Recent decisions in the Federal Court have clarified the timing requirements for an employee’s final pay and the applicable penalties for non-compliance.
The Federal Court may fine an employer up to $66,000 for failure to pay accrued but unused annual leave on or before the date of termination or for failing to make payment in lieu of notice (where applicable) prior to termination.
Accrued but unused annual leave
Accrued but unused annual leave (including annual leave loading) must be paid to an employee on or before the date of their termination.
The Fair Work Act 2009 (Cth) provides that all accrued but unused annual leave must be paid to an employee ‘when’ their employment ends.
In the recent Federal Court decision of Dorsch v HEAD Oceania Pty Ltd (Penalty) [2024] FCA 484 this was interpreted as meaning on or before the date of their termination.
In that case, Mr Dorsch complained that his employer did not pay his accrued annual leave balance of $8,022.82 until approximately 3-months after the date of his termination.
The Court found that Mr Dorsch had suffered financial distress following his dismissal and noted that payment of accrued but unused annual leave often provides a financial buffer for employees in the wake of their termination and loss of ongoing wages.
The Court stressed the obligation for large, well-resourced organisations to be capable of ascertaining their legal obligations and stated that ignorance (including mistaken belief) in relation to the law is no excuse for non-compliance.
The employer was ordered to pay a pecuniary penalty of $17,000 (25% of the maximum penalty) to Mr Dorsch for its contraventions of the Fair Work Act 2009 (Cth).
Payment in lieu of notice
Payment in lieu of notice must be made before the employment terminates.
The Fair Work Act 2009 (Cth) prohibits an employer from dismissing an employee unless they have given the minimum required notice or made payment in lieu of that notice.
The Federal Court’s decision in Southern Migrant and Refugee Centre Inc v Shum (No 3) [2022] FCA 481 provides that notice (or payment in lieu of notice) is a “mandatory prerequisite to lawful termination”.
In that case, Ms Shum had been terminated with immediate effect and received her payment in lieu of notice 4 days later.
The Court held that because Ms Shum had been paid ‘after’ her employment came to an end, her employer had contravened its obligations under the Fair Work Act 2009 (Cth).
The matter was referred back to the Federal Circuit and Family Court of Australia for consideration of a possible penalty and an order for compensation be paid to the employee.
How to ensure you are compliant?
In practice, the best course of action may be to issue all amounts in an employee’s final pay at the same time:
- before the employee’s final day if they have been given notice of termination; or
- just before they are given a termination letter if they are not being given any notice of termination.
Employers should coordinate closely with their payroll teams to ensure that all relevant payments can be calculated and processed within the applicable timeframes.
Of course, discussions with the payroll team should be confidential to avoid prematurely communicating your decision.
If you require any further information, please get in touch with our employment law team.
