Some FAQs about termination payments
21st January, 2016
Many payroll professionals find that the topic of termination payments gives rise to a lot of questions. When do they get paid? Do I have to pay public holidays? How is it taxed? And the big one – why is there an additional eight percent on my outstanding holiday pay amount?
Here are the answers to some frequently asked questions about termination payments.
Q. When do I have to pay my employee’s final pay?
There is nothing in legislation to determine when an employee’s final pay should be processed.
Depending on the Individual Employment Agreement (IEA), the final pay will be either on the last day of employment, or in the next regular pay day, as in, if you are normally paid on a Wednesday and you finish on a Friday, your final pay may be included in the next Wednesday pay run.
Q. Is an employee entitled to upcoming public holidays when they leave?
In some cases, yes they will be. If an employee has enough Outstanding Holiday Pay (that is, entitled days owing from previous years) that takes them up to or past the next public holiday then the employer must pay those public holidays as statutory days not worked.
Example:
Brent has handed in his resignation and will be finishing his job at ABC Co on 18 December. Brent has three weeks Outstanding Holiday Pay owing from previous years that will be paid out on his final day.
As he is being paid the further three weeks after his last day of wages, this technically takes him to 8 January, in which case he is entitled to be paid Public Holiday Not Worked for all of the statutory days for Christmas and New Year.
If Brent had no Outstanding Holiday Pay owing from previous years, his pay would only be up to the 18th, therefore he wouldn’t be entitled to the statutory holidays.
Q. Do I just pay out my employee’s total balance as Days Paid when they are being terminated?
No. Termination pay is made up of two parts:
Outstanding (or Entitled) Days – Any days earned in previous holiday pay years that the employee hasn’t taken as holidays. These will be paid out as days, at the higher of the 52 week average or Ordinary Rate.
Current Year Entitlement – Any days that have been earned since their last holiday pay anniversary. The entitlement for this year is not paid out as days, instead it is paid out as eight percent of all gross earnings for that holiday pay year.
Q. Why is there an additional eight percent on my outstanding holiday pay amount?
Under the Holidays Act any payments to an employee may be cumulative, meaning that any gross payments made to employees are included in the current year’s Gross Paid for purposes of calculating their current year’s 8 percent.
For more information – and a bit of light reading – you can check out the Holidays Act.