Understanding the many complexities of paying employees at termination

Termination can be messy, least of all what is owed to a departing employee under the Holidays Act 2003. At Payroll Intelligence we have to talk in plenty of technical terms in order to make sure such payments are being carried out in accordance with the complex legislation.

We often have to articulate these very complex principles into easy to understand ways. Below, we have documented these key principles in such a way that users of all levels should be able to understand what’s required and how to avoid a chain reaction of underpayment (if it hasn’t started already).

1. Pay out the Remaining Balance of Entitlement.

This is the biggest one. If you have watched Payroll Intelligence’s video on Annual Holiday Entitlements you will be familiar with how these stack up like ‘monopoly’. What you are paying in this first component is essentially that stockpile of leave that has been steadily arising by at least four weeks, every time 12 months of continuous employment has been completed.

Here’s the first bit of bad news: if that balance that is meant to be in weeks is actually being shown in your payroll tool as days or hours, you are - in a legislative sense - dead on arrival. This is where someone’s bad procurement decision of what payroll tool to use, comes back to haunt you. Equally bad but slightly less terminal is if your system has been steadily accruing little bits of leave each pay period. Don’t worry what your payroll company’s little phone app says - Annual Holiday only goes up once a year, so be careful you don’t pay out more weeks than what’s truly owed.

Those weeks are payable at whatever’s largest of AWE and OWP. We won’t dwell on the acronyms, your payroll tool should be on top of that much - but if it’s already making those other mistakes then there’s no guarantees.

It’s at this stage we can carve out a group of employees who are owed no entitlement. Because:

Their entitlement to Annual Holidays was met by 8% PAYG, i.e. “casual” employees.
The employee is leaving before they’ve become entitled to their four weeks i.e. within their first 12 months.
The employee has taken entitlement in advance and essentially gone into overdraft.

We’ll come back to these people.

Payroll Intelligence offers an assisted payroll service called Tempus. Employers who partner with Tempus have their employees’ balances of Annual Holiday Entitlement arising and deducting correctly, and in lawful units of measure. There is no compromise on this, even the most complex rosters have balances rise and fall in line with legislation.

2. Paying out Alternative Holidays.

This won’t apply to all employees, only those who have worked Public Holidays. Those are measured in days and you will choose whether to pay in Average Daily Pay or Relevant Daily Pay. Again, be careful not to pay ‘8 hours’ of these; what the day was worth when the employee earned this day could be very different to what’s owed now that you’re paying it.

What’s the difference between Days in Lieu and Alternative Holidays? It is easy to trip over your language here, because the old fashioned label for an Alternative Holiday is often “Day In Lieu”. Your organisation may have a Time Off In Lieu (often known as TOIL) arrangement and this balance may or may not be payable at termination, depending on the agreement. But what definitely is payable are any Alternative Holidays.

3. Paying out any Notional Public Holidays.

This is trickier to explain. If your employee is one of those we carved out earlier as having no entitlement, you can skip this section.

For all others: you essentially have to plot the Annual Holiday Entitlement and see if it would overlap any Public Holidays that are also an Otherwise Working Day. We’re deep in the Holidays Act 2003 with this one, but here’s a simplified version:
If an employee finishes on 1 April and has four weeks Annual Holiday Entitlement, you will likely have to pay them for Good Friday, Easter Monday, and ANZAC Day.

Payroll software that gets marketed as “compliant” is like riding in a “safe” car. It’s a nice marketing buzzword, but there are no real guarantees in the technology or its human pilot. At Tempus, globally-sourced technology executes payments that are overseen by leading experts on Minimum Entitlements under the Holidays Act 2003.

4. "8%" of Gross Earnings Since Last Entitlement Arose.

You need to add up all the Gross Earnings since the employee’s last Entitlement to Annual Holiday arose i.e. if they have quit after 18 months, we’re interested in what the Holidays Act 2003 defines as Gross Earnings between months 13-18 and we’re going to find 8% of that value.

Hint: if the employee has worked for you for less than 12 months, this will pretty much mean 8% all of their earnings.

Remember, what they’ve earnt since that Entitlement last arose also includes payments for the points above; their balances of Annual Holiday Entitlement, Alternative Holidays, and Notional Public Holidays. You have to make those payments AND a further 8% on top again - keep that in mind when you next look at their leave balances.

5. Cash Value of Entitlement Taken In Advance.

This is the most complex of the lot, but it is where the ‘Employer Strikes Back’. All these entitlements and monies flowing out to the employee, here’s where the employer may be able to balance some of the equation.

Keep it simple: an employee has been with you for less than 12 months. They have taken Annual Holiday Entitlement before the Entitlement itself had actually arisen; their balance of leave entitlement essentially went into overdraft. Whatever the cash value(s) of those payments were; the employer gets to deduct it from the termination payment.

Even simpler? The Holidays Act 2003 basically tries to hit the reset button, and treat any part year as if it were “casual”. The law doesn’t treat the part year by trying to award part of four weeks (hence why there’s no such thing as Accruing leave balances), instead it settles the whole ordeal by recalculating things on a cash basis, as if the employee were ‘casual’ during that broken part-year. You have already carried out the 8% calculation above, now it’s simply allowing you to offset that final answer by any cash that was - for lack of a better term - paid before it was owed.

Remember, if you’re an employer and you’re going to exercise your right to claw back this cash value of Annual Holiday taken in advance, you need to be very sure of those earlier Annual Holiday payments. I.e. when John Doe took that initial holiday shortly after he started, did you pay him correctly in the first place? Don’t be afraid to exercise your right to this money, but don’t be naive that a John Doe employee may not understand (or like) this, and if they’re exiting anyway they may just get the whole process independently reviewed. How squeaky clean are you, really?

Conclusion.

Payroll Intelligence is here to help people at a variety of junctions, and we proudly make this expert content available to anyone who seeks free guidance. But there is little point in an organisation carrying this specialist knowledge in-house: by the time your payroll officer re-reads this as a refresher when your next employee leaves, it would have been quicker for our Tempus team to take this off your hands. If your organisation has better things to do than payroll, we would be happy to talk. Payroll by Tempus: It’s a matter of time.

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