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A contract of employment may end for different reasons. For instance, you might lawfully terminate an employee, or your employee might voluntarily resign. Generally, you must pay out your employee’s accrued entitlements upon termination. Sometimes, these payments can include leave loading. This article will understand the rules regarding final pay and will outline:

  • leave loading;
  • your employee’s entitlements upon termination; and
  • other relevant factors when terminating employment, including notice periods.

If you are unsure about paying out your employee upon termination, it would be wise to seek legal advice.

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What Is Leave Loading?

In short, leave loading is a payment your employee may be able to claim in addition to their annual leave entitlements. For example, under the National Employment Standards, all employees (excluding casuals) may have an entitlement to four weeks of paid annual leave for each year they work for you. Furthermore, a modern award, enterprise agreement or employment contract may provide your employee with an entitlement to leave loading.

Ultimately, the rate of leave loading will depend on what the relevant award, enterprise agreement or employment contract prescribes.

Typically, employers will calculate the loading at 17.5% of your employee’s usual wages.

In other words:

Leave loading = 17.5% x Normal Weekly Pay x Number of Weeks of Leave.

Paying Leave Loading Upon Termination

Under the Fair Work Act, you must pay out all entitlements your employee accumulates before their termination. For example, if you terminate your employee, but they still have unused annual leave and leave loading entitlements, you must transfer these entitlements in their final pay.

If you terminate your employee, you must pay out their leave loading at the rate you would have done so had your employee taken that period of annual leave. For example, say your employee is entitled to 17.5% leave loading under a modern award. If your employee has accumulated 40 hours of leave loading, but you terminate their employment, you must pay out for their 40 hours of leave loading at 17.5%.

However, there may be instances where you do not have to pay out leave loading separately upon termination. This is because your employee might earn an annual salary that includes loading. It would be wise to clarify your final pay obligations by checking your employee’s employment contract or seeking advice from a lawyer.

Generally, if you pay your employees leave loading during their employment, you will also be required to pay this upon termination.

Final Pay Entitlements

Final pay refers to any outstanding entitlements you must pay your employees upon termination. Depending on the relevant award, enterprise agreement or employment contract, final pay includes:

  • any outstanding wages;
  • accumulated annual leave and leave loading;
  • payment in lieu of notice (if they are not working out their notice period);
  • long service leave (if applicable); and
  • redundancy pay (if applicable).

However, you should note that your employee’s accumulated personal leave is not payable upon termination. 

Most awards require you to pay your outgoing employee their final pay within seven days of their employment ending. However, this timeframe is subject to change depending on the award or enterprise agreement covering your employees.

Notice of Termination

You must provide your employees with notice before you terminate their employment. Similarly, in the instance where your employee resigns, they must provide you with notice.

A notice period is the length of time that you or your employee must provide the other party to end employment.

The relevant award, enterprise agreement or employment contract will typically outline the requirements for notice periods. However, the National Employment Standards provide the minimum notice periods when terminating an employee. These periods are listed below.

Your Employee’s Period of Continuous ServiceMinimum Notice Period
One year or lessOne week
More than one year but less than three yearsTwo weeks
More than three years but less than five yearsThree weeks
More than five years Four weeks

You should note that in addition to the notice periods above, you must give an extra week of notice if your:

  • employee is aged 45 years or older; and
  • has worked for you for at least two years.

Deductions to Final Pay

If your employee is resigning and fails to provide you with proper notice, you may receive an entitlement to deduct a particular amount from their final pay. This can deter outgoing employees from giving you little to no notice. However, you can only deduct pay if an employee’s award or agreement allows you to do so. 

In any event, you should seek legal advice before you make any deductions to your employee’s final pay.

Key Takeaways

Leave loading is an additional payment that your employee may be able to receive in addition to their annual leave entitlements. You must pay out any accumulated leave loading in your employee’s final pay. Additionally, you should pay any:

  • outstanding wages; 
  • annual leave; and
  • if applicable, long service leave, redundancy pay and payment in lieu of notice. 

If you have questions regarding final payments, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Are all employees entitled to leave loading?

Unlike annual leave, which all employees, excluding casuals, are entitled to under the National Employment Standards, not all employees are entitled to leave loading. Therefore, your employees’ leave loading entitlements will only exist if the relevant award, enterprise agreement or employment contract prescribes it.

What is payment in lieu of notice?

Once you give your employee notice of termination or they provide you with notice of their resignation, they can either work until the end of the notice period; or you can pay them in lieu of them working out their notice period. 
This is called ‘payment in lieu of notice.’ It is an amount you would have been liable to pay your employee had they continued to work for you until the end of the notice period.


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