Understanding Termination Payments in Australia: Employer’s Obligations

When someone’s time with your business comes to an end, you want the exit to be fair, compliant and low-stress for everyone. A key part of that process is getting the termination payment right.

In this guide, we’ll walk through what a termination payment is, what typically needs to be included, how timing works, and the tax and superannuation considerations to keep in mind. We’ll also flag common mistakes and share a simple process to help you stay compliant.

What Is a Termination Payment?

A termination payment is the final amount paid to an employee when their employment ends. It’s not a single fixed amount for every situation - what’s included depends on how the employment ended (for example, resignation, dismissal, redundancy, or the end of a fixed-term contract), the employee’s contract, and any applicable modern award or enterprise agreement.

At a high level, a termination payment may include:

• Outstanding wages and allowances up to the final day
• Payment in lieu of notice (if notice is not worked)
• Payout of unused annual leave (and any applicable leave loading)
• Long service leave (if applicable under state or territory laws)
• Redundancy pay (if the employee is eligible)
• Other contractual entitlements (for example, commissions or bonuses that have become payable)

Your obligation is to ensure the departing employee receives everything they are entitled to. Errors here can lead to disputes, penalties, or claims - which are all avoidable with a clear process.

What Should Be Included In Final Pay?

The exact components will vary by the situation, but most termination payments are made up of the following elements.

1) Outstanding Wages

Pay all wages, loadings and allowances for hours worked since the last pay cycle up to (and including) the final day. If there are authorised overtime hours that haven’t yet been paid, include those as well.

Be careful with deductions. Deductions from wages are only permitted in limited circumstances - typically if required by law (for example, PAYG withholding), authorised by a court or the Fair Work Commission, or authorised in writing by the employee and principally for the employee’s benefit. Unauthorised deductions can create liability, so use caution and have a clear basis if you are making any. For issues around deductions or holding back pay, it’s worth reviewing guidance on withholding pay.

2) Payment In Lieu of Notice

If you decide the employee won’t work out their notice, you’ll generally need to pay what they would have earned if they had worked their notice period. The amount of notice depends on the National Employment Standards, any applicable modern award or enterprise agreement, and the contract. For detail on when and how this applies, see Payment in Lieu of Notice.

3) Accrued Annual Leave (and Leave Loading)

Permanent employees are entitled to be paid out any unused annual leave on termination. If leave loading normally applies to annual leave during employment, it generally applies when paying out unused leave as well. For employers, it’s helpful to be clear on how annual leave is treated at the end of employment - including your obligations when someone leaves - as outlined in annual leave on resignation.

4) Long Service Leave

Long service leave entitlements are governed by state and territory laws. Employees may be entitled to a payout of unused long service leave on termination once they meet eligibility thresholds, which vary by jurisdiction. Because the rules are state-specific (and sometimes allow pro rata entitlements after a certain number of years), check the applicable legislation for your location or seek advice to confirm the correct amount.

5) Redundancy Pay

If the role is genuinely redundant and the employee is eligible, redundancy pay will usually be payable in addition to notice and other entitlements. Small business employers (fewer than 15 employees) are generally exempt, and there are other exceptions. To estimate the amount quickly, you can use a redundancy calculator, or review the detailed steps in how to calculate your redundancy payment.

6) Other Contractual Entitlements

Review the Employment Contract, applicable award or enterprise agreement to identify any additional amounts that have become payable - for example, commissions already earned, allowances, or bonuses that have met the criteria to vest. Make sure any eligibility conditions and timing requirements in the contract are applied consistently.

7) Deductions: Know the Limits

This point is worth repeating. You can’t make deductions from final pay unless the law permits it or the employee has provided written authorisation and the deduction is primarily for their benefit. Even with authorisation, some deductions are prohibited. If in doubt, take a careful, conservative approach and seek advice before deducting anything from termination pay.

When Do You Have To Pay It, And How Fast?

There’s no single deadline in the Fair Work Act 2009 (Cth) that sets a universal timeframe for final pay. Instead:

• Modern awards or enterprise agreements may specify a timeframe (for example, within 7 days of termination).
• Employment contracts sometimes set a deadline (for example, on the next scheduled payday).
• If nothing is specified, best practice is to process and pay entitlements as soon as reasonably practicable after the last day of employment.

Paying promptly reduces disputes and demonstrates you’re meeting your obligations. If you need a simple roadmap to follow, many employers find it useful to keep a short checklist for exits alongside their payroll process, and to document calculations for transparency. For a deeper dive into putting the numbers together, see calculating final pay.

A Practical Exit Checklist

• Confirm the end date, reason for termination and required notice.
• Identify applicable instruments (award or enterprise agreement) and the notice period.
• Calculate outstanding wages, allowances and overtime.
• Calculate payment in lieu of notice if notice won’t be worked.
• Payout unused annual leave (and any applicable leave loading).
• Check long service leave rules for your state or territory.
• Assess redundancy eligibility and amount if the role is redundant.
• Review the contract for any other entitlements or deductions, and ensure deductions (if any) are lawful and properly authorised.
• Prepare the final payslip showing the breakdown and taxes withheld.

Tax And Superannuation On Termination Payments

Not every component of a termination payment is treated the same way for tax and superannuation. Getting this right avoids back-and-forth with payroll, employees and the ATO.

How Tax Typically Applies

• Normal wage components are taxed as ordinary earnings through payroll.
• Unused annual leave and long service leave are usually taxed as lump sums under specific ATO rules.
• Genuine redundancy payments may have a tax-free component up to a cap, with any balance taxed as an employment termination payment (ETP).
• Other ETPs (for example, certain ex gratia amounts) have their own concessional tax treatment up to caps.

Tax treatment is highly technical and depends on the employee’s circumstances and the type of payment. Sprintlaw does not provide tax advice - it’s important to confirm treatment with your accountant or tax adviser, particularly for ETPs and redundancy components.

What About Superannuation?

• Superannuation is generally paid on ordinary time earnings up to the termination date. For a refresher, see ordinary time earnings.
• Unused annual leave and long service leave payouts are usually not subject to super.
• Whether super is payable on payment in lieu of notice can be nuanced. For practical guidance, review payment in lieu and superannuation and superannuation on termination payments.

Payroll software often applies default rules - but those rules still depend on you classifying each component correctly. When in doubt, double-check with your accountant or payroll adviser.

Common Mistakes To Avoid (And How To Stay Compliant)

Even well-intentioned employers can slip up at termination. Here are frequent pitfalls, and how to steer clear of them.

• Missing leave loading: If leave loading normally applies, include it when paying out unused annual leave.
• Miscalculating notice or payment in lieu: Check the NES, any award/enterprise agreement, and the contract before paying payment in lieu of notice.
• Applying the wrong redundancy rules: Confirm whether the redundancy is genuine and whether exemptions apply (small business employers are often exempt). Use a redundancy calculator to sanity check your figures.
• Unlawful deductions from final pay: Only make deductions where the law permits or the employee has provided valid, written authorisation and the deduction is principally for their benefit. If you’re unsure, treat deductions cautiously and seek advice or revisit withholding pay rules.
• Delaying final pay without a valid reason: Even if no specific timeframe applies, aim to pay as promptly as possible. Some instruments require payment within days of termination.
• Overlooking contractual entitlements: Revisit the Employment Contract to identify any commissions, bonuses or allowances that have become payable on termination.

A simple way to avoid these traps is to document your calculations, keep award and enterprise agreement obligations handy, and use a consistent process for all exits. If a scenario is unusual (for example, a senior executive with bespoke incentives), a short call with an employment lawyer can save you time and risk.

Handling Disputes And Documentation

Despite best efforts, disagreements can occur. If an employee queries their final pay:

• Respond quickly and keep communication open and professional.
• Provide a clear breakdown of each component (wages, annual leave, long service leave, redundancy, and any payment in lieu of notice), including how tax was applied.
• Double-check the contract, award/enterprise agreement and your payroll records to confirm entitlements and balances.
• If the issue remains unresolved, consider early advice from an employment law expert so it doesn’t escalate unnecessarily.

Good paperwork helps avoid friction. Most businesses will prepare a termination letter confirming the end date, outline entitlements being paid, and issue a payslip for the final pay. If the exit is more complex or sensitive (for example, a negotiated separation), you may also use a deed to settle matters and set expectations - speak with our team about the right documents for your situation, including an Employee Termination Documents Suite if you need a complete set.

A Note On Awards, Enterprise Agreements and State Laws

Remember that modern awards and enterprise agreements can set stricter or additional requirements (such as shorter payment timeframes or extra allowances). Long service leave rules come from state and territory laws, so the calculation and eligibility can differ depending on where the employee works. Build these checks into your process so nothing is missed.

Key Takeaways

• A termination payment is the final pay an employee receives when employment ends - usually including outstanding wages, any payment in lieu of notice, unused annual leave (and loading), long service leave where applicable, and redundancy pay if eligible.
• There’s no single universal deadline in the Fair Work Act for final pay; check the award or enterprise agreement and the contract. If no timeframe is set, pay as promptly as reasonably practicable.
• Deductions from final pay are tightly regulated. Only deduct where permitted by law or with valid written authorisation that is primarily for the employee’s benefit.
• Tax and superannuation treatment varies by component. Redundancy and ETPs have specific tax rules; annual leave and long service leave payouts are generally taxed as lump sums. Confirm treatment with your accountant, and review whether super applies using resources like superannuation on termination payments.
• Common mistakes include missing leave loading, miscalculating notice, applying the wrong redundancy rules, and delaying payment. A clear process and documented calculations help you stay compliant and avoid disputes.
• If a termination is complex or contested, early advice can save time and reduce risk. Keep your Employment Contract and policies up to date to make exits smoother.

If you’d like a consultation about termination payments or help with your employment law obligations, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.