June 23, 2019

A guide to Employment Termination Payments (ETP's)

Updated: 26 January 2022

When an employee leaves your business, you might make a lump sum payment to them.

An employment termination payment, also known as an ETP, is a payment made to an employee when they are leaving your business.

You can pay an employee an ETP simply because they are leaving, or if there is some legal agreement to pay an ETP.

ETP classification

Why does it matter if a payment is called an ETP ?

Employee's pay less tax for an ETP than their regular income. 

In the case of a wrongful dismissal, the amount needs to be paid within within 12 months of the employee's termination to be a valid ETP.

ETP Examples

An ETP includes:

  • Notice payments - payments in lieu of notice;  
  • Unpaid rostered days off (RDO's)
  • 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).

ETP exclusions

And these items below 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 employee's 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 employees to avoid any misunderstandings or disputes. 

Deed of release for ETP's?

A deed of release for an employment termination may set out key terms for finalising an employment relationship including ETPs but you don't always need one.

Release from any future legal claim by an employee is the main reason to have a deed of release in place. 

It's important to note that employee's do not have to sign  deed of release to get paid their legal entitlements because they are exactly that, a legal entitlement that employee has a right to be paid in any event. 

So what exactly is a legal entitlement? I'm glad you asked. 

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

However, if you are paying an employee a 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 employee 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 an employee’s contract has more favourable 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 an employee to sign a deed of release and It’s a good idea to get legal and accounting advice if you are unsure of how to handle a termination or an ETP. 

Be sure to leave. your questions and comments below or contact us if you have any questions. 

About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, Vivian advises Australia's top entrepreneurs on business and employment matters. Clients benefit from Vivian's commercially focussed and pragmatic legal advice, business experience, and commitment to deliver the best quality business legal services to her clients.

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