Payments on Termination of Employment – Employer Obligations

27 May 2024

Many employers continue to operate on the basis that, on termination of employment (for whatever reason) entitlements will be paid ‘in the next pay run’ or ‘in the next 7 days’, but this is not the correct legal approach. And the consequences of non-compliance can be costly…

To illustrate the point, a recent (and complicated) Federal Court decision considered what penalty should follow an employer’s failure to pay annual leave entitlements when employment ends.  The facts are complex but one element of the case was that annual leave was taken but not recorded by the employee and there was a dispute as to what entitlement was owed at termination.

The employer conceded an amount was due, and it was not paid for 3 months post termination. The evidence was the termination itself was stressful for the former employee and he was under financial distress in this time.  There was no dispute that the annual leave due was not paid on termination as required by the National Employment Standards (NES).

The former employee (applicant) sought a penalty for non-payment of this entitlement on termination at 40 – 55% of the maximum to ensure general deterrence to employers at large and specific deterrence for his former employer.  The respondent sought the appropriate penalty which goes ‘not further than considered reasonably necessary to deter contraventions of a “like kind”.’

Despite evidence that the employer had a genuine belief that the applicant had no entitlements on termination, and that there was no intended contravention, in the final analysis the Court considered the size and level of resources of the employer to be relevant to the assessment of penalty.

The penalty awarded for non-payment of the leave when employment ended was $17,000 paid directly to the applicant.

For employers:

Entitlements that are required to be paid when employment ends must be paid, regardless of whether there is a dispute about other employment matters.  For example, in the case of notice of termination we have previously alerted employers that a failure to pay the required notice in lieu before terminating employment is breach of the NES. Steps should be taken to ensure payroll staff are aware of these obligations for all terminating employees.  A failure to pay entitlements when due presents immediate risk which can be mitigated by strict compliance with the Act.

Dorsch v HEAD Oceania Pty Ltd (Penalty) [2024] FCA 484


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