Termination Pay - How is it calculated, why can it sometimes be negative?
The calculation of Termination Pay is very different to the calculation of Annual Leave during the course of employment. Firstly, some important points to note.
| Entitled Leave | From the start of your employment, most Payrolls accrue leave on a pay-by-pay basis. This 'accrued' leave is done for the benefit of the Employer (accounting for leave liability) and the Employee (so you know how much leave you have available). After 12 months (and on every anniversary of your start date) the number of days/weeks/hours accrued now becomes Entitled Leave and the accruals start again from zero. |
| Accrued Leave | This is the leave that 'accrues' within your current holiday pay year. As per the above, it is done solely for the benefit of Employers and Employees and is NOT defined in the Holidays Act. |
| Current Holiday Pay Year | This is a rolling period based originally on your Start Date and rolls over each year on your Anniversary. |
| Advanced Leave | This is leave taken from your Accrued balance if allowed by the Employer. An employer is not required to approve the payment of Advanced Leave. It is paid on the same calculation basis as Entitled Leave. You cannot have an Entitled Leave balance and an Advanced Leave balance as an Advanced balance can only exist when there is no Entitled Leave. |
| Public Holidays in the future may be included in Termination Pay | Entitled Annual Leave is extended past the last working day and if a Public Holiday falls within this period, then it must be added to the Termination Pay. For example, if you have 7 days of Entitled Leave and there is a Public Holiday 3 days after your last working day, then you are entitled to be paid the Public Holiday(s). |
| Alternative Leave must be paid out on Termination | If you have an Alternative Leave balance then these must be paid out. These would normally be paid based on the hours worked on your last day of employment - your Relevant Daily Pay. Alternative Leave does not extend Entitled Leave balances. |
| Long Service Leave may be payable on Termination | This will depend on the clause within your Employment Contract. |
| Sick Leave is not paid out on Termination | This is the usual situation but refer to your Employment Contract for any variation. |
| Redundancy Payments | Redundancy Payments are not included in Annual Leave rates as not considered ‘Earnings'. |
| Lieu of Notice Payments are deemed 'Earnings' | These would be taken into account in the final Termination Pay calculation. |
| Termination whilst on Parental Leave | When an employee terminates whilst on parental leave you must set the termination date to the date they went onto Parental Leave. This has the effect of unwinding any Leave that is transferred from Accrued to Entitled Leave within the period. |
| Holiday Pay | Holiday Pay and Annual Leave are the same in respect to this post. |
| Deductions from a Termination Pay | You cannot make non-statutory deductions from an employee's Termination Pay without their written consent. |
| Payment of Termination Pay | Unless stated within an Employment Contract, the final pay must be made within the next normal pay cycle. |
Before explaining the Termination Pay Calculation, it is important you understand how Annual Leave is calculated during the course of your employment as it is fundamental to understanding why Termination Pay may end up being negative.
Leave calculation during Employment
The calculation of your Leave during your working life (regardless if it's Entitled or Accrued Leave) is as follows:
'The greater of your Ordinary Weekly Pay (OWP) compared to your Average Weekly Earnings (AWE), also referred to as your 52 Week Average. If you are unable to determine your Ordinary Weekly Pay, then you must use a 4 Week Average, compare it to AWE, and pay the higher of the two.'
Leave calculation on Termination
Unlike the above calculation, Termination Pay is quite different and has a number of other steps.
- All Entitled Leave is paid at a rate similar to the above calculation (greater of OWP and AWE), plus 8% on top.
- All Accrued hours/days/weeks units are ignored on Termination and the $ calculation is 8% on all Gross Earnings during your Current Holiday Pay Year (since your Entitlement Date) LESS the $ value of any Advanced Annual Leave.
- Plus, 8% of Gross on all other items paid in your final pay, that are liable for Holiday Pay. This will include your final hours, any public holidays payable, any alternative leave, hours in lieu payments etc.
Why is the Termination Pay negative?
Finally, we can answer the question and the reason is two-fold:
- During the year the employee has taken a lot of Advanced Leave, and in many cases, takes all their leave as soon as it accrues. This must be paid based on the Leave Calculation during Employment.
- The calculation on Termination is less complex (8% of Gross LESS any Advanced Leave taken), and because Advanced Leave is deducted on Termination, it can result in a negative figure.
How can we manage negative Termination Pays?
There are two strategies to prevent negative Termination Pays.
- Paying Advanced Leave is solely at the Employer's discretion, there is no requirement to pay it.
- If you are comfortable paying Advanced Leave, put a limit on it, for example, one must always maintain an Accrued Leave balance of 1 Week. This may stop it but we also advise you to let the employee know the repercussions of taking Advanced Leave.