What do you as an employer have to pay when an employment ends? Most employers would expect to have to pay any unpaid wages and accrued but untaken annual leave, but what about other leave entitlements such as personal / carer’s leave or long service leave? Aside from leave entitlements, do you have to pay bonus payments? And what if the employment ends because of redundancy?

What is a termination payment?

A termination payment may refer to any monies payable to an employee after the employment ends. Generally speaking, an employer must pay to an employee all unpaid wages and accrued but untaken annual leave (including leave loading if applicable) regardless of whether the employee resigned or was terminated. In addition, if an employee has an entitlement to accrued but untaken long service leave, then this entitlement must also be paid out when the employment ends.

If the employment ends because the employer decides to terminate the employment, then the employer has an obligation to provide the employee with a certain amount of notice or pay the employee an equivalent amount in lieu of notice. An exception to this of course is serious misconduct which, if established, will allow the employer to end the employment without notice.

If the employment ends because the employee chooses to resign, then the employee will usually have to provide the employer with a certain amount of notice. In some circumstances, the employer may decide it is in the best interests of the business to either have the employee not attend work or to simply pay to the employee an amount that is equivalent to what they had of earned had he or she worked out their notice period.

What if the employment ends because of redundancy?  

Under the National Employment Standards (NES) an employee is entitled to an additional amount if the employment ends because of redundancy (providing the employee has been with the business for at least 12 months when the redundancy takes effect). The entitlement to redundancy pay under the NES applies as a minimum safety net entitlement. Sometimes a modern award, enterprise agreement or even a contract of employment may provide for an additional entitlement to redundancy pay.

Do I have to pay bonus payments to the employee?

Generally speaking, bonus payments are a separate matter. Whether there is a contractual entitlement to the bonus after termination will depend on the particular wording of the employment contract.

For this reason, we generally recommend that any bonus schemes are set out in a separate document to the employment contract (such as an employer policy). The policy should expressly provide that the bonus payment will not be payable on termination of employment and also that it at all times remains within the sole and absolute discretion of the employer to vary or amend such schemes.

How do I recover unpaid monies from a former employee?

The Fair Work Act imposes strict conditions on the ability of an employer to withhold monies that would otherwise be payable to an employee upon termination of the employment. Generally speaking, unless the deduction is authorised in accordance with a modern award or enterprise agreement, it must be agreed to in writing and be principally for the benefit of the employee.

Recovering unpaid monies from a former employee therefore generally involves pursuing the employee by way of a debt recovery process through the court system. However, some awards provide that an employer can withhold from any monies owing to the employee an amount equivalent to the notice that the employee was required to provide where the employee resigns and fails to provide his or her employer with the required amount of notice. In such circumstances, it is important to ensure that you comply with the specific terms of the applicable modern award or enterprise agreement when making the deduction.

How do you avoid the risk of a claim for unpaid entitlements?