Termination Payments

How to process termination payments

There are various ways in which the status of a permanent employee can change, such as transitioning to a casual position or being terminated. In this article, we will explore the different methods for managing leave pay payouts in these situations.

When it comes to handling terminations, there are 2 available processes for you to consider:

• HR termination process - Terminate the employee profile first, then manage the payment.
• Payroll termination process - Manage the payment first, then terminate the employee profile.

If you are looking for further information regarding employee terminations please feel free to refer to the following.

• Creating an Employment Termination Payments (ETPs), select here.
• Cashing out leave entitlements (non-termination), see our help guide article here!

This article will cover: 

• The differences between both termination processes
• Managing the payroll side of both termination processes
• Termination payments when moving from permanent to casual employment
• Termination reporting 

  For information and steps regarding terminating the employee profile, please refer to this article. 

Differences in termination processes

Depending on the situation, there are two termination processes available. The process depends on the person and the order of termination. These are:

• • HR termination process - Terminate the employee profile first, then manage the payment.
  • Payroll termination process - Manage the payment first, then terminate the employee profile.

HR Termination Process

This process is best practice as there are a number of features that will assist in the payroll process.

• • Terminated profiles can be filtered in the payroll menu, making managing termination payments simpler.
  • Entitlements to be paid out are automatically added to existing draft payslips, or a new payslip will be created if none exist. 
  • Draft payslips with termination payments are blocked when there are other draft payslips for the employee or when the employee has a negative leave balance. This prevents accidental termination payments when there are still entitlements that will be added to the employee's accrued value. 

Payroll Termination Process

This process requires the admin to manually handle and consider all aspects of the termination payment. 

• • Termination payments can be added directly to draft payslips or new payslips. 
  • Termination payslips should be processed after all other draft payslips for that employee. This ensures that the correct leave entitlement balance will be paid out. 
  • Termination payslips will not be blocked regardless of whether there are other draft payslips for the employee. 

HR termination process

The HR termination process starts by terminating the employee profile. It is during that step that you determine how the leave entitlements will be handled (paid out or deleted).

  For more information on these steps, please refer to the Terminate and Offboard an Employee article. 

The process for paying a terminated employee with this method is as follows:

This process assumes that you have terminated the employee profile prior to processing pay.

1. Leave entitlements are added to a payslip. On the termination date for the employee, any leave entitlements to be paid out will be added to a payslip.
   • If no draft payslip exists already, one will be created automatically, and the termination payout will be added.
   • If there is an existing draft payslip, the termination payout will be added to this.
   • However, if there is a leave redemption on this payslip, the termination payout will instead be added to a new payslip. 
     
     For example, if your employee took annual leave in the last week of their employment, the remainder of their annual leave to be paid will be added to a new payslip.
2. The payslip may be blocked from processing. If the payslip with the termination payment is blocked, there will be other draft payslips for the employee or the employee has a negative leave amount. These will need to be addressed before processing the termination payslip, please take a look at the steps for this process below before proceeding.
   
   
3. Process the termination payslip. Once the payslip with the termination payment is not blocked, you may process it as standard. You can process this at the same time as your other payslips or manage it separately. 

Blocked payslips

To manage a blocked payslip:

1. Select the blocked button to the right.
   
   
   
   
2. This will give you a summary of what is blocking the payslip from being processed. Select View payslip.
   
   

   

3. You will be taken to a filtered list of all draft payslips that are blocking the termination payment from being processed. 
   These draft payslips can either be deleted or generated. Whatever is most appropriate.
   
   
   
   

  Please note: The best practice is to process termination payments prior to the employee has been archived. If additional payments are required, you will need to reactivate your employee. 

Payroll termination process

The payroll termination process starts by paying out the leave entitlements and then ends with terminating the employee profile.

Terminating the employee profile is the same in both processes and can be viewed here.

To pay out an employee's leave entitlements:

1. Navigate to Payroll > Pay.
2. Select the relevant filters to locate the desired payslip.
   • You can also create a manual payslip if no draft payslip exists already.
3. Select the down arrow next to the payslip ID > Edit.
   
   
   
   
4. In the Edit Payslip screen, select Add entitlement > select your entitlement Type > then the Termination option under the Method drop-down. 
   
   
   
   
5. Upon selecting Termination, you will be prompted to select the appropriate STP reportable label:
   
   • Lump Sum A Redundancy
   • Lump Sum A Termination
   • Lump Sum B
   • Unused Leave on Termination
     If you are unsure which label to choose, please refer to the ATO guidelines here.
   
   
   
   
6. Upon finalising any further edits, Preview and Update the payslip. You will see under the Entitlements Paid section the entitlement hours along with any relevant loadings paid to the employee. 
   
   

  For more information on editing payslips, please see our help guide article here!

  Please note: Leave terminations are automatically taxed as regular gross. You may wish to calculate a different withholding amount and override the tax on this payslip. Find out more here. 

Existing employees moving from full-time to casual & managing their entitlements

If you have an existing full-time employee who is moving to a casual employment type, when you add in the details of the new position, a pop-up will show asking you how you would like to manage their leave entitlements.

There are three options:

• • Pay Out - The entitlement balance will be paid out on the final payslip for the current position and will be removed from the Employee Profile, typically this is for Annual Leave. 
  • Carry Over - Entitlement will remain on the Employee Profile and transfer the current balance to the new position, typically this is for Long Service Leave.
  • Delete - Entitlement will be deleted and the balance removed from the profile after the current position has concluded. This is typically used for most other leave types (compassionate, personal).

To finalise entitlements for a full-time employee going to casual:

1. Create the New Position, select Casual, fill in the appropriate details, and move to Continue.
2. In the Entitlements section you will see the existing entitlements for this employee. 
3. Use the radio buttons to choose which leave types you'd like to:
   
   • Pay Out
   • Carry Over
   • Delete 

Typically, Annual Leave would be paid out, Long Service Leave would be carried over and all other leave types deleted.

  Hot tip: If you choose to carry over a leave entitlement (e.g. LSL), you will be required to select the casual position that the carried-over entitlements will be associated with. 

When you navigate back to the Employee Card > Employment Type and scroll down to the Entitlement Area, you will notice the orange 'Pay Out' badge over the entitlements selected.

  Please note: The pay out process will occur in the payslip for the final period ending before the employee becomes casual. If no draft payslip is created in that period through approving times or leave, a manual payslip will need to be created.

Termination payment reporting

For your post-payroll needs, there are 2 reports that you can refer to in order to see your termination payments. However, each report has its specific use. These reports are:

• • Advanced Payroll Activity Report - This report will display all leave and ETPs paid in your platform. However, it will not filter specifically for leave paid on termination.
  • Standard Payroll Activity Report - This report can be used to filter for payslips with Leave Terminations, see below for more details. 

To use the Standard Payroll Activity Report for termination payments:

1. Navigate to Reports > Financial > Standard.
2. Set the required date range > add your groupings (recommended groupings would be Employee ID, Payslip and Period End).
3. In Extra Filters, select 'Payslips with Leave Terminations'.
4. Select any other search criteria or reporting options you need then Submit.

  You can read more about the Standard Payroll Activity Report here. If you are looking to learn more about reporting on Terminations for HR purposes, please read here.