pay may include:

• Wages for work performed up to the final day of employment
• Unused accrued annual leave, including any annual leave loading that applies
• Payment in lieu of notice, if you're paying the notice period instead of having them work it
• Any unpaid allowances, commissions, bonuses or penalty rates that have already been earned, including amounts under a commission agreement
• Redundancy pay, if the role is genuinely redundant and the employee is entitled to it
• Long service leave, if payable under the relevant state or territory long service leave laws
• Reimbursement of approved business expenses

For notice, the National Employment Standards minimum notice periods are:

• 1 week if the employee has worked for you for 1 year or less
• 2 weeks if they have worked for more than 1 year and up to 3 years
• 3 weeks if they have worked for more than 3 years and up to 5 years
• 4 weeks if they have worked for more than 5 years
• An extra 1 week if they're over 45 and have completed at least 2 years of service

An award, enterprise agreement or contract may provide a longer notice period, so check those documents as well.

There's no single final pay deadline in the Fair Work Act that applies to every employee in every situation. Many modern awards require final pay to be made within 7 days after employment ends. If no specific deadline applies, paying as soon as practical and no later than the next scheduled pay run is usually the safest approach.

Final Pay Steps You Can Follow

1. Confirm the termination date: Record the final day of employment and whether notice is being worked or paid in lieu.
2. Check the industrial instrument: Review the modern award, enterprise agreement or contract for leave loading, final pay timing and any extra entitlements.
3. Reconcile leave balances: Check annual leave, long service leave and any pending leave requests against payroll records.
4. Calculate each payment separately: Separate wages, annual leave, loading, notice and reimbursements so the employee can see what has been paid.
5. Process payroll correctly: Apply PAYG withholding, super and Single Touch Payroll reporting using your payroll system or accountant.
6. Keep records: Save the calculation, payslip, termination correspondence and any deduction authorisations.

Can You Deduct Money From An Employee's Final Pay?

You can only deduct money from an employee's final pay if the deduction is lawful under the Fair Work Act, an award, an enterprise agreement, a court order or a valid written authorisation.

This is an area where it's easy to make a costly mistake. You might feel that a deduction is fair, especially if equipment is missing or training costs haven't been recovered. But fairness on its own isn't enough. If the deduction isn't legally permitted, it can create an underpayment issue.

A deduction is more likely to be lawful if:

• The employee has authorised it in writing and the deduction is principally for their benefit
• The employee's award or enterprise agreement permits it
• A law or court order requires it, such as child support deductions
• The employee has agreed to repay a specific amount, and the arrangement isn't unreasonable

Be careful with deductions for:

• Unreturned uniforms or equipment
• Damage to company property
• Cash register shortages
• Training costs
• Overpaid wages
• Outstanding loans or salary advances

If you want to recover property, it's usually better to send a clear written request first, with a deadline for return. If you want the option to deduct certain amounts, your employment contract and workplace policies should deal with this clearly from the start. Even then, the deduction still needs to comply with the Fair Work Act and must not be unreasonable.

For overpayments, don't simply take the money from final pay unless you're sure you can. A written repayment agreement is often the cleaner path.

What Documents Should You Prepare When Employment Ends?

You should prepare clear final pay records, a termination or resignation record, a payslip and any documents required by the employee's award, agreement or business process.

Good documents help you avoid confusion later. They also make it much easier to answer questions if the employee queries their final pay or if the Fair Work Ombudsman ever asks how you calculated it.

Common documents include:

• Final payslip: Showing wages, leave payout, loading, deductions, tax withheld and super where relevant
• Final pay calculation: Your internal breakdown of how each amount was calculated
• Termination letter or resignation acceptance: Confirming the final employment date and any notice arrangements
• Separation certificate: Often requested by employees for Services Australia purposes
• Certificate of service: Required under some awards if the employee asks for one
• Property return checklist: Recording the return of laptops, keys, uniforms, phones, cards and documents
• Confidential information reminder: A short reminder about ongoing confidentiality, restraint or IP obligations if these are in the contract

Under Fair Work record-keeping rules, employee records generally need to be kept for 7 years. That includes pay records, leave records, superannuation contribution records and termination records.

Final Pay Summary Outline

If you're preparing a written final pay summary, you can use this outline as a starting point. Have a lawyer tailor it before you rely on it, because templates often miss award-specific and contract-specific details.

1. Employee Details: Name, position, employment type and applicable award or agreement.
2. Employment End Date: Final day of employment and whether the employee resigned, was dismissed or was made redundant.
3. Notice: Notice given, notice worked, or payment in lieu of notice.
4. Wages Owed: Ordinary hours, overtime, penalty rates and allowances up to the final day.
5. Annual Leave Payout: Accrued leave balance, hourly rate, loading and total amount.
6. Other Entitlements: Long service leave, redundancy pay, commissions, bonuses or reimbursements if applicable.
7. Deductions: Each deduction, the legal basis for it and any written authorisation.
8. Payroll Processing: PAYG withholding, super treatment and STP reporting steps.
9. Business Property: Items returned and any items still outstanding.
10. Record Keeping: Where the calculation and supporting documents will be stored.

Key Takeaways

• Unused annual leave must be paid out on termination as if the employee had taken that leave while still employed.
• Annual leave loading usually needs to be included if the employee would have received it when taking annual leave.
• Final pay can include more than leave, including wages, notice, redundancy pay, long service leave and reimbursements.
• You should check the award, enterprise agreement and employment contract before relying on any final pay calculator.
• Deductions from final pay are tightly controlled, so get written authorisation and check the legal basis before deducting anything.
• Clear records, payslips and termination documents make final pay much easier to explain and defend if questions come up later.

If you'd like help with final pay calculations, employment contracts, termination letters and lawful deduction wording, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.