Understanding exactly what you pay superannuation on when termination of employment occurs can be a little confusing and unclear. The rule of thumb is you are required to pay 10.5% company super on an employee’s ordinary times earning (OTE). OTE includes an employee’s ordinary hours of work, commissions, bonuses, allowances, and annual leave.
So, what super do you pay when employment ends? Is super paid on notice periods, redundancy payments, accrued annual leave and long service leave payouts and leave loading?
Firstly, let’s take a look at what an employee termination payment actually is.
What is an employee termination payment?
An employee termination payment (ETP) or “final pay” is a lump sum payment made when a person’s employment ends. Termination could be for reasons such as redundancy, dismissal, resignation, retirement, or death.
The Fair Work Ombudsman states that when an employment relationship ends, the employer must pay:
wages or other remuneration still owing;
payments in lieu of the notice of termination (should the employee not work out their notice period);
accrued annual or long service leave entitlements;
redundancy entitlements (if eligible).
According to the Australian Taxation Office (ATO), ETPs can include:
payments for unused sick leave or unused rostered days off
payments in lieu of notice
a gratuity or 'golden handshake'
an employee's invalidity payment (for permanent disability, other than compensation for personal injury)
compensation for loss of job or wrongful dismissal
genuine redundancy payments
early retirement scheme payments that exceed the tax-free limit
certain payments made after the death of an employee
the market value of the transfer of property (less any consideration given for the transfer of this property).
The ATO says ETPs do not include:
lump sum payments for unused annual or long service leave
the tax-free part of a genuine redundancy payment or an early retirement scheme payment
superannuation benefits (for example, a lump sum or income stream from a super fund)
foreign termination payments.
Is superannuation paid on termination payments?
Generally, termination payments do not include superannuation benefits. Certain termination payments are not part of an employee’s OTE. The ATO says that termination payments for unused annual leave and long service leave are not OTE. In these circumstances, the employer can refuse to pay superannuation.
An exception applies if your employer pays out a relevant notice period (ie payment in lieu of notice), as this becomes part of your OTE. A termination payment made in lieu of notice is considered OTE because it is equivalent to the ordinary amount you would have earned had your employment continued until the end of the notice period.
Here’s a quick table to summarise a few different types of termination payments and whether employers typically must pay super on them.
Termination payments and super eligibility.
Payments in lieu of notice
Unused annual & long service leave
Annual Leave Loading (for unused annual leave)
Unfair dismissal payments
For further information around what you pay superannuation on click here: List of payments that are ordinary time earnings.
How can Essential HR help?
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To learn more how we can assist your workplace stay up-to-date and compliant by visiting our website at: www.esshr.com.au.