TERMINATING an employee’s employment can be fraught with legal risk. And whether it is a dismissal, a redundancy, a resignation or even retirement, there are certain payments you are obligated to make once the employment contract ceases.
How to calculate these payments can be tricky… But that’s a matter for another day.
Today we look at the ruling the FWC made about the timing for making termination of employment payments, and what the exceptions to this rule may be.
As part of the 4-yearly review of modern awards, a recent decision of the Full Bench of the Fair Work Commission (FWC) considered the appropriate time period for making payments to employees on termination of employment.
In the decision, the FWC recognised that it was unfair to employers to be required to make termination payments at the time of termination or within a few days thereafter.
However, the FWC also stated it was not sufficient for termination payments to be made in accordance with the employee’s usual pay cycle, because an employee may have to wait up to a month to receive their payment.
Payments due upon termination of employment include:
- payments in lieu of notice;
- outstanding salary;
- accrued untaken annual leave and long service leave; and
- in redundancy circumstances, a redundancy payment.
The FWC ruled that modern awards should provide for unpaid wages and all other amounts due to an employee to be paid no later than 7 days after the employee’s last day of employment.
3 exceptions to making termination of employment payments
There are a few exceptions to this rule though:
Payments in lieu of notice
The FWC recognised that an exception may apply for payments in lieu of notice. Section 117(2) of the National Employment Standards (NES) in the Fair Work Act 2009 (Cth) (FW Act) prohibits the termination of an employee’s employment (not including cases of serious misconduct or certain other exceptions) unless you have:
- given the prescribed minimum period of notice; or
- made a payment in lieu of notice before or at the time of termination of employment.
A contravention of s 117(2) is a contravention for which a civil penalty may be imposed.
Accordingly, if you tell an employee you are terminating their employment by a payment in lieu, you need to make the payment in lieu at the time of the termination of employment to avoid exposure to the imposition of a civil penalty.
The FWC also provided some guidance on the operation of s 323 of the FW Act which regulates aspects of the payment by an employer to an employee of amounts payable in relation to the performance of work.
It covers all wage and wage-related amounts due from an employer to one of its employees, regardless of the source of the entitlement. It covers:
- commission payments;
- incentive-based payments;
- monetary allowances;
- penalty rates; and
- leave payments.
Section 323 requires you to pay these amounts to employees no later than 1 month after the entitlement to payment accrues. The payment is to be made by either cash, cheque or EFT.
The FWC also recognised that an exception may need to apply where an employer applies for a full or partial exemption from making redundancy payments under s 120 of the FW Act (on grounds that acceptable employment has been obtained by the retrenched employee).
For example, the FWC should have the power to make an order delaying the requirement to pay redundancy pay until the application for a full or partial payment exemption is resolved.
3 lessons about making termination payments
- Make sure the entitlement to bonuses or commissions is not triggered too early.
For example, some employers may retain amounts of commission earned in case certain unforeseen costs arise that are entitled to be deducted from the gross commission figure. However, once an entitlement to be paid arises, s 323 of the FW Act requires payment within 1 month.
Failure to pay will attract exposure to civil penalties.
- If you wish to terminate the employment of an employee immediately by making a payment in lieu of notice, you need to ensure the payment is made on the last day of employment.
- You have 7 days for all other termination payments
In relation to other termination payments aside from notice payments, DON’T leave making these payments until the usual pay cycle. Award-based employees will need to receive these payments within 7 days of the last day of employment.
Failing to comply with your obligations under a modern award will expose you to legal claims from affected employees, a union representing those employees or the Fair Work Ombudsman (FWO).
The potential maximum fines for individuals is up to $126,000 or up to $630,000 for bodies corporate.
What else do you need to know?
The FW Act requires the FWC to conduct a review of all modern awards every 4 years to ensure the modern awards system is meeting its objective, and it recently completed such a review. Make sure you comply with all the obligations laid out in applicable modern awards.
IMPORTANT: Earlier this year, changes were made to penalty rates for public holidays and Sundays – so make sure you are complying with those if the relevant modern awards apply to your employees.
Click here for access to the Modern Awards chapter in the Employment Law Practical Handbook.