Final account construction: Everything about final settlement

When an employee is leaving your business, you have to calculate the final settlement. In this article, we will explain everything you need to know. As an employer, it's your responsibility to ensure everything is in order when employees leave your business.

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- 5 min read

When an employee is leaving your business, you have to calculate the final settlement. In this article, we will explain everything you need to know. As an employer, it’s your responsibility to ensure everything is in order when employees leave your business.


What is final settlement?

Final settlement, also called final pay, is what an employer owes an employee when their employment ends. The final settlement involves paying out holiday pay and salary when an employee resigns.

Employees are entitled to a final settlement in the following situations:

  • Resignation by the employee
  • Termination of employment by the employer
  • Temporary employment with an expired contract
  • Retirement

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Payments for final settlements

When an employee quits, you should make sure that they get the following entitlements in their final pay:

  • Outstanding wages for hours the employee has worked. You have to include extra pay for working at particular hours (such as evenings, weekends or public holidays) or special allowances.
  • If the employee has vacation days left, they should be paid out. This includes extra if they usually get more money during vacations.
  • If an employee has been working a long time, you might have to pay them for some extra leave that they did not take.
  • If you did not give the employee enough notice before they had to stop working, you might have to pay them for the equal time.
  • If the role of an employee becomes unnecessary at the workplace, they could receive additional compensation known as a severance package.

Sometimes, when someone stops working for a company, the government might ask you to fill out a paper called an “Employment Separation Certificate.” This paper should have details about the last payment the person gets when they leave. If you want to know more about how to give or get these certificates, you can check the Services Australia website.


When the employee finishes with holiday days left

When someone finishes their employment, it is important to make sure they get paid for any unused vacation days. The employee should receive at least their regular pay for the hours they would have normally worked during the vacation, up to 38 hours a week, unless their award, agreement, or contract says they should get more. However, the regular pay usually does not cover extra payments like penalties, allowances, overtime rates, or bonuses. Some awards might require paying the regular rate instead of the base rate. Some employees might already receive an annual salary or a comprehensive hourly rate that includes vacation loading, and in such cases, it doesn’t need to be paid separately.

The details about whether vacation loading is part of the salary or hourly rate should be mentioned in the employment contract.


Check if sick leave needs to be paid

Usually, when someone leaves their job, you do not have to pay them for unused sick leave. But there are some cases where you might need to.

If it is allowed in their award or agreement, and a few conditions are met:

  • There should be a written agreement saying the leave can be paid instead.
  • The employee must have at least 15 days of unused sick or carer’s leave left after they get paid.
  • They should be paid the full amount they would have received if they actually took the leave.

If the employee does not meet these criteria, you do not have to pay for unused sick and carer’s leave. However, there might be exceptions depending on the employee’s awards. Some awards have specific rules that might not fit the conditions mentioned above.


How to calculate salary for the final pay

To know how much you must pay, you should check the award that applies to the specific employee and their job classification. This will give you the minimum pay rate. However, if there is a registered agreement or employment contract, the base pay might be higher,

The final payment can be at the base rate or the employee’s usual pay rate, depending on the award, agreement or contract. Most awards outline the rules for payments when someone leaves, whether it is at the base rate or not. They also specify when this final payment should occur.


Final pay for long service leave

Employers might get long service leave based on their award or agreed-upon terms, but in most cases, it comes from the state or territory’s long service leave laws. These laws spell out a few important things: how long someone has to work at a company before they can take long service leave, the payment for long service leave when they leave the job, and how the duration and payment rate for long service leave are figured out.

Calculating long service leave depends on where you work, like the state or territory, and the rules that apply there. You have to check the law, called the Act, for the place where you work.

Let’s look at some examples. In New South Wales, after 10 consecutive years of work, employees are entitled to approximately 8.67 weeks of long service leave. After the first 10 years, for every extra five years they work, they get another month (about 4,33 weeks). In Victoria, rules may vary, and employees could qualify for long service leave after seven continuous years of work.


When to pay final settlement

Upon leaving a job, individuals should be compensated for all worked hours. This includes extra pay for unconventional hours or special allowances.

In Australia, employers are generally required to provide the final paycheck to departing employees within 7 days. This timing can also be mentioned in the employer contract, enterprise agreement or other registered agreements. Typically, the final salary should be paid within 7 days of the employee leaving, unless otherwise specified.