Working out a departing employee’s final pay can feel complex - especially when you’re juggling notice, untaken leave, public holidays and (sometimes) redundancy.
The good news is you can approach it step by step. Once you confirm why employment is ending and the last day of work, you can calculate each component, add what’s owed (and only make lawful deductions), then process payment on time with a clear, itemised payslip.
Below, we break down what to include, when to pay it, a simple method to calculate each element, common pitfalls to avoid, and a worked example to help you get it right the first time.
What Is Final Pay In Australia?
Final pay (sometimes called termination pay) is the total amount an employee is owed when their employment ends for any reason - resignation, termination, redundancy or the end of a fixed-term contract.
In most cases, final pay will include:
- All hours worked up to and including the last day, at the correct base rate plus any applicable loadings, penalties or allowances.
- Payment for accrued but untaken annual leave, including any leave loading if it applies under the employee’s award, agreement or contract.
- Notice entitlements - either worked notice or payment in lieu if the employee won’t work the notice period. If you’re paying it out, check your obligations around payment in lieu of notice.
- Redundancy pay (if it’s a genuine redundancy and the employee is eligible - small business exemptions can apply).
- Time off in lieu (TOIL) or overtime owed where not already taken or paid. For TOIL practices, see time off in lieu.
- Any outstanding allowances, commissions, bonuses or expense reimbursements that have been earned under your policies or contract.
- Long service leave (LSL) payout, if the employee is entitled under the relevant state or territory law. For an overview, see long service leave payouts.
Generally, personal/carer’s leave (sick leave) is not paid out on termination unless an award, enterprise agreement or contract says otherwise.
When Do You Have To Pay Final Pay?
There isn’t a single timeframe in the National Employment Standards (NES) that applies to all situations. Instead, timing is usually set by the applicable award or registered agreement, or by the employment contract.
As a rule of thumb, pay as soon as practicable after the last day, or in the next regular pay cycle if that is consistent with the award, agreement or contract. Some instruments require payment within a set number of days - always check what applies to your employee.
Whatever the timing, issue an itemised payslip showing each component, and provide any required documentation (for example, separation certificates for Services Australia when requested).
Step-By-Step: How To Calculate Final Pay
1) Confirm The Reason For Ending Employment
Identify why the employment is ending - resignation, termination for performance or conduct, genuine redundancy, end of a maximum-term contract, or a mutual separation agreement.
The reason matters because it changes which entitlements apply (for example, redundancy pay) and whether the employee will work their notice or receive payment in lieu of notice.
2) Determine The Notice Period And Last Day
Check the award, enterprise agreement or contract to confirm notice requirements. The Fair Work Act sets minimum notice by length of service, which may be increased by contractual terms. If you need a refresher on how to work it out, see calculating employee notice periods.
Confirm the last day of employment and whether the notice will be worked or paid out.
3) Calculate Hours Worked, Overtime And Allowances
Pay all ordinary hours up to the final day at the correct classification rate. Add any approved overtime, penalty rates, shift loadings and allowances earned but not yet paid. If the employee has banked TOIL and can’t take it before finishing, pay it out as required by the applicable instrument.
4) Add Accrued Annual Leave (And Leave Loading If It Applies)
Calculate the employee’s accrued but untaken annual leave balance and pay it at the correct rate. If your award or contract provides for annual leave loading, include it in the payout. For context on how loading works on termination, see annual leave on resignation.
5) Assess Redundancy Pay (If Applicable)
For genuine redundancies, check eligibility and the amount based on continuous service (noting small business exemptions and exclusions for certain employees and fixed-term contracts). For the method and service bands, see how to calculate redundancy pay.
6) Check Long Service Leave Requirements
Long service leave is governed by state and territory laws, including qualifying thresholds and pro‑rata rules. Confirm entitlements based on the employee’s jurisdiction and service period. Our overview of long service leave payouts outlines the typical approach.
7) Work Out Superannuation On Final Pay
Superannuation must be paid on ordinary time earnings (OTE). Generally, OTE includes ordinary hours worked, but excludes certain termination payments like unused annual leave and long service leave paid on termination. For clarity, review ordinary time earnings and superannuation on termination payments, and check your payroll settings.
8) Make Only Lawful Deductions
Deductions from final pay must be allowed by law, the award/agreement, or be authorised in writing by the employee and principally for their benefit (for example, salary sacrifice). Review the rules in section 324 of the Fair Work Act before applying any deduction.
9) Apply The Correct Tax Treatment
Standard earnings are taxed as usual. Some termination components may have special tax rules. For example, genuine redundancy amounts can receive concessional tax treatment up to a tax‑free limit. By contrast, unused annual leave and unused long service leave paid on termination are generally not employment termination payments (ETPs) and are taxed under specific rules for unused leave, not as ETPs.
Payments in lieu of notice and some other termination amounts can be ETPs. Because tax treatment is fact‑specific, it’s wise to confirm withholding and reporting with your payroll system and an accountant or bookkeeper.
Important: Tax and superannuation treatment can change. Always confirm current obligations with a qualified tax professional before processing termination payments.
10) Issue Payslip And Provide Exit Documents
Provide an itemised payslip with each component listed separately and any required employment termination documents. Where appropriate, some employers also finalise a tailored separation agreement to cover confidentiality, post‑employment restraints and the return of company property.
Final Pay Components Explained (With Practical Tips)
Ordinary Wages And Penalties
Pay all ordinary hours at the correct classification rate to the last day. If the final week includes weekends, late nights or public holidays, apply the relevant penalties and loadings per the award or agreement. If the employee takes paid leave during notice, it’s typically paid at the base rate unless the instrument says otherwise.
Notice Or Payment In Lieu
If the employee resigns with notice, they usually work through it unless you agree otherwise. If you require them to leave immediately, they’re usually entitled to a payout in lieu equal to the notice period (base rate unless the instrument provides a different approach). This is separate from redundancy pay. If you’re unsure about this component, read up on payment in lieu of notice.
Annual Leave And Leave Loading
Accrued but untaken annual leave must be paid out. If your award or contract includes annual leave loading, apply it to the termination payout where required. Double‑check whether loading applies to termination - many instruments say yes, but not all. Our guide on annual leave on resignation explains the main scenarios.
Long Service Leave
LSL rules vary by state and territory. Some jurisdictions allow pro‑rata payouts after a minimum period (for example, seven years) even if full entitlement hasn’t vested. Confirm the applicable legislation before you finalise the amount.
Redundancy Pay
For a genuine redundancy, calculate the amount based on continuous service, subject to any exclusions. Remember that small businesses (fewer than 15 employees) are often exempt. If you need a quick sense check, use the method in how to calculate redundancy pay or compare with a redundancy calculator.
Commissions, Bonuses And Expenses
If an employee has earned commissions or bonuses under your policy or contract, include the amounts that have become payable. Reimburse approved business expenses that have been submitted with receipts, and close out any floats or corporate card balances before the final payment runs.
Superannuation And ETPs (Plain-English Overview)
- Superannuation generally applies to ordinary time earnings only. In most cases, that excludes payouts of unused annual leave and long service leave.
- Genuine redundancy may attract concessional tax treatment up to a limit, separate from ETP rules.
- Some termination amounts (such as payment in lieu of notice) can be ETPs and have specific tax treatment. Unused leave payments are generally not ETPs.
Because payroll systems treat these differently, double‑check your mapping and seek accounting advice where needed.
A Worked Example Of Final Pay
Let’s imagine a full‑time employee resigns on 1 June and will not work the notice (you agree to pay it out). They are covered by an award that includes 17.5% annual leave loading.
- Base salary: $1,300 per week (ordinary hours only)
- Continuous service: 2 years and 8 months
- Accrued annual leave balance: 10 days (2 weeks)
- No redundancy, no outstanding overtime, no allowances owing
Here’s how you could calculate final pay:
- Ordinary wages to last day: If the last day is 1 June and they’ve already been paid up to 25 May, pay 26 May–1 June ordinary hours. Assume this equals $1,300 for the week.
- Payment in lieu of notice: The contract requires 2 weeks’ notice and you choose to pay it out, so 2 × $1,300 = $2,600 (base rate as per the contract).
- Annual leave payout: 2 weeks × $1,300 = $2,600, plus 17.5% loading ($455) = $3,055.
- Long service leave: Not yet eligible under the relevant state rules (confirm based on the jurisdiction).
- Superannuation: Pay super on ordinary time earnings only (for example, the week of ordinary wages). Don’t pay super on the unused annual leave payout if your instrument and super rules exclude it. Cross‑check your settings against OTE and termination payments guidance.
Total (before tax and any lawful deductions):
- Ordinary wages: $1,300
- Payment in lieu of notice: $2,600
- Annual leave + loading: $3,055
- Subtotal: $6,955 (less tax)
Check whether any deductions are allowed and properly authorised (for example, to recover a payroll advance). Only make deductions that comply with section 324 and your award or contract. Provide an itemised payslip with each component listed separately, and issue any separation certificates if requested.
Note on tax: Unused annual leave in this example is generally taxed under unused leave rules (not as an ETP). Payment in lieu of notice may be an ETP. Confirm the correct withholding with your accountant or payroll specialist.
Key Takeaways
- Final pay typically includes ordinary wages to the last day, accrued annual leave (plus loading if applicable), notice or payment in lieu, and any redundancy or long service leave that applies.
- Confirm the reason for exit and the last day first - this determines notice, redundancy eligibility and which components apply.
- Superannuation is paid on ordinary time earnings, not typically on unused annual leave or long service leave paid on termination - check OTE and termination payments rules.
- Unused annual leave and unused long service leave payouts are generally not ETPs, while payments like payment in lieu of notice can be - always verify tax treatment with your accountant.
- Only make deductions that are lawful and properly authorised under section 324, and issue a clear, itemised payslip with any required exit documents.
- Use a simple process: confirm the reason and last day, calculate each component, apply correct super and tax, then pay on time - consider a separation agreement for sensitive exits.
If you’d like a consultation about calculating final pay for your team, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.
