June 23, 2019

Employment termination payments & legal requirements

Updated: 2 December 2019

On termination of employment, you'll likely pay your workers an employment termination payment (ETP).

You may pay a worker an ETP simply because they are leaving, or if there is a settlement amount for the termination. 

For example, a deed of release is given to a worker when on termination because there may have been a dispute leading up to the termination.

In this article, I am going to use ETP instead of employment termination payment for brevity.

Why does the meaning of an ETP matter?

The ETP tax is lower than the tax for a worker’s normal income (if paid within 12 months of the worker’s termination) so workers will be checking to make sure their ETP tax is correct.  

These are all ETPs

An ETP includes:

  • Notice payments - payments in lieu of notice;  
  • Genuine redundancy payments or early retirement scheme payments (that exceed the tax free limit)
  • Compensation for loss of job or wrongful dismissal

ETP's may also include: gratuity or ‘golden handshake’.

Although not a common term these days, a golden handshake is a payment that’s given to someone for retiring early and unpaid sick leave (though this is not common).

Not an ETP

And these items are not ETP’s: 

  • Lump sum payments for unused annual or long service leave 
  • Tax free part of a genuine redundancy payment
  • Superannuation benefits
  • Foreign termination payments.

You can also learn more about how ETP’s are taxed on the Australian Taxation Office website. 

Employer obligations

Employers must give workers’ pay slips showing a breakdown of any payment made to them.

And ETP’s are no different. It’s important to provide a breakdown to workers to avoid any misunderstandings or disputes. 

Deed of release for ETPS?

A deed of release for an employment termination may set out key terms for finalising an employment relationship including ETPs. 

Release from any future legal claim by a worker is the main reason for a deed of release. 

Now, workers do not have to sign a deed of release to get paid their legal entitlements.

Legal entitlements include notice pay, sick leave and annual leave and long service leave. 

However, if you are paying a worker an ex gratia payment (an extra payment thats not legally required), in this case, the entitlements and ex gratia payment can both be set out in the deed of release. 

If the worker signs the deed of release, they get the ex gratia payment, if they don’t, then they won’t get paid anything more than their legal entitlements.

Contract vs Fair Work Act minimum entitlements

If a worker’s contract has more generous entitlements for example, extra notice than the Fair Work Act, then those entitlements apply and must be paid. 

You can read more about the relationship between contracts and Fair Work legislation requirements here

Finally, you cannot force a worker to sign a deed of release and It’s a good idea to get legal advice if you are unsure of how to handle a termination or an ETP. 

I wish you every success in your ventures!

Questions? Comments? Leave them below.


About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, CPA and owner of a business consultancy, Vivian is well-positioned to advise Australia's top entrepreneurs. Entrepreneurs benefit from Vivian's commercially focussed legal advice, business experience, and commitment to deliver the best quality business legal services to entrepreneurs.

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