Every time an employee leaves, whether they resign, are dismissed, are made redundant, or finish a fixed-term contract, you have a legal obligation to pay out their final entitlements correctly and on time. That final payment is not discretionary and it is not one fixed amount. It is made up of whatever wages, leave, notice and redundancy entitlements the law says that particular employee has accrued, which depends on their length of service, their contract, and any modern award or enterprise agreement that covers them.
Getting it wrong is not a minor payroll annoyance. Underpaying final pay breaches the National Employment Standards (NES) in the Fair Work Act 2009 (Cth), exposing you to Fair Work Ombudsman (FWO) investigation, civil penalties that increased substantially in 2024 and 2025, and, for intentional underpayments, criminal prosecution from 1 January 2025. This guide sets out who these obligations apply to, what you must include in a termination payment, when it must be paid, how tax and superannuation apply, and the consequences of getting it wrong.
Who has to get this right
The NES apply to all employees in the national workplace relations system, regardless of any award, enterprise agreement or contract, so nearly every Australian employer has these obligations. The Fair Work Ombudsman describes notice and redundancy pay as part of the NES that apply across the board, and the same is true of final wages and annual leave payouts.
A few thresholds change what you owe, so it pays to know where you sit:
- Small business employers: generally exempt from redundancy pay where the business has fewer than 15 employees at the time notice of termination is given. When counting, include all employees, including the employee being dismissed and anyone else being dismissed at the same time, count casuals only if they work on a regular and systematic basis, and treat associated entities as a single employer.
- Employees with less than 12 months continuous service: not entitled to redundancy pay, and casual periods do not count towards that service.
- Casuals, fixed-term and seasonal workers, and employees dismissed for serious misconduct: not entitled to NES notice of termination or redundancy pay.
- Awards and enterprise agreements: can set higher standards, such as more generous redundancy pay, extra notice, or a shorter deadline for final pay, and you must meet whichever standard is more favourable.
The components of a termination payment
What you must pay depends on how the employment ended and what the employee has accrued. These are the components that make up a lawful final payment.
Final wages and lawful deductions
Pay all wages, allowances and loadings for work done up to and including the final day, including authorised overtime that has not yet been paid. Wages must be paid in full: under s 323 of the Fair Work Act 2009 (Cth), amounts owed for work performed must be paid in money, and deductions are only permitted in the limited cases set out in s 324. A deduction is lawful only if it is authorised in writing by the employee and is principally for the employee's benefit, is authorised by an enterprise agreement, is authorised by a modern award or an order of the Fair Work Commission, or is authorised by a law or court order.
There is one common exception to watch. The Fair Work Ombudsman notes that an award or enterprise agreement can allow you to withhold part of final pay when an employee resigns without giving the notice their instrument requires. Outside that specific situation, treat any deduction with suspicion and get advice before applying it.
Notice or payment in lieu of notice
You must give written notice of the day of termination, and the notice period must be at least the NES minimum, which is based on continuous service:
- 1 year or less: 1 week
- more than 1 year up to 3 years: 2 weeks
- more than 3 years up to 5 years: 3 weeks
- more than 5 years: 4 weeks
- employees over 45 with at least 2 years of service: an extra week
If you decide the employee will not work out their notice, you must pay them instead, and the payment in lieu of notice must be at least what they would have earned had they worked the full notice period. The Fair Work Ombudsman is clear that this is calculated at the employee's full pay rate, including incentive-based payments and bonuses, loadings, monetary allowances, overtime and penalty rates, and any other separately identifiable amounts. Payment in lieu of notice is also subject to a strict deadline, which we cover below.
Accrued annual leave
Unused annual leave must be paid out on termination. Under s 90(2) of the Fair Work Act 2009 (Cth), the payout must equal the amount that would have been payable had the employee taken the leave during employment. That means annual leave loading must be included if the employee would have received it while taking leave, and the Fair Work Ombudsman confirms this applies even where an award, enterprise agreement or contract says it does not. Sick and carer's leave, by contrast, is never paid out when employment ends.
Long service leave
Long service leave comes from state and territory legislation, not the NES, and the rules differ by jurisdiction. Employees may be entitled to a payout of unused long service leave on termination once they meet the eligibility thresholds in their state or territory, and some states provide pro rata entitlements after a number of years of service. Because the calculation and eligibility rules genuinely vary by location, check the legislation for the state or territory where the employee works, or take advice, before finalising the figure.
Redundancy pay
If the employee's job is genuinely redundant and they are eligible, you must pay redundancy pay under s 119 of the Fair Work Act 2009 (Cth), in addition to notice and the other components above. The amount is based on continuous service:
- at least 1 year but less than 2: 4 weeks
- at least 2 years but less than 3: 6 weeks
- at least 3 years but less than 4: 7 weeks
- at least 4 years but less than 5: 8 weeks
- at least 5 years but less than 6: 10 weeks
- at least 6 years but less than 7: 11 weeks
- at least 7 years but less than 8: 13 weeks
- at least 8 years but less than 9: 14 weeks
- at least 9 years but less than 10: 16 weeks
- at least 10 years: 12 weeks
Redundancy pay is calculated at the employee's base rate of pay for ordinary hours, which excludes bonuses, loadings, monetary allowances, overtime and penalty rates. The exemptions set out above apply, most importantly the small business exemption and the 12 month service requirement. A dismissal only counts as a genuine redundancy under s 389 if the job is no longer required to be done by anyone due to changes in the operational requirements of the business, and you have met any award or agreement consultation obligations; if it would have been reasonable to redeploy the employee, the redundancy is not genuine. Under s 120, the Fair Work Commission can reduce or remove redundancy pay where you have obtained other acceptable employment for the employee or genuinely cannot pay.
When final pay is due
There is no single universal deadline for final pay in the Fair Work Act 2009 (Cth), so the starting point is your award or enterprise agreement. Most awards require final pay within 7 days of the employee's last day of employment, and the Fair Work Ombudsman says you must follow whatever your award or agreement provides. Where the NES requires an entitlement to be paid sooner than the award does, the NES wins.
If nothing in your award, agreement or contract sets a timeframe, the Act requires you to pay at least monthly, but best practice, as the FWO puts it, is to pay final pay as soon as possible after employment ends, for example in the next pay cycle, and without unreasonable delay.
One deadline is absolute. Payment in lieu of notice must be paid before or on the day of termination, not on the next pay run. Missing it is a straightforward contravention of the NES.
Tax and superannuation on termination payments
Each component of a termination payment is treated differently for tax and super, and misclassification is a common source of underpayment claims.
Tax treatment
For tax purposes, each component of a termination payment falls into one of the following categories:
- Ordinary wages and payment in lieu of notice are taxed as normal income through the payroll, using PAYG withholding.
- Unused annual leave and long service leave paid on termination are lump sum payments, reported separately (as lump sum A or B on the income statement), and are not employment termination payments.
- Genuine redundancy payments are tax-free up to a limit that grows with years of service: a base amount plus an amount for each completed year of service, indexed each 1 July. The Australian Taxation Office explains that anything above the tax-free limit is an employment termination payment (ETP), taxed at concessional rates up to a cap, with the excess taxed at marginal rates.
- A payment is not a genuine redundancy, and is instead taxed wholly as an ETP, where the employee leaves voluntarily, ends a fixed-term contract, has reached age pension age, or is dismissed for disciplinary or performance reasons.
ETP caps and concessional rates change over time and interact with the employee's other income, so confirm the treatment with your accountant or tax adviser before finalising any redundancy or ETP amount.
Superannuation
Superannuation guarantee (SG) is payable on ordinary time earnings up to the termination date. The ATO's ordinary time earnings guidance draws three clear lines for termination:
- Unused annual leave, annual leave loading and long service leave paid on termination are salary and wages but are not ordinary time earnings, so no SG is payable on them.
- Payment in lieu of notice is ordinary time earnings for all termination reasons, so SG is payable on it at the current rate of 12 per cent (in force from 1 July 2025). On a $10,000 payment in lieu of notice, that is $1,200 of super.
- Redundancy payments, employment termination payments and other payments made in consequence of the termination are not ordinary time earnings, so no SG is payable on them.
The payment in lieu point catches many employers out, because super is payable on it even though it is not paid for work actually performed. Payroll software does not always get this right, so check how your system classifies each component.
What happens if you get it wrong
The FWO can investigate underpayments, issue compliance notices requiring you to calculate and repay amounts, and take you to court. The consequences have escalated sharply in recent years, as the FWO explains:
- Higher civil penalties: for underpayment-related contraventions by non-small business employers (15 or more employees), the maximum penalty can now be the greater of three times the value of the underpayment or the applicable penalty unit amount.
- Serious contraventions: where a contravention of the NES, award or record-keeping obligations is knowing or reckless, maximum penalties are multiplied by five for businesses with 15 or more employees.
- Criminal exposure: from 1 January 2025, intentionally underpaying wages or entitlements, including superannuation, is a criminal offence, with fines, imprisonment or both. Honest mistakes are not covered, and small businesses that comply with the Voluntary Small Business Wage Compliance Code cannot be referred for criminal prosecution.
Separately, getting the termination itself wrong, for example dismissing without proper notice or without a genuine redundancy, can expose you to unfair dismissal and general protections claims in addition to the underpayment issues.
A final pay checklist for every exit
A consistent process is the best protection. Work through these steps for every departure:
- Reason and date: confirm the end date, the reason for termination, and whether notice will be worked or paid out.
- Instruments: identify the applicable award or enterprise agreement and check the contract for extra entitlements or deadlines.
- Wages: calculate outstanding wages, allowances, loadings and overtime to the final day.
- Notice: apply the NES minimum notice, and if paying in lieu, pay the full rate by the day of termination.
- Annual leave: pay out unused annual leave, including leave loading where it applies during employment.
- Long service leave: check the state or territory rules for the employee's location, including any pro rata entitlement.
- Redundancy: confirm the redundancy is genuine, check the small business exemption and service requirements, and apply the correct scale at base rate.
- Deductions: only deduct where s 324 permits, and document the basis.
- Tax and super: classify each component for PAYG and lump sum reporting, and pay SG at 12 per cent on ordinary time earnings components, including payment in lieu of notice.
- Paperwork: issue the final payslip with a breakdown and a termination letter, and keep your calculations on file.
When to bring in a lawyer
Most straightforward exits can be handled with care and a good checklist, but a few situations genuinely warrant advice before you pay:
- negotiated separations and deeds of release, where the payment structure affects tax and ETP treatment
- senior executives with bespoke incentives, bonuses or share arrangements
- dismissals that are contested or where the redundancy is not clearly genuine
- insolvency situations, where the Fair Entitlements Guarantee may be involved
- any deduction you are unsure about, or any FWO inquiry or compliance notice
A lawyer can check the interplay between the NES, your award or agreement and the contract, calculate the entitlements, review the lawfulness of deductions, draft the termination documents, and coordinate with your accountant on the tax treatment of any ETP or redundancy component.
The payment in lieu of notice trap
If there is one part of a termination payment to double-check, it is payment in lieu of notice, because it carries two obligations that are easy to miss. It must be paid before or on the day of termination, not on the next scheduled pay run, and unlike unused leave and redundancy payments, it attracts superannuation at 12 per cent. Pay it late and you have breached the NES regardless of the amount; skip the super and you have an SG shortfall on top. Before your next exit, check what your payroll process does when someone leaves and confirm that a payment in lieu is scheduled for the termination date itself, with super calculated on it. That single check removes the most common source of final pay disputes.