Ending employment is rarely just an administrative step. In Australia, final pay has to be accurate, timely and classified correctly for tax and reporting. A missed allowance, an unpaid leave balance or the wrong tax treatment can quickly turn a routine termination into a compliance issue.
When an employee’s job ends in Australia, their final pay must include outstanding wages, unused annual leave (plus loading if it applies), notice or payment in lieu of notice, and — if the role is genuinely redundant — redundancy pay based on length of service. Most modern awards require this to be paid within 7 days of the employee’s last day, and payment in lieu of notice must be made on or before the termination date. Getting any of these wrong is one of the most common — and most costly — payroll compliance mistakes Australian employers make.
This guide breaks down exactly what belongs in a final pay, how notice and redundancy entitlements are calculated under the National Employment Standards (NES), and when the money legally needs to land in the employee’s account.
What Counts as “Termination Pay” in Australia?
Termination pay isn’t one single payment — it’s a bundle of entitlements that can apply depending on why the employment ended (resignation, dismissal, redundancy, or end of contract). A compliant final pay can include:
- Outstanding wages for all hours worked up to the last day, including any overtime or penalty rates owed
- Unused annual leave, paid at the employee’s full rate of pay (plus annual leave loading, where the award or contract provides for it)
- Notice of termination, either worked or paid out as a lump sum
- Redundancy pay, if the position itself has genuinely become redundant
- Unused long service leave, where the employee has met the relevant state-based threshold
- Any other contractual entitlements, such as accrued time off in lieu, earned bonuses, or unreimbursed expenses
Unused annual leave and long service leave are separate NES entitlements — they’re paid out regardless of why someone left, and they sit outside the redundancy calculation itself.
Ordinary final pay items that still need to be paid
Fair Work guidance makes a clear distinction between ordinary final pay items and extra termination entitlements. Ordinary final pay generally includes wages owing for hours worked up to the last day of employment. That can include ordinary hours, overtime already worked, penalty rates, loadings and allowances that formed part of the employee’s pay under an award, agreement or contract.
If the employee has unused annual leave, that balance usually needs to be paid out when employment ends. This is a major area where mistakes happen. The payout is not limited to the base leave hours alone. If annual leave loading would have been payable had the leave been taken during employment, that loading generally needs to be included in the payout as well.
Long service leave also needs close attention. Whether it is payable, and how much is owed, depends on the relevant state or territory long service leave law, industrial instrument, or pre-existing entitlement. In practice, this often means payroll needs to confirm both service length and the legal basis for the entitlement before processing the final pay.
A termination can also trigger a reconciliation of less obvious balances. Time off instead of overtime that has been accrued but not taken may need to be paid out. Reimbursements, commissions or approved expenses already earned but not yet paid may also need to be included if they are due under the employment arrangement.
If leave was taken in advance and the employee has not accrued it back before leaving, Fair Work says the amount still owing can be deducted from final pay where that deduction is permitted.
| Final pay item | What it can include | Key payroll note |
|---|---|---|
| Outstanding wages | Ordinary hours, overtime, penalties, allowances | Check the last roster, timesheets and pay period cut-off |
| Unused annual leave | Accrued leave plus annual leave loading where applicable | Do not treat this as an ETP, usually taxed at marginal rate unless a redundancy |
| Long service leave | Accrued long service leave where the employee qualifies | Check state or territory rules and any agreement terms |
| TOIL or accrued time off | Untaken time off instead of overtime | Confirm whether payout is required under the instrument |
| Adjustments | Deductions for advanced leave, overpayments, authorised deductions | Make sure any deduction is lawful and documented |
Notice, payment in lieu of notice and redundancy pay
Not every termination attracts the same extra payments. A resignation, a dismissal and a redundancy can each lead to a different final pay outcome.
If the employee is required to work out their notice period, they should usually be paid as normal for that time. If the employment ends immediately and the employer does not require the notice period to be worked, a payment in lieu of notice may be required. Fair Work includes pay in lieu of notice as a possible part of final pay where the employee is entitled to notice.
Redundancy introduces another layer. If the termination is a genuine redundancy and the employee is eligible, redundancy pay may need to be added to the final pay, along with any notice entitlement and the employee’s outstanding leave balances. Eligibility is not automatic in every case, so the employer needs to test the situation against the National Employment Standards, any award or agreement, and the employee’s circumstances.
The easiest way to think about these amounts is to separate them by why they arise.
- Notice worked: paid as normal earnings for the notice period
- Payment in lieu of notice: may apply when employment ends without the notice period being worked
- Redundancy pay: may apply if the role is genuinely no longer required and the employee is eligible
- Unused leave payouts: still need to be dealt with even when redundancy pay is also payable but the tax treatment is different
Notice of Termination: How Much Is Required?
Under the Fair Work Act, an employer can’t end someone’s employment without either giving the minimum notice period or paying them out in lieu of it. The NES sets the following minimums based on continuous service:
| Period of continuous service | Minimum notice period |
|---|---|
| 1 year or less | 1 week |
| More than 1 year – 3 years | 2 weeks |
| More than 3 years – 5 years | 3 weeks |
| More than 5 years | 4 weeks |
Employees aged 45 or over with at least two years of service at the time notice is given are entitled to an extra week on top of the table above.
A few categories of employees fall outside these minimums altogether, including casuals, employees engaged for a specific task or season, and anyone dismissed for serious misconduct (theft, fraud, or serious safety breaches, for example).
Redundancy Pay: The NES Scale
Redundancy pay applies when a role is no longer needed and the business isn’t classified as a small business (fewer than 15 employees). It’s calculated on continuous service and paid at the employee’s base rate for ordinary hours — it doesn’t include bonuses, loadings, or overtime.
| Continuous service | Redundancy pay |
|---|---|
| At least 1 year, less than 2 years | 4 weeks |
| At least 2 years, less than 3 years | 6 weeks |
| At least 3 years, less than 4 years | 7 weeks |
| At least 4 years, less than 5 years | 8 weeks |
| At least 5 years, less than 6 years | 10 weeks |
| At least 6 years, less than 7 years | 11 weeks |
| At least 7 years, less than 8 years | 13 weeks |
| At least 8 years, less than 9 years | 14 weeks |
| At least 9 years, less than 10 years | 16 weeks |
| At least 10 years | 12 weeks* |
*Redundancy pay actually steps back down to 12 weeks at the 10-year mark, a quirk that dates back to the Australian Industrial Relations Commission’s 2004 Redundancy Case decision.
Employees with less than 12 months’ service, casuals, and staff of most small businesses aren’t entitled to statutory redundancy pay — though notice may still apply. Employers who genuinely can’t afford redundancy pay, or who’ve found the employee comparable alternative employment, can apply to the Fair Work Commission to have the amount reduced.
When Is Final Pay Legally Due?
This is where a lot of businesses come unstuck. There are two different timing rules, and mixing them up is a common source of underpayment claims:
- Payment in lieu of notice — if an employer chooses not to have the employee work out their notice, that payment must be made on or before the day employment ends. There’s no grace period here.
- The rest of the final pay (outstanding wages, annual leave, redundancy) — most modern awards require this within 7 days of the employee’s last day. Where an award or agreement is silent, the Fair Work Ombudsman’s guidance is that final pay should be made “as soon as reasonably practicable,” with 7 days treated as best practice.
- Each State for Long Service Leave requires different timing when a termination, with most advising payment on the day of leaving.
Recent Federal Circuit and Family Court decisions have shown the courts are increasingly willing to penalise employers for even short delays, so treating the 7-day window as a hard deadline — not a target — is the safer approach..
Tax and Superannuation on Termination Payments
A common source of confusion is that termination pay is not taxed as one single lump sum. The ATO separates different termination-related payments into different categories, and those categories can be taxed and reported differently.
A few things trip employers up on the tax side:
- Payment in lieu of notice is treated as an Employment Termination Payment (ETP) for tax purposes, but it does attract superannuation guarantee contributions because it’s treated as ordinary time earnings.
- Genuine redundancy pay, by contrast, does not attract superannuation, and can qualify for concessional tax treatment up to the tax-free redundancy threshold.
- Unused annual and long service leave are reported and taxed differently again, and shouldn’t be bundled into the redundancy component on the employee’s income statement.
Getting these categories crossed on a payslip or an Employment Separation Certificate is one of the most frequent errors we see when terminations are processed without specialist payroll support — and it’s exactly the kind of detail our team checks as part of every outsourced payroll service we run for clients.
Common payroll risks in termination pay processing
Termination calculations often go wrong in the small details rather than the obvious ones. A missed allowance for the final week, an annual leave loading omission, or a failure to reconcile award increases can leave an employer short-paying a departing employee.
Award and enterprise agreement interpretation is a frequent pressure point. The final pay may need to include overtime, penalties, higher duties, rostered allowance entitlements, meal allowances, accrued rostered days off or TOIL payouts depending on the instrument. Where rates have recently changed, payroll should also confirm that the employee was paid at the correct rate up to the termination date, including any increase that took effect from the first full pay period after 1 July where relevant.
A proper termination process should include a reconciliation step, especially if the employee has variable hours, complex allowances or multiple pay categories.
- missed leave loading
- unreconciled TOIL balances
- outdated award rates
- unlawful deductions
- incorrect ETP coding
- late final pay
Yes. Redundancy pay and notice (or payment in lieu) are separate NES entitlements and are both payable when a role is made genuinely redundant, on top of any accrued leave.
No. The redundancy (severance) component itself is exempt from the superannuation guarantee. However, payment in lieu of notice does attract super, as it’s treated as ordinary time earnings.
Payment in lieu of notice must be paid on or before the termination date. The remaining final pay — wages, leave, redundancy — should be paid within 7 days under most modern awards, and no later than “as soon as reasonably practicable” under the NES.
Most casual employees aren’t entitled to notice of termination or redundancy pay, though outstanding wages and any accrued entitlements specific to their award still apply.
An employer can apply to the Fair Work Commission to have the redundancy amount reduced if they can demonstrate genuine financial hardship, or if they’ve secured the employee comparable alternative employment.
A practical termination pay checklist for employers
A sound process starts before the employee’s record is closed. Payroll, HR and line managers should all be working from the same termination date, reason for termination, notice arrangement and final work pattern. If any of those inputs are wrong, the final pay will usually be wrong too.
It also helps to keep a clear audit trail. Final pay calculations should show how each amount was derived, what tax category was used, what was withheld, and when the payment was made. That record supports both employee queries and compliance reviews.
- Confirm the termination date and reason for ending employment.
- Check the award, agreement, contract and National Employment Standards that apply.
- Reconcile all earnings and balances, including wages, allowances, overtime, leave and TOIL.
- Determine whether notice, payment in lieu, or redundancy pay applies.
- Classify each amount correctly for tax and reporting before releasing the pay.
Common Termination Pay Mistakes Employers Make
- Paying redundancy and notice as one lump figure without separating the components for tax and super purposes
- Applying superannuation to genuine redundancy pay (it shouldn’t be there) or forgetting it on payment in lieu of notice (it should)
- Missing the “before or on termination day” rule for payment in lieu of notice
- Overlooking the extra week of notice for employees 45 and over with 2+ years of service
- Assuming a “small business” exemption applies without correctly counting associated entities and casuals on a regular and systematic basis
- Leaving superannuation and leave loading calculations to the last minute, which pushes final pay past the 7-day window
Why specialist payroll support helps with termination pay compliance
Termination pay sits at the intersection of the Fair Work Act, award interpretation, tax law, and superannuation rules — which is exactly why it’s one of the areas where DIY payroll and generic software most often go wrong. If you’d rather hand this over to a team that processes terminations correctly the first time, our outsourced payroll specialists handle the full calculation, tax treatment, and superannuation side of every termination — with a 100% onshore, Australian-based team behind every pay run. Get in touch to find out how we can take termination pay off your plate.
This article provides general information only and isn’t a substitute for advice from the Fair Work Ombudsman (13 13 94) or a qualified workplace relations professional. Always check the specific award, enterprise agreement, or employment contract that applies to your employee.
