Termination Pay Runs

Termination During a Pay Period

If an employee's employment terminates before the end of a pay period, do not include them on the Normal Pay for that pay period.

Doing so would set the employee's Last Paid To date to be the end of that pay period and thus prevent you from entering an earlier date as a Termination Date.

All payments for a partial final pay period are to be entered onto the Termination Pay Run.

An employee with leave accrual entitlements is entitled to accrue leave on any ordinary time earnings hours (e.g. Standard Hours) worked during a partial final pay period.

If unused leave balances are being paid out, the Termination Pay Run will automatically calculate the partial accrual and add it to the unused leave payout figure.

If you terminate an employee without the required notice period, it is important that you use the Payment In Lieu of Notice allowance type rather then enter additional Standard Hours.

This will ensure that the payment is reported correctly to the ATO and prevent the employee accruing additional leave on incorrectly entered Standard Hours.

Is a Termination Pay Run Always Required?

A termination pay run is required if the employee has been included on a pay run in the current tax year, even if there are no payments or unused leave balances to be paid.

This is so that an STP submission is sent to the ATO to change the status of previously reported data for the current tax year to "Final" and to report the Termination Date and Termination Reason. It also generates a termination pay advice for the employee.

The termination pay run will automatically set the employee's status to "Terminated" and clear any leave balances (whether paid out or not) in Marlin HR, as well as in the general ledger if the leave type is set up to accrue there.

If an employee has not been included on a pay run in the current tax year, no data has been reported to the ATO and therefore a termination pay run is optional.

In this case, you may manually set the employee's status to "Terminated" in Employee Maintenance after clearing any leave balances with leave balance adjustments, or process a termination pay run that will automatically perform these tasks for you.

Casual Employees

For casual employees that have been included on a pay run in the current tax year, the process is the same as for permanent employees.

If you are unlikely to use the casual employee again, we recommend processing a termination pay run to set their status as "Terminated" and report their amounts to the ATO as "Final".

If you are likely to use them again you may be better to change their status to "Inactive" in Employee Maintenance so that they don't keep appearing for selection on every pay run.

When they return you can change their status to "Returned" and enter the return date so that they appear for selection on the first pay run on or after their return date. This will save you from having to re-enter them as a new employee if you use them again.

If you have casual employees in the system that have not worked for you in the current tax year and you wish to clear them out, just change their status in Employee Maintenance to "Terminated" after clearing any leave balances with leave balance adjustments.

Multiple Termination Pay Runs

A terminated employee can not be included on a Normal Pay Run or an Adjustment Pay Run but they can be included on additional Termination Pay Runs.

This enables you to correct errors, make payments that were not included on the original Termination Pay Run, or to cater for situations where payments are to be split across multiple dates.

An employee's first Termination Pay Run captures the Termination Date and Termination Reason and reports them to the ATO. Any additional Termination Pay Runs processed for the employee will automatically re-apply the original Termination Date and Termination Reason as mandated by the ATO.

Multiple employees can be included on a single Termination Pay Run if the Date Paid is the same as they will be included in the ABA wages bank file created by that pay run. Those employees can have the same or different Termination Date as this is captured under the Options button for each employee.

Termination Pay Run Quick Reference Guide

Preparation

Perform Normal Pays for All Complete Pay Periods Worked

If the employee worked the complete pay period, include them on the Normal Pay Run for that pay period before processing the Termination Pay.

If the employee's termination date was before the end of a pay period, do NOT include them on the Normal Pay Run for that period as it will set their Paid To date beyond their Termination Date and prevent you entering the correct Termination Date on the Termination Pay (in which case you would need to enter their Paid To date as the Termination Date and enter a note in the Comments field such as "Last day of work was xx/xx/20xx").

Any hours worked during a partial final pay period are to be entered on the Termination Pay.

Check Unused Leave Balances

Open the Leave Entry screen and check that the employee's leave balances at the bottom of the screen look correct.

If the employee is entitled to a payout of unused Long Service Leave but you hadn't set this up as an entitlement, you will need to do so now (see Long Service Leave) and enter the balance using a Leave Balance Adjustment.

As the Termination Pay automatically takes care of it all, it is important that you:

• Do not create any Leave Entries to pay out unused leave on the Termination Pay
• Do not use Leave Balance Adjustments to zero any unused leave balances that you will not pay out on the Termination Pay
• Do not transfer an "Annual Leave With Loading" balance to "Annual Leave" if you will not pay leave loading on an Unused Annual Leave payout on the Termination Pay.

Gather All Termination Payment & Deduction Details

Before processing a Termination Pay it is crucial that you consult your Employer Association, Tax Accountant or the ATO to ensure that you have complete and detailed information on all termination payments that you are obliged to pay the employee as well as what, if any, deductions are valid.

Was the termination a Standard termination (voluntary resignation, retirement or termination due to inefficiency), or due to a Genuine Redundancy, invalidity or early retirement scheme?

A complete list of all payments to be made (including appropriate details):

• Unpaid work hours (Standard, Time & Half, Double Time),
• Unpaid allowances or commissions,
• Unused annual leave,
• Unused long service leave,
• Lump sum redundancy payments, including the Tax-Free component (to be reported as Lump Sum D), and the Taxable component (to be reported as an ETP with Code 'R'),
• Payment in lieu of notice (to be reported as an ETP payment with ETP Code 'O', not as Standard Hours),
• Any other applicable ETP payments (Amount, Tax Amount, ETP Code).

Any amounts you are entitled to deduct from the termination payment, such as:

• Deduction in lieu of required notice by the employee (for resignation).
  You will need to create a new Deduction Type for this called "Deduction in Lieu of Notice". Do not use the Allowance Type called "Payment in Lieu of Notice" as that is reported to the ATO as a payment type and will be rejected by the ATO if you enter a negative amount.

Note: Generally an employer is not permitted to make any deductions from the payout of unused leave to an employee.

Any other information pertinent to the processing of this termination.

Check All Required Earnings Types, Allowances and Deductions Are Available in Marlin HR

Check that there is an Allowance type available for each payment that you need to make to the employee.

Select System > Allowances from the Marlin HR menu, then click on the Refresh icon and respond Yes to the confirmation prompt.

Check that each Allowance you will use has the correct STP reporting codes selected.

If a suitable Allowance does not appear in the list, click on the Add to create one to suit your requirements (see Allowances).

Check Tax Rate on Payout of Unused Annual Leave & Long Service Leave

At the time of writing, the applicable tax rate for the payout of unused Annual Leave and Long Service Leave for a standard termination is the employee's marginal tax rate.

Marlin HR will automatically take care of this for you when you tick the "Standard" termination check box on the Options window before initialising the Termination Pay.

However, for a termination due to a genuine redundancy, invalidity or early retirement scheme, the tax rate to be applied is 32%.

When you select "Genuine Redundancy" as the Termination Reason on the Options window before initialising the Termination Pay, Marlin HR will automatically apply the tax rate entered in Options Maintenance.

To check this tax rate, select System > Options from the menu and select the ATO Options tab.

Initialising the Termination Pay Run

Open the Pay Run screen.

Select Termination Pay in the Type of Pay Run pick list.

Click on the Options button on the row of the employee being terminated to access the termination options for that employee.

Enter the Termination Date and the Termination Reason.

Tick the check boxes for the Unused Leave balances to be paid out and the check box to pay Leave Loading if appropriate (please see Leave Loading).

Do NOT leave these leave check boxes unticked with the intention of entering the leave balances as Standard Hours on the Termination Pay Run instead (as Standard Hours attract leave accrual and employer superannuation).

Click on the OK button to save your selections and return to the Pay Run screen.

There will now be a tick beside the Options button for this employee, indicating that they have been selected for this Termination Pay Run and you have selected their termination options.

Repeat the process for any other employees to be included on this Termination Pay.

Click on the Initialise button.

Termination Pay Details

Once the Termination Pay is initialised, the summary screen will be displayed and show all employees selected on the termination pay.

Double-click on the employee to access their payout details screen.

Viewing the Leave Payout

You can click on the Term Leave Payout field to view the payout of unused leave (as per your selections on the Termination Options window before initialising the termination pay).

Accruing Leave on a Termination Pay

Any hours worked or leave taken since their last Normal Pay must be entered on an employee's Termination Pay and the employee is entitled to accrue leave on a pro rata basis for any of those hours that are specified as Ordinary Time Earnings (OTE) by the ATO.

Generally this only includes Standard Hours, Annual Leave, Personal Leave and Long Service Leave.

The Termination Pay will calculate and pay it out automatically if you ticked the Payout Unused Annual Leave or Payout Unused Long Service Leave check box on the Termination Options window before initialising the Termination Pay.

Entering Unpaid Earnings & Allowances

Click on the Earnings field to enter any unpaid earnings since their last Normal Pay.

Click on the Before Tax Allowance field to enter any unpaid allowances since their last Normal Pay.

Adding a Termination Payment (e.g. Redundancy Payment or ETP)

Click on the A/T or Term Allowance field then click on the Add button and select the appropriate termination payment type.

Repeat this step for all termination payments that you need to add.

If You Terminated the Employee Without Notice

If you did not give an employee the required notice of termination you may be required to make a payment to the employee in lieu of notice given.

Please see In Lieu of Notice.

If Employee Resigned Without Giving the Required Notice

If your employee was required to provide you with say 2 weeks of notice but gave no notice, the equivalent of two weeks pay may be forfeited by the employee from any wages outstanding at the time of termination.

This is considered a permitted deduction under the Fair Work Act 2009 (s324(1)(c)).

However, annual leave payable on termination is not deductible because the Act (s90(2)) requires the employer to pay accrued annual leave at the end of the employment.

The NES overrides any provision in a modern award or enterprise agreement where there is an inconsistency.

Employee Loan Repayment

If you need to withhold part of the employee's Net Pay as repayment of a store loan or purchase, click on the After Tax Deduction field and then click on the Add button to select the Employee Loan Repayment deduction.

Adjusting Tax

Marlin HR will calculate the tax on hours and amounts entered against earnings types at the employee's standard tax rate (i.e. according to the tax scale selected in Employee Maintenance).

Tax on payout of unused Annual Leave and Long Service Leave will be taxed at the employee's standard rate (for a "Standard" termination) or 32% (for a "genuine redundancy, invalidity or early retirement scheme").

Tax on amounts entered onto allowance types will be calculated according to the tax method selected on each allowance type (see System > Allowances). Where the Tax Method selected in the allowance type is Enter $Tax On Pay, you can manually enter the amount of tax to be withheld when you enter the amount of the payment.

This may be required as the applicable tax rate on termination related payments (e.g. golden handshakes, compensation payments etc.) may vary depending upon the particular employee's scenario.

Please confirm the amounts of tax to be withheld with your tax accountant, employer association or the ATO.

If the total tax calculation on the Termination Pay is different to what you have been advised, you can adjust the total tax amount up or down by clicking on the 'Tax' field in the 'This Pay Run' column and then clicking on the 'Tax Adjustment' field and then on the Edit button.

On the Tax popup, enter the Amount (this will be the difference between the current Tax figure and the desired tax figure), select either Add Tax or Reduce Tax as required, and then click on the OK button.

Check the updated Tax amount to ensure that it is now what you expected (and that you didn't select Add instead of Reduce).

Finalising the Termination Pay Run

Once you have entered all required payments and deductions, adjusted the tax, and thoroughly double-checked everything, click on the Save to return to the summary screen.

If you have selected other employees on this Termination Pay, repeat the steps above for these employees.

If appropriate, click on the Print icon to view an Interim Pay Run Analysis Report, print it and have your manager approve it.

Once approved, Finalise the Termination Pay.

Print or Email the Termination Pay Advice for the employee(s) and make payment.