Avoiding a common payroll error: Making termination payments by the last day of employment

Managing Director - Workplace & Legal

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When it comes to termination payments, most employers work on the basis that they can pay an employee within seven days of termination or in the next pay run.

However, there’s increasing awareness that this approach isn’t correct. In fact, most of the common termination payments need to be made by the last day of employment.

Let’s break it down:

 

Payments in Lieu of Notice

Under Section 117(2)(b) of the Fair Work Act, it’s unlawful to terminate someone’s employment by paying them in lieu of notice unless the payment is made before the employment ends. The Federal Court confirmed this in Southern Migrant and Refugee Centre Inc v Shum (No 3) [2022] FCA 481, where a payment in lieu made four days after termination was found to contravene the Act.

 

Annual Leave Payments

Section 90(2) of the Fair Work Act specifies that, if an employee has untaken paid annual leave at the time of termination, the employer must pay the employee the amount that would have been paid to them if they had taken the leave. The recent case of Dorsch v HEAD Oceania Pty Ltd [2024] FCA 162 highlighted this, with the Federal Court imposing a $17,000 fine on HEAD Oceania for paying $8,022 in annual leave three months after the employee’s last day. This was a large delay, but the Court also made it clear that payment is required by the last day of employment.

 

Long Service Leave Payments

Long service leave payments vary by state, but most require payment upon termination. In New South Wales, the payment must be made “forthwith” (immediately) on termination, while in Victoria, it must be made on the day of termination, with failure to comply being a criminal offence.

 

Redundancy Payments

The language in the National Employment Standards (NES) around redundancy payments doesn’t specify that they must be made by the day of termination. For award-covered employees, redundancy payments will usually be subject to the applicable award’s requirement for payment of NES entitlements, which is often within seven days after termination.

 

Why compliance matters

Few employers comply fully with these requirements but, as with other areas of payroll compliance, things that once seemed not to matter now do. There is an increasing level of scrutiny of these areas and with penalties for breach it can can result in a costly situation for employers who aren’t compliant.

 

If you need guidance to ensure your payroll processes are fully compliant, our team is here to help. With Source, access an in-house style legal team who can support you with the day-to-day legal needs – all within a fixed monthly retainer. Reach out today to learn more.

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