Processing Final pay – The Timing

Processing final pay – the timing.

One of the questions we get asked on repeat is:

When terminating someone’s employment when do I need to pay their final payment?

We know that many business owners (especially small businesses) struggle to pay their employees their final pay, especially when there is a huge chunk of annual leave and payment in lieu of notice involved. Sometimes, these payments can be anywhere between $5k – $10k, which can be a massive hit for a micro business.

Many thought this was governed by the Award or industrial agreement (as the Fair Work Act) is kind of silent. Best practice was 7 days, as per the Fair Work Ombudsman website but a few cases have now changed EVERYTHING.

So, listen up, business owners, HR peeps and payroll gurus. We have some crucial advice for you that could save you a hefty fine and a lot of headaches. Recently, the Federal Court hit an employer with a $17,000 fine for delaying the payment of an employee’s accrued annual leave. On top of that, they had to pay $10,000 in damages because the delay caused the employee financial stress. Let’s break down what happened and what you need to know to avoid the same fate.

The ruling: no room for delay

A recent Federal Court ruling clarified when employers need to pay certain entitlements to terminated employees. This includes payment in lieu of notice, accrued but untaken annual leave, and redundancy pay.

Key takeaway: As mentioned the Fair Work Act (FW Act) doesn’t specify an exact deadline for these payments, but the Federal Court has made it clear – any accrued but untaken annual leave must be paid out on the day the termination takes place.

Not 3 days or 7 days later. The last day of their employment.

The case breakdown

In this case, an employer paid an employee’s accrued annual leave three months after termination. The Court ruled this was three months too late, violating section 90(2) of the FW Act. The penalty? $17,000. Additionally, the Court awarded $10,000 in damages to the employee due to the financial stress caused by the delay.

Ignorance or lack of cash isn’t an excuse

The employer argued that they delayed payment due to limited knowledge of Australian employment law and concerns about the accuracy of leave records. The Court didn’t buy it. The ruling emphasised that employers must know and understand their obligations under the FW Act. Ignorance or lack of care is not a valid excuse.

We know that being hit with these massive payouts can be distressing, but as a business, you need to take this into consideration when making the decision to terminate or make them redundant. If you cannot afford to pay, then you should not terminate them.

The legal implications

This ruling isn’t an isolated case. Another recent Federal Court decision highlighted that payment in lieu of notice must be made before the dismissal comes into effect. Paying these entitlements after termination is not lawful.

Ensuring compliance

Terminating an employee is tough, but you need to handle it correctly to avoid legal issues. Here’s what you should do:

1. Understand your obligations: Know what the Fair Work Act and any relevant awards or agreements require.
2. Act promptly: On the day of termination, pay all owed entitlements, including wages, notice, accrued annual leave, long service leave, and redundancy pay.
3. Seek expert advice: If you’re unsure about your obligations, consult with an HR expert or employment lawyer.

Bottom line

Don’t wait until it’s too late. Make sure you’re up to date with your obligations under the Fair Work Act and avoid costly penalties and damages. If in doubt, get advice. Remember, following best-practice guidelines is not enough if you’re not aware of the latest case law.

Stay sharp, know your stuff, and keep your business compliant. Better yet, become an HR Gurus Member, and we can help you stay across this information, you can call us with one of your unlimited calls to check before you act. That way, you can avoid the courtroom and focus on what you do best—running your business.

Written by Managing Partner – Jessy Warn.