Termination Pay: The Good Bosses' Guide

Crunching the Numbers

Breaking up is never easy, especially when it requires a heap of math. One of the most common questions we hear is "how do I calculate termination pay?"

There are a few things that you'll always need to include in that last pay; the goal is to settle up any extras that the employee is owed.

First, the easy ones:

• Pay out any alternate public holidays
• Pay out any outstanding incentive payments or bonuses

Then comes the tough bit: annual leave.

First, double-check that your leave records are up-to-date so you're working with the right numbers.

Entitled Leave

Pay this as if the employee actually took a holiday. (Remember, the holiday pay rate is either the average hourly/daily rate or ordinary rate over the past 52 weeks - whichever is higher)

Starting from the day after their leaving date, count out the leave days on the calendar. Would that time include a public holiday? If it does, they should be paid out a statutory holiday too.

Then add an extra 8% of the entitled leave to the total.

Accrued Leave

Work out 8% of the employee’s gross taxable income from their last anniversary date to their final day. Add that to the total.

Here's an example:

Tom is leaving. His anniversary date was in September, and since then he’s earned $18,000. Tom’s average hourly rate for the last 52 weeks is $25, and he works a 40-hour week. He doesn’t have any alternate public holidays available, but he has two weeks of entitled leave. His last day is December 1st, so his 2 weeks of entitled leave don't cover a public holiday.

Alternate public holidays = 0

Additional statutory holidays = 0

Entitled leave:
2 weeks = 80 hours
80 hours x $25 = $2,000
8% of $2,000 = $ 160
Entitled leave total = $2160

Accrued leave:
Current year's income = $18,000
8% of $18,000 = $1,440

Total owed: $2160 + $1,440 = $3,600

Don't forget, Tom is entitled to his entire final pay on his last day, or the next normal payday at the latest.

For PaySauce users, the system will take care of this for you - you just have to run a report. Here's an easy guide.

The Bitter End

While nobody wants to end the employee/employer relationship badly, it happens. Here's what you need to know if things get unpleasant.

What if a departing employee owes you money?

You might think it's reasonable to take it out of their final pay. But does the law agree?

The answer is...kind of. There are a lot of hoops to jump through to get your money back without getting in hot water.

• Hoop 1: The employment agreement. Your employee's initial contract needs to say that if they owe you when they leave, you can pull it out of their pay.
• Hoop 2: A current agreement. Even if they gave permission at the start of employment, an employee can give 2 weeks notice in writing that they've changed their mind. So when they hand in a letter of resignation, they might also add a note that they don't want anything taken from their last pay packet.
• Hoop 3: Let them know. If the employment agreement is fine, and the employee hasn't withdrawn their permission, you still need to run it by them. You shouldn't take anything out of their pay without their prior knowledge.

If you use their pay to collect on a debt without their permission, the employee can pursue that money through MBIE or the Employment Relations Authority.

If the amount that your employee owes is more than their entire final pay, you’ll probably have to write off whatever's left of the debt. Its rough, but it's the law.

What if an employee walked off the job without notice?

You had to spend money to get someone else to cover at the last minute. Can you take those costs from their pay?

If an employee leaves their job and doesn’t give the notice required in their employment agreement, you still can’t make deductions or withhold wages or holiday pay unless they've given their written consent. If you think there's a risk, you should include a deductions clause in their employment agreement. Make sure it gives permission to recoup your losses from their wages or holiday pay if they leave without notice. A deductions clause has to meet a few requirements, to make sure that it's fair for both parties.

So, check that:

• You gave them plenty of opportunity to consider the contract and ask for independent advice before signing
• They actually signed the employment agreement!
• Any deductions you take are based on:
  • money you lost as a direct result of your employee failing to work their notice period and
  • the length of the notice period they skipped

Keeping it Legal

Termination pay is one of the biggest causes of disputes taken to MBIE.

What do you do if your employee breaks the law, refuses to leave or accuses you of something? If there are any serious problems, get expert help straight away.

If your employee breaks the rules or does something illegal, your knee-jerk reaction might be to just fire them. Do not dismiss anybody without seeking legal advice. If you do it the wrong way - and it’s easy to get it wrong - you could face a $10,000 fine for unjustified dismissal. Even if you have a really good reason, you'll get in trouble if you don’t follow the correct procedures.

Take a deep breath and step away from the situation. One hasty comment could cost you a lot of money - 84 Kiwi employers paid out personal grievance claims in the back half of 2018, because of "humiliation, loss of dignity, and injury to the feelings of the employee". Document everything, protect any evidence, and think carefully about what action to take. All verbal and written warnings should be carefully recorded.

Before you act, contact MBIE (0800 20 90 20) or find a good employment lawyer. And of course, you can always ask us questions! Head to our contact page , or see MBIE for more info.

 

Looking for more good stuff on employment? Check out our other articles on sick leave, cash-ups and annual leave.