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Business Tax Tips – Terminations

images/Business Tax Tips.PNGTermination pays will be different according to the circumstances involved. Always check the award or workplace agreement of the employee and the National Employment Standards to ascertain how the legal obligations will apply to each termination.

There are 2 main groups of terminations

  1. Common/Usual Terminations can be straight forward, such as where the employee resigns and gives notice; they are simply paid out any unused annual leave or unused long service leave. (THIS article)
  2. Complex/ETP Terminations can be more complex where it involves an employee’s retirement, death, dismissal or redundancy; these situations may involve a lump sum “employment termination payment” or ETP. ETP payments are taxed differently. (NEXT month’s article)

All the Types of Terminations

  • Resignation
  • Retirement – employee reaches a certain age, although an employer cannot force retirement in the current law
  • Invalidity – terminates employment due to ill health (employee must have 2 medical certificates to prove invalidity)
  • Abandonment – employee does not return to work and provides no explanation
  • After 3 days of no contact it is considered resignation without notice (dependent on Award)
  • Dismissal
    • Dismissal with notice – employers must give minimum period of notice
    • Summary dismissal – employee dismissed on the spot for serious misconduct (immediate, in lieu of notice)
    • Constructive dismissal – employee resigns after threat of dismissal
  • Fixed Term Contract – contract ends
  • Redundancy – employee’s position is no longer required by the employer
  • Early Retirement Scheme – employers offer employees incentives to retire early or to resign due to reorganising the business. The scheme must meet 3 conditions:
    • Scheme is available to a broad group of employees
    • Scheme is implemented due to reorganising the business
    • Scheme is approved by the Commission of Taxation

Notice of Termination

If an employer is terminating an employee’s employment, proper written notice must be given. The period of notice will be dependent on the period of service.
The below table outlines the minimum period of notice required.

images/Termination Period Notice.JPG

Payment in Lieu of Notice

Pay in lieu of notice is an option that the employer has when an employee terminates work. This is where the employer allows the employee to leave at the time of resignation and not work out their notice period (as per above table). Payment in lieu of notice must be at the full rate of pay for the hours the employee would have worked had the employment continued until the end of the minimum notice period. Superannuation is payable on in lieu of notice payments.

Deduction of Payment In Lieu of Notice from Final Pay – refusal to work notice period

Deduction of payment in lieu of notice occurs when the employee resigns, and refuses to work out their notice period, or chooses to only work part of the notice period. The employer can withhold the value of the notice period required from the final pay.

The employee is required to discuss with their employer whether they can work less than the notice period allowed. If the employer agrees, then there is no issue – best practice however is to put this in writing. The employer can disagree to the early finish, and is not required to give a reason for refusal to accept the employee’s request to leave earlier, however possible reasons could be:

  • Busy time of the year (e.g.: retail position at Christmas) and unable to find replacements;
  • May be in the middle of a project;
  • May not want them leaving too soon due to type of work, and possible issues with taking clients, etc.

If this happens and the employee decides to finish early, most awards advise that an employer can deduct up to one week’s wages from an employee’s final pay for wages owing, providing they meet the following criteria:

  • Employee is over 18;
  • Employee has not given the correct notice under the award;
  • The deduction is not unreasonable.

Next month we look at complex terminations with ETP, Redundancy etc

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