Final Pay in Australia: How to Calculate Leave and Termination Payments

What are employer obligations at the end of employment?

When an employee’s employment ends (whether due to resignation,redundancy, or termination), employers in Australia have clear obligations regarding the worker’s final pay. Final pay is the last payment owed to an employee when their employment ends, and it must include all outstanding wages and entitlements. Handling final pay correctly is crucial – getting it wrong can lead to Fair Work complaints, costly back-pay orders, or even claims of “wage theft.” In this guide, we’ll explain final pay calculation in Australia covering what must be paid (unused leave, notice, etc.), when it must be paid, and common pitfalls to avoid. The goal is to help Australian employers remain compliant with Fair Work requirements and give departing employees everything they’re owed.

Employer obligation overview: At termination (or “end of employment”), an employer should calculate and issue final pay promptly. This includes paying any accrued entitlements (not “benefits”) like unused annual leave, pro-rata long service leave, outstanding wages, and applicable notice or redundancy payments. Failing to pay correct final entitlements on time can result in penalties from the Fair Work Ombudsman (FWO) and damage your reputation. Let’s break down the specifics, starting with the deadline for final pay.

When is Final Pay Deadline?

How soon must you pay an employee’s final wages and entitlements after their last day? While the Fair Work Act 2009 itself doesn’t specify an exact timeframe, most modern awards require final pay to be processed within 7 days of employment ending. In other words, best practice (and often a legal requirement via awards) is to ensure the departing employee receives all their due payments within one week of their final working day. Some employment contracts or enterprise agreements may set a different timeframe (for example, by the next regular payday), but if an award applies, you must follow the award’s rule if it’s more strict.

This “7-day rule” is widely accepted as the standard. For instance, the Fair Work Ombudsman explicitly notes that “Most awards say that employers need to pay employees their final payment within 7 days after their last day of employment.”. Failing to meet this deadline could lead to disputes or even penalties. In a 2023 court ruling, an employer who delayed final payments beyond the last day of employment was found non-compliant, reinforcing that final pay should ideally be settled on or before the 7th day after termination.

What’s Included in Final Pay: Wages, Leave & Other Entitlements

Final pay isn’t just the last paycheck for hours worked; it encompasses all remaining monetary entitlements owed to the employee. According to the Fair Work Ombudsman, an employee’s final pay is typically made up of:

• Outstanding wages for hours worked up to their last day, including any penalty rates or allowances for those hours. For example, if they worked overtime or a public holiday in their final week, include the appropriate penalties.

• Payment in lieu of notice (if the employee isn’t working through a required notice period). We’ll discuss notice payouts more below.

• Accrued but unused annual leave, including any annual leave loading that would have been payable had they taken the leave during employment.

• Accrued or pro-rata long service leave (LSL) if applicable – typically when the employee has a certain length of continuous service (discussed in detail in the Long Service Leave section).

• Redundancy pay, if the employment ended due to genuine redundancy and the employee is entitled under the National Employment Standards (usually if they had 12+ months service and the business has >15 employees – see our redundancy pay article for the specific scale).

• Any other outstanding entitlements such as unpaid commissions or bonuses that were contractually owed, or time off in lieu balances, etc.

Importantly, sick and carer’s leave (personal leave) is not paid out on termination. Personal/carer’s leave is a use-it-or-lose-it entitlement under the NES; any untaken balance simply lapses when employment ends. Similarly, casual loading (for casual employees) isn’t “paid out” as such, since it’s already included in each casual pay rate – casuals also don’t get paid leave accruals, so typically their final pay is just last wages owing and maybe any agreed outstanding amounts.

To summarise, final pay must include every type of remuneration the employee has earned or accrued but not yet received up to the end date, except those specifically excluded by law (like sick leave). It’s wise to provide an itemised breakdown to the employee showing how you calculated each component of their final pay – transparency can prevent disputes. Let’s look more closely at key components like annual leave, long service leave, notice periods, and permissible deductions.

Paying Out Unused Annual Leave (Including Leave Loading)

By law, unused annual leave must be paid out in full when an employee’s job ends. This requirement is part of the National Employment Standards. Every hour or day of accrued annual leave the employee hasn’t taken should be paid at their ordinary pay rate for their final pay. If the employee was entitled to annual leave loading (usually an extra 17.5% on their pay when taking leave, common in many awards), then that loading must be included in the payout as well.

Fair Work guidance is crystal clear on this: “An employee’s unused annual leave gets paid out when their employment ends. This includes annual leave loading if the employee gets it when they take annual leave. Annual leave loading is paid out on termination even when an award, enterprise agreement or contract says that it’s not.”. In other words, you cannot contract out of paying leave loading on termination – even if an outdated clause in a contract or award tried to exclude it, the Fair Work Act overrides that and requires payout of loading.

Calculating annual leave payout: Take the number of hours or days of annual leave the employee has accrued but not taken. Multiply by their base hourly rate (or normal daily rate). If applicable, add the 17.5% loading (or the loading % specified in their award/agreement) on top of the base amount.

For example, if an employee has 10 days of leave remaining and their normal rate is $30/hour for 7.6 hours per day, the base leave payout is $30 * 7.6 * 10 = $2,280. If they are entitled to 17.5% loading, add 17.5% of $2,280 (which is $399) making the total $2,679. This entire amount would be part of final pay, and it also attracts superannuation since annual leave payments are considered ordinary time earnings (OTE).

Note: Some employers allow “cashing out” of annual leave during employment under strict conditions, but on termination, payout of all unused leave is mandatory. If an employee took more leave than they had accrued (negative leave balance) and owes that time, you may deduct the advanced leave from final pay if there was a prior written agreement to do so (see Deductions section).

By ensuring you properly calculate unused annual leave (and any loading), you’ll comply with the NES and avoid underpaying a common entitlement that departing employees will certainly watch for.

Long Service Leave Payouts: Pro-Rata Entitlements by State

Long Service Leave (LSL) is a long-tenure leave entitlement that varies by state/territory law. Generally, LSL provides a substantial period of paid leave (e.g. 8.67 weeks or more) after about 10 years of continuous service with the same employer (or within the same group). When an employee with a long service leave entitlement leaves the company, any unused long service leave must be paid out as part of their final pay. If the employee hasn’t reached the full LSL accrual period, they might still be eligible for a pro-rata payout of long service leave depending on the jurisdiction and the reason for leaving.

Here’s the key point: LSL entitlements are governed by state/territory legislation, so the rules differ across Australia. Some common scenarios include:

• Full entitlement after 10 years: In most jurisdictions (NSW, QLD, WA, etc.), once an employee hits 10 years’ service, they are entitled to the full long service leave (such as 2 months or 8⅔ weeks) and any additional pro-rata as per state formula. If their employment terminates after 10 years, they receive payout for the entire LSL entitlement (and in some states, an additional pro-rata amount for years beyond 10) regardless of the reason for termination.

• Pro-rata between 7 and 10 years: Many states allow a pro-rata payout if an employee leaves after a certain minimum (often 7 years) of service even if they haven’t reached 10. For example, Victoria’s Long Service Leave Act 2018 allows pro-rata payout after 7+ years of continuous employment, no matter the reason for termination. Western Australia and South Australia also permit pro-rata after 7 years (with SA requiring 7+ years and WA 7-10 years unless terminated for serious misconduct). Queensland and NSW historically required 10 years for a full payout, but they provide pro-rata between 5–10 years under certain conditions. In NSW, an employee who resigns between 5 and 10 years due to illness, domestic necessity, etc., or is terminated by the employer (except for serious misconduct) is eligible for pro-rata LSL. If they simply resign for other reasons before 10 years, NSW doesn’t mandate LSL payout. Queensland’s Industrial Relations Act provides pro-rata after 7 years if the employee is terminated (including resignation in some cases) – effectively making 7 years the threshold in practice.

• Minimum 5-year rule in some cases: The ACT explicitly allows pro-rata LSL payout after just 5 years continuous service if employment ends (the ACT Long Service Leave Act says 5+ years on termination gets pro-rata). Some other states’ conditional pro-rata (like NSW’s illness/necessity rule) also kick in at 5 years. However, no state grants LSL for someone with, say, 3 or 4 years of service – the minimum to ever see any LSL payout is typically 5 years (and even then with conditions, except ACT).

Because these rules vary, employers must consult their state’s LSL legislation or authority when calculating a long service leave payout. For example, if you’re in New South Wales, refer to the Long Service Leave Act 1955 (NSW) and guidance from NSW Industrial Relations; if in Victoria, the Long Service Leave Act 2018 (Vic) and the Wage Inspectorate Victoria (which oversees LSL) will have calculators and FAQs. Indeed, the NSW Government website provides contacts for each state’s LSL agency.

As a general guidance, if an employee with substantial tenure leaves:

• Check their length of continuous service with you (including any prior entity continuity if business ownership changed – as most laws count service as continuous through a business sale).

• If they’ve met the full LSL qualifying period (commonly 10 years or 7 in some states), calculate their full LSL entitlement. If they took any LSL during employment, factor that in; otherwise, use the formula (e.g. 8.67 weeks for 10 years, etc.).

• If they fall short of the full period but above the minimum pro-rata threshold, determine the pro-rata amount. For instance, in VIC or WA, 7, 8, or 9 years would get a proportion of the full leave paid out. As an example from WA: an employee with 8 years service ending employment would get pro-rata LSL for those 8 years (since WA allows 7-10 year pro-rata on termination, unless fired for serious misconduct).

Don’t forget that long service leave is usually paid at the employee’s ordinary rate of pay at the time of termination (including any regularly received bonuses or loadings in some states’ calculations). And in states like NSW, if the employee was casual or had variable hours, you may need to calculate the payment based on average weekly pay over the last 5 years or similar (state laws provide the exact method). If in doubt, use the calculators or contact the state authority.

Bottom line: Failing to pay out LSL when required can land you in legal hot water. Make sure to assess each departing employee’s tenure and check if LSL payout is owed. The Fair Work Ombudsman notes that untaken long service leave is usually paid on termination, and depending on state law, pro-rata may apply after as little as 5 years continuous service. It’s a complex area, so when unsure, get advice or reach out to the state’s resource for clarity.

Payment in Lieu of Notice Period

Under the National Employment Standards, when an employer terminates an employee’s employment, they must either provide the minimum notice period (let the employee work for that notice duration) or pay the employee in lieu of notice (i.e. pay out the notice period as a lump sum, and end employment immediately). The required notice period depends on the employee’s length of continuous service and age – for instance, 1 week notice if employed 1 year or less, up to 4 weeks notice after 5+ years service, plus one extra week if the employee is over 45 years old with at least 2 years service. (An employment contract or award may stipulate a longer notice period, which would then apply if greater than the NES minimum.)

If the employee works through their notice period, you simply continue paying their normal wages and entitlements until the end of that period. However, often employers choose to terminate immediately and pay out the notice. In such case, the amount to pay in lieu of notice is the full pay the employee would have earned if they had worked during the notice period. This includes not just base wages, but also things like regular allowances, loadings, and bonuses they would have reasonably expected during that time. For example, if an employee’s last day is today but they are entitled to 3 weeks’ notice, you must pay them an additional 3 weeks’ worth of wages (including ordinary hours, and likely any regular overtime or allowances they’d have gotten) as part of their final pay.

When notice is not required: If an employee is terminated for serious misconduct, you can terminate without notice (and thus no notice pay is owed). Also, if an employee resigns, they are generally expected to give you notice. Should the employee fail to give the required notice when resigning, certain awards allow the employer to deduct from their final pay an amount equivalent to the notice not given (usually capped at one week’s wages) – see Deductions section.

Example: Sarah has worked 3.5 years and is being made redundant. NES minimum notice is 3 weeks (since 3+ years but less than 5). Instead of having her work the final 3 weeks, you decide to make today her last day. You will pay Sarah 3 weeks’ pay in lieu of notice. If her base weekly pay is $1,000 and she normally also earns a $100 weekly allowance, the payout in lieu of notice should be $1,100 x 3 = $3,300 (plus include any accrued leave, etc., separately). This notice pay is taxed as part of her ETP (employment termination payment) for tax purposes.

Always document in writing that the final pay includes payment for notice in lieu, so the employee understands they have been compensated for that period. Remember that even if no work is performed, payment in lieu of notice is an entitlement (except misconduct cases).

Deductions from Final Pay: What You Can and Cannot Deduct

Employers sometimes wonder if they can deduct certain amounts from a departing employee’s final paycheck – for example, if the employee owes money, has company property, or didn’t work their full notice. It’s critical to understand that deductions from wages (including final pay) are tightly regulated under the Fair Work Act. You generally cannot deduct anything from an employee’s final pay unless: (a) the employee has given written consent and the deduction is principally for their benefit, (b) the deduction is required or authorized by law (like tax or child support), (c) it’s allowed under a modern award or enterprise agreement, or (d) a court order authorises it.

Here are common scenarios:

• Failure to give notice: If an employee resigns without giving the required notice, many modern awards permit an employer to withhold or deduct wages equal to the shortfall in notice (often capped at one week’s pay) from their final pay. This is lawful only if an award/enterprise agreement term applies or the Fair Work Act (NES) allows it. In fact, the NES (s.117) allows an employer to deduct at most one week’s wages from an employee who is over 18 and doesn’t provide notice, but only if it’s stipulated in the relevant industrial instrument. For example, if an employee owed 2 weeks notice but only gave 1, one week’s wages might be withheld from final pay if the award says you can.

• Employee owes money or property: Say the employee has an outstanding loan from the company, or hasn’t returned a uniform, laptop, or other company property. You cannot simply deduct the value from their final pay unless the employee has previously authorized it in writing (e.g. a signed agreement to deduct the laptop cost if not returned) or such deduction is allowed by an applicable award. Deductions for cash shortages, property damage, or unreturned equipment are usually unlawful without consent. Even with consent, be careful – the deduction must not benefit the employer purely. For instance, deducting the cost of a missing uniform is generally not lawful unless the employee agreed and it was principally for their benefit (which is unlikely).

• Overpaid wages or leave in advance: If you overpaid an employee in the past or they took annual leave in advance and now owe that time back, you may deduct those amounts from final pay if and only if the employee authorizes it or the award allows. The proper approach is to get a written acknowledgment from the employee for the overpayment recovery. Without consent, your safest route is to request repayment separately or pursue legal recovery; unilaterally docking pay can breach the Act. According to experts, you should obtain written employee approval and not reduce their pay below minimum wage in doing so.

• Tax and legal withholdings: Obviously, you must deduct PAYG income tax from final payments as required, and remit any superannuation on eligible components. These are lawful deductions by law. Similarly, if you have a government order (like a child support garnishment or court order) that applies, you will deduct that as required from final pay. These don’t require employee consent.

Unlawful deduction examples: It’s not legal to fine an employee by deducting pay for things like lateness, misconduct, or poor performance. You cannot deduct training costs or course fees because the employee quits soon after a sponsored training – not unless there was a valid repayment agreement. You can’t hold back their last paycheck until they return company property – you still must pay them on time and then separately deal with property return or recovery (unless a prior written agreement allows a specific deduction for something like failure to return a uniform, which is rare and must be reasonable). The Fair Work Act’s stance is that the money an employee has earned is theirs, and deductions are an exception, not the rule.

Penalties for improper deductions: If you make unauthorised deductions, the employee could complain to the FWO. Employers found to have unlawfully deducted wages can be ordered to repay those amounts and may face penalties up to $16,500 per breach for individuals or much higher for companies. It’s not worth the risk – always get explicit written permission for any deduction that isn’t squarely within the law, or better yet, avoid contentious deductions altogether and seek other ways to recover debts.

In summary, you can deduct from final pay only what is lawful: tax, super (which is contributed, not deducted from net pay), any agreed salary sacrifice, or genuinely agreed deductions for the employee’s benefit (e.g. a purchased item the employee wanted). You cannot deduct to cover your business losses or the employee’s liabilities to you unless a legal provision or court allows it. When in doubt, err on the side of paying the employee their full earned wages and separately invoicing or negotiating any recoveries.

Key Takeaways for Final Pay

Handling final pay in Australia requires attention to detail and knowledge of the legal requirements. Here are the key points for employers to remember:

• Don’t delay final payments: Aim to pay all amounts owed within 7 days of termination (as most awards require). Timely payment helps avoid legal issues and maintains goodwill.

• Include all entitlements: Final pay must cover all outstanding wages, unused annual leave (with loading), pro-rata long service leave (if applicable), notice pay, and any redundancy pay if relevant. Exclude only those leave types not payable by law (e.g. sick leave).

• Calculate accurately: Ensure you calculate annual leave payouts and long service leave correctly based on the employee’s conditions and relevant state laws. If unsure about final pay calculation in Australia for complex cases, use the Fair Work Ombudsman’s tools or seek advice.

• Observe notice requirements: Provide required notice or payment in lieu for terminations. If an employee resigns without notice, check if you can lawfully deduct a notice shortfall – don’t assume, verify via award or written agreement.

• Only make lawful deductions: Do not arbitrarily subtract costs or debts from someone’s final pay. Only deduct with proper authority (e.g. tax, super, written consent for a valid reason). It’s often safer to pay everything out and pursue any owed money separately to stay compliant.

• Keep records and communicate: Document the final pay calculation and provide the employee with a payslip or statement showing all components (wages, leave, etc.). This transparency can prevent disputes. Remember to also provide a separation certificate if requested, and update your payroll records (you must keep termination records for at least 7 years by law.

Finally, if you’re ever unsure about your obligations, it’s wise to consult the Fair Work Ombudsman resources or an employment law professional. The FWO website has dedicated sections on final pay calculations and even a Pay and Conditions Tool for notice and redundancy calculations.

Final Pay: Frequently Asked Questions