How To Calculate Termination Pay: A Guide For Employers

Ending employment is a normal part of running a business - but getting the final pay right is critical.

Whether it’s resignation, redundancy or dismissal, there are specific entitlements that need to be calculated and paid promptly. If you underpay or miss something (like leave loading or the correct notice amount), you risk back-pay claims, penalties and unnecessary disputes.

In this guide, we break down termination pay in plain English. You’ll learn what to include, how to work it out step by step, when payment is due, and where awards or enterprise agreements can change the rules. We’ll also flag common mistakes and share practical tips to make the process smoother.

If you prefer to follow a structured checklist, there’s a calculating final pay guide you can use alongside this article. And if you’re dealing with a tricky scenario, we’re here to help.

What Counts As Termination Pay?

Termination pay (often called “final pay”) is everything an employee is owed when employment ends.

Depending on how the employment ends, it can include:

• Outstanding wages for hours worked up to the final day (including overtime and allowances if applicable)
• Payment in lieu of notice (if notice isn’t worked)
• Payout of accrued but unused annual leave (and annual leave loading if it would have applied)
• Long service leave (subject to state/territory rules and eligibility)
• Redundancy pay (if applicable)
• Accrued rostered days off (RDOs) and time off in lieu (TOIL), where the relevant award or agreement requires payout
• Any contractual entitlements (e.g. bonuses or commissions, where terms are met)

The exact mix depends on the employment contract, any applicable award or enterprise agreement, and the reason for the termination.

Which Laws Apply - And When Do You Have To Pay?

In Australia, the Fair Work Act 2009 and the National Employment Standards (NES) set the baseline rules for notice, redundancy pay and minimum entitlements. Modern awards or enterprise agreements can add more generous terms (including stricter timing for payment) and additional entitlements.

Timing matters. Many awards require final pay to be made within seven days of the end of employment, or by the next pay cycle. Check the applicable award or agreement and your contract so you don’t miss a deadline.

Your employee’s contract will also be key. It should set out pay, notice periods and any additional benefits on termination. If it’s been a while since you reviewed yours, consider updating your Employment Contract template so it’s clear and consistent with current laws and your award.

Step-By-Step: How To Calculate Termination Pay

A structured process helps you avoid gaps and errors. Work through the steps below and keep clear records of each calculation.

1) Confirm The Basics

• Last day of employment (and whether notice is worked or paid out)
• Reason for termination (resignation, redundancy, dismissal, serious misconduct, end of fixed term)
• Applicable award or enterprise agreement (and any company policies that affect entitlements)

2) Outstanding Wages And Allowances

Calculate wages for hours actually worked up to the final day, including overtime, penalties and applicable allowances. Make sure any shift penalties or weekend rates under the award are included.

3) Payment In Lieu Of Notice (If Not Worked)

If you decide the employee won’t work their notice, you must pay them instead.

This should be at the employee’s full rate of pay for the hours they would have worked during the notice period (not just the base rate). “Full rate of pay” generally includes incentive-based payments and monetary allowances the employee would have received, consistent with the Fair Work framework and any applicable award or agreement.

Use the NES as a minimum for notice length, and remember some contracts stipulate longer notice (never shorter). For a deeper dive, see payment in lieu of notice.

4) Accrued Annual Leave And Leave Loading

Accrued but unused annual leave must be paid out on termination.

If an award or agreement provides annual leave loading (commonly 17.5%) and it would have applied when the leave was taken, it usually needs to be included in the payout. Check your award terms carefully - they can differ.

5) Long Service Leave (State/Territory Rules)

Long service leave (LSL) entitlements depend on state or territory legislation and the employee’s length of continuous service. Some jurisdictions allow a pro-rata payout after a minimum period if the employee resigns for certain reasons, while others do not.

Always check the LSL rules for your state/territory and any award provisions before you calculate this component.

6) Redundancy Pay (If Applicable)

If it’s a genuine redundancy and the employee has at least 12 months’ service (and you’re not a “small business employer” under the Act), redundancy pay may be required. The amount is based on years of continuous service.

As a cross-check, you can use a redundancy calculator and review how to apply the service bands in this overview of how to calculate redundancy pay.

7) RDOs, TOIL, Bonuses And Commissions

Whether RDOs and TOIL must be paid out - and at what rate - varies by award or agreement. Some instruments require cashing out at ordinary time; others set different rules. Check the specific terms before paying these balances.

Performance-based payments (bonuses/commissions) depend on the contract and policy. If targets were met and entitlement has crystallised, include them in the final pay. If the rules require employment at a certain date, apply those terms fairly and consistently.

8) Taxes, Super And Other Deductions

Different components of final pay are taxed differently. Ordinary wages are taxed as usual. Unused annual leave and long service leave payouts are generally not employment termination payments (ETPs); they’re taxed under specific ATO rules for unused leave lump sums. Genuine redundancy and early retirement scheme amounts can have tax concessions within caps.

Superannuation may be payable on some components of final pay. For example, whether super applies to payment in lieu of notice depends on the Superannuation Guarantee rules and current ATO guidance. See this overview on payment in lieu and super.

Important: Sprintlaw provides legal information, not tax advice. Because tax and super treatments change and depend on your circumstances, please speak with your accountant or payroll specialist before processing final payments.

9) Prepare An Itemised Final Payslip

Provide a clear, itemised statement breaking down each component and how it was calculated (wages, notice, leave, redundancy, tax withheld, super, etc.). Good records reduce confusion and help resolve questions quickly.

10) Pay Promptly And Keep Records

Make payment on or as soon as possible after the last day, and in any case within the timeframe required by the applicable award or agreement. Retain all supporting records, including calculations and communications.

Notice, Redundancy And Special Scenarios

These scenarios create the biggest calculation differences and are worth a closer look.

Minimum Notice Periods (NES)

• Up to 1 year of service: 1 week
• 1–3 years: 2 weeks
• 3–5 years: 3 weeks
• Over 5 years: 4 weeks
• Add 1 extra week if the employee is 45+ and has at least 2 years’ service

If you don’t require the employee to work the notice, pay the equivalent at the full rate of pay for the hours they would have worked. Again, contracts can set longer notice periods, but not shorter than the NES.

Redundancy Pay

Redundancy pay usually applies if an employee has 12+ months of service and the employer is not a small business employer (fewer than 15 employees). Amounts are based on continuous service and set out in the NES, but an award, agreement or contract can provide more generous payments.

Not all terminations attract redundancy pay - for example, serious misconduct or a resignation may change the outcome. Double-check the facts and the instrument that applies.

Serious Misconduct

If employment ends due to serious misconduct, notice (or payment in lieu) is generally not required. However, you still need to pay wages up to the final day and other accrued entitlements such as annual leave. Apply any award or agreement rules carefully and ensure your internal process is robust and documented.

Fixed-Term Contracts Ending

When a fixed-term contract naturally expires, entitlements usually include wages up to the end date and accrued leave. Notice may not be required where the contract ends on its stated expiry. If you terminate early, standard notice or payout rules often apply - check the contract and instrument.

Documents And A Smooth Process

Good paperwork and clear communication reduce the risk of disputes and speed up processing.

• Employment Contract: Sets out core terms like pay, notice and benefits. Ensure your Employment Contract templates are up to date and consistent with awards.
• Termination Letter: Confirms the last day of employment, reason for termination and a summary of entitlements being paid.
• Itemised Payslip: Break down each component of the final payment and any deductions.
• Separation Certificate: Many employees will need this for Services Australia purposes. See the guide to employer separation certificates.
• Consultation Records (Redundancy): If a redundancy is involved, keep records of the consultation process required by the award/NES.

If a situation is complex (for example, overlapping bonuses, partial notice worked, or a contested redundancy), consider having a second person review the calculation and get legal guidance early.

Common Mistakes (And How To Avoid Them)

• Using base rate instead of full rate of pay for notice: Payment in lieu should reflect the full rate for hours that would have been worked, not just the base hourly rate.
• Missing leave loading: Many awards require annual leave loading to be included in the payout.
• Assuming TOIL/RDO rules are the same everywhere: Payout requirements vary - always check the specific award or agreement.
• Overlooking redundancy details: Service bands, small business exemptions and alternative obligations can change the amount and eligibility.
• Tax and super missteps: Unused leave is generally not an ETP; super may apply to some components but not others. Confirm the correct treatment with your accountant or payroll specialist and use reliable tools as a cross-check.
• Late payment: Many awards have strict deadlines. Aim to process on, or within a few days of, the final day.
• Poor documentation: Keep a clear paper trail (contract terms, calculations, letters, payslip) to resolve any questions quickly.

If you want a reference while you work, this practical guide to calculating final pay pairs well with your payroll system.

Key Takeaways

• Final pay can include wages, payment in lieu of notice, accrued annual leave (with loading where applicable), long service leave and, if relevant, redundancy pay.
• Always check the applicable award or enterprise agreement - it can change timing, payout rules (e.g. TOIL/RDOs) and amounts.
• Payment in lieu of notice should be at the full rate of pay for hours that would have been worked, and notice length must meet at least the NES.
• Unused leave payouts are taxed under specific ATO rules and are generally not ETPs; confirm tax and super treatment with your accountant.
• Use a methodical process: confirm terms, calculate each component, apply tax/super rules, issue an itemised payslip and pay on time.
• Keep your documentation tight - a clear contract, termination letter and separation certificate will prevent confusion and reduce disputes.

If you’d like help reviewing a final pay calculation or updating your processes, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.