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What is Final Pay in Australia?
Final pay, or termination pay, is the total amount an employer must pay an employee when their employment ends. It includes all outstanding entitlements accrued up to the last day of work. Calculating final pay correctly is a legal requirement under the Fair Work Act and relevant state-based long service leave laws.
What is Included in Final Pay?
An employee's final pay typically consists of several components:
- Accrued Annual Leave: Payment for any untaken annual leave, calculated at the employee's full rate of pay. Many Modern Awards include an annual leave loading of 17.5% on top of this amount.
- Payment in Lieu of Notice: If the employee is not required to work their notice period, they must be paid for it. The entitlement is based on the award, agreement, or the National Employment Standards (NES).
- Redundancy Pay: In cases of genuine redundancy, employees with at least 12 months of service are entitled to redundancy pay based on their years of service.
- Long Service Leave: Employees who have reached the qualifying period (usually 7 or 10 years, depending on the state) are entitled to be paid for any accrued long service leave.
How is Final Pay Calculated?
The calculation follows a step-by-step process:
Step 1: Determine the Hourly Rate
Divide the gross weekly wage by the number of ordinary hours worked per week.
Step 2: Calculate Annual Leave Pay
Multiply the accrued annual leave hours by the hourly rate. If leave loading applies, add 17.5% of this amount.
Step 3: Calculate Notice Pay
If notice is paid in lieu, multiply the notice entitlement (in weeks) by the gross weekly wage.
Step 4: Calculate Redundancy Pay
For genuine redundancies, refer to the NES table to find the weeks of pay based on years of service, then multiply by the gross weekly wage.
Step 5: Calculate Long Service Leave Pay
Use the accrued long service leave hours if provided. Otherwise, estimate based on state rules: multiply years of service by the state's weekly accrual rate, then by ordinary weekly hours, and finally by the hourly rate.
Step 6: Sum the Components
Add all the above amounts to arrive at the gross final pay.
Example Calculation
Maria worked in NSW for 8 years and was made redundant. Her gross weekly wage is $1,500 for a 38-hour week. She has 152 hours of accrued annual leave (with loading), is entitled to 4 weeks' paid notice, and has no recorded long service leave hours.
- Hourly Rate: $1,500 / 38 = $39.47
- Annual Leave Pay: 152 hours × $39.47 = $6,000.24
- Leave Loading: 17.5% of $6,000.24 = $1,050.04
- Notice Pay (paid in lieu): 4 weeks × $1,500 = $6,000
- Redundancy Pay: 14 weeks (from NES table for 8 years) × $1,500 = $21,000
- Long Service Leave: Not yet qualified (10 years in NSW).
- Gross Final Pay: $6,000.24 + $1,050.04 + $6,000 + $21,000 = $34,050.28
Maria's redundancy pay tax-free threshold is $12,524 + ($6,262 × 8) = $62,620. Since her redundancy pay ($21,000) is below this, the entire amount is tax-free.
Common Scenarios
Resignation
Employees who resign are entitled to accrued annual leave and any long service leave, but not redundancy pay. They typically work their notice period, so no payment in lieu is made.
End of Fixed-Term Contract
Similar to resignation, the employee receives accrued leave entitlements. Redundancy pay does not usually apply if the contract ends as agreed.
Dismissal
In cases of summary dismissal for serious misconduct, the employee may forfeit their notice period but is still entitled to accrued annual and long service leave.
Next Steps: Preparing Documentation
Once you have calculated the final pay, you should formalize the termination. A Letter of Termination of Employment clearly outlines the termination date, reason, notice period details, and a breakdown of the final payment. This provides a clear record for both employer and employee and helps prevent disputes.