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As an employer or HR manager, understanding how to calculate final pay is crucial to ensure that you adhere to the compliance and maintain good relations with departing employees. Final pay includes various components that need to be calculated correctly to ensure compliance and fairness. In this comprehensive guide, we will delve into it in details.
What is final pay?
Final pay, also known as a termination payment, is the amount of money that an employee is entitled to receive upon the termination of their employment.
It encompasses various components, including:
Wages and salary
This includes any unpaid wages or salary the employee has earned up to the date of termination, which might include the current pay period and any accrued but unused leave.
If the employment contract stipulates a notice period, the employer must pay the employee for the notice period, even if the employee is not required to work during that time.
Accrued annual and long service leave
Employees in Australia are entitled to paid annual leave and long service leave. Any accrued but unused leave must be included in the final pay calculation.
In cases of redundancy, employees may be entitled to redundancy pay, which is calculated based on their length of service and age.
This might include any outstanding bonuses, commissions, or other entitlements the employee is due under their employment contract or relevant legislation.
When does final pay have to be paid?
Many industry awards stipulate that employers are required to disburse an employee’s final payment within seven days following the termination of their employment. In cases where employment contracts, enterprise agreements, or other registered agreements establish specific payment timelines for final pay, those terms take precedence.
If the employee’s award, contract, or agreement lacks provisions specifying the timeline for final pay, the recommended practice is to ensure that employees receive their final pay within seven days from the conclusion of their employment.
How to calculate final pay?
Calculating final pay can be a complex process. Here’s a step-by-step guide to help you calculate final pay accurately:
Determine the components
Identify all the components that need to be included in the final pay, such as unpaid wages, notice period, accrued leave, redundancy pay, and any other entitlements.
Calculate wages and salary
This includes any unpaid wages or salary the employee has earned up to the date of termination. You can use their regular pay rate and the number of days they’ve worked during the pay period to calculate this.
Calculate notice period pay
A notice period pay refers to the compensation an employer is required to provide to an employee when ending their employment while adhering to the notice period outlined in the employment contract or relevant industrial instrument, such as an award or enterprise agreement.
Calculate accrued leave
Determine the amount of annual and long service leave accrued by the employee. Calculate the value of this leave based on the employee’s pay rate.
Calculate redundancy pay
You can use Fair Work’s calculator to calculate redundancy pay based on the employee’s length of service and age.
Sum it all up
Add up all the calculated components to determine the total final pay amount.
You can check the Pay and Conditions Tool to find your award and pay rate on Fair Work website.
How to process final pay with Workstem?
Processing final pay accurately and efficiently can be challenging, especially for employers with multiple employees. This is where payroll software like Workstem can make a significant difference.
Workstem streamlines the process by:
- Maintaining records
Workstem helps you maintain accurate records of final pay calculations for future reference and compliance purposes.
- Managing leave accruals
The system can keep track of leave balances, ensuring that employees are paid correctly for any accrued leave.
- Automating calculations
Workstem can calculate final pay automatically based on the components you input, reducing the risk of human error.
Revolutionise payroll compliance with Workstem!
Workstem, your one-stop payroll and HR software, provides a streamlined and compliant approach to handling Employment Termination Payments (ETP), which enables businesses to process leave cashing out, payments in lieu of notice, genuine redundancy pay and more, all in accordance with ATO regulations. Besides, your tax addition and deduction can be customised and auto-calculate based on your rule set.
We integrate rostering, attendance, leave and payroll, with the AI engine, all payroll-related data will be processed in one database and then auto-calculate the final pay. By using Workstem, you can simplify the process of managing payroll and improve transparency in your workplace.
Workstem has industry experts to help the software implementation and training. With Workstem, no matter your people are full-time, part-time or casual, no matter they’re under what award, even EA, we can handle all automatically! Take control of your ETP and more payroll issues with Workstem. Reach out us now!