Can an Employer Withhold Pay After Termination?

 

Exploring the possibility of your employer withholding pay after termination, regardless of your employment type—casual, part-time, or full-time—is crucial, as when your employment ends, your employer may likely owe you final pay.

The sum of your final pay is often comprised of outstanding wages, leave entitlements (if any) and other termination payments.

However, in limited circumstances, your employer may be entitled to withhold pay after termination in your final pay.

This is a complex issue that is rooted in the factual circumstances of each case.

 

What is Final Pay?

 

Final pay (or an employment termination payment) is what an employer owes an employee when their employment ends and it includes:

• payment of outstanding wages (including penalty rates and allowances)
• any accrued entitlements, such as annual leave and long service leave
• payment instead of notice (if the employee is not working the notice period), and
• redundancy pay.

Generally, an employee’s final pay must be paid within 7 days of termination, or within such other timeframe as specified by their modern award, employment contract or enterprise agreement.

However, in limited circumstances, employers may not have to pay notice, long service leave or redundancy pay and may be able to withhold up to one week’s wages from an employee’s pay.

 

Calculating Your Final Pay

 

Annual Leave

 

When an employee ceases employment, the employer must include all unused annual leave entitlements in the employee’s final pay.

If an employee is terminated and they have a period of untaken annual leave, they must be paid out what they would have been paid had they taken that period of annual leave.

This is generally paid at the employee’s base rate of pay for the hours, and the base rate of pay generally does not include payments such as penalties, allowances, overtime rates or bonuses.

If annual leave loading is ordinarily payable on an employee’s annual leave as a result of their modern award, enterprise agreement or employment contract, then they will be entitled to payment of the applicable annual leave loading on any unused annual leave as part of their final pay.

Generally, casual employees do not accrue annual leave entitlements but instead receive a higher rate of pay.

 

Sick Leave

 

In most cases, employers are not required to give a departing employee a sick leave payout.

 

Long Service Leave

 

Employees may be entitled to long service leave as a result of their applicable modern award, employment contract, or enterprise agreement.

In South Australia, long service leave is calculated as follows:

• how long an employee must be employed in the business before they are entitled to long service leave
• how much long service leave is paid to the employee on termination of their employment, and
• how the amount of long service leave (and the rate it is paid at) is calculated.

 

Other Entitlements

 

In calculating an employee’s final pay, the employer must also include any other items to which the employee might otherwise be entitled, including:

• any overtime worked
• penalty rates
• monetary allowances
• incentive-based payments and bonuses, and
• any other separate identifiable amounts.

 

Notice, Deductions & Redundancy

 

Notice of termination and redundancy pay form part of the National Employment Standards contained in the Fair Work Act 2009 (Cth), which provide for the minimum terms and conditions of employment across Australia.

Addressing the intricacies of employer practices post-termination prompts the question of whether employers can withhold pay after termination.

 

Notice

 

Whether an employee resigns or is dismissed, notice is generally required.

The notice period is the length of time that an employee or employer must give to terminate employment, and is usually specified by the modern award, employment contract or enterprise agreement.

However, in the absence of set notice periods by any one of those instruments, the Fair Work Act 2009 (Cth) provides minimum notice periods when dismissing an employee.

The minimum notice period is based on the employee’s continuous service and the length of time they have been employed by the business.

For employees over the age of 45 years who have completed at least two years of continuous service, the minimum notice period is extended by one extra week.

Notice periods do not apply to employees who:

• are casual
• are on a fixed-term contract
• do seasonal work
• are dismissed due to serious misconduct
• have a training arrangement for a set period
• are daily hire employees in the building and construction, or meat industry, or
• are weekly hire employees in the meat industry whose termination depends on seasonal factors.

 

Deductions

 

An employee’s modern award, employment contract or enterprise agreement will usually stipulate when an employer can withhold final pay from an employee.

Delving into the specifics, it’s pertinent to consider the circumstances under which employers can withhold pay after termination.

Whenever money is taken out of an employee’s final pay, this is called a deduction.

Most modern awards say that an employer may deduct up to one week of pay and not any other entitlements, e.g., leave, from an employee’s final pay if:

• the employee is over 18 years old
• the employee has not given the correct amount of notice, and
• the deduction is not unreasonable in the circumstances.

Subject to the terms of an employee’s modern award, employment contract or enterprise agreement, an employer may also deduct money from an employee’s final pay if the employee agrees in writing and the deduction is principally for their benefit, and:

• the deduction is allowed by law, a court order, or by the Fair Work Commission,
• the deduction is allowed by the modern award, or
• the deduction is allowed by the employment contract or enterprise agreement, and the employee agrees to it.

However, even if the deduction is made in accordance with the modern award, employment contract or enterprise agreement, an employer cannot deduct if:

• the deduction benefits the employer, and not the employee,
• the deduction would be unreasonable in the circumstances, and
• the employee is under 18 years and their parent or guardian has not agreed in writing.

 

Redundancy

 

When a position becomes redundant to an employer’s needs, or if an employer becomes insolvent or bankrupt, an employee may be dismissed – this is called redundancy.

If an employee’s position is made redundant, they should be given the minimum notice period for their length of service as set out in the Fair Work Act 2009 (Cth), or by the employee’s modern award, employment contract or enterprise agreement.

The employee can work out the notice period, or be paid instead of notice if the employer prefers them not to work out the notice period.

In addition to any leave or other entitlements the employee may otherwise be paid upon termination of their employment, they may also be entitled to redundancy or severance pay, depending on the following circumstances:

• the employee’s length of service
• the employee’s basis of employment (e.g., full-time, part-time, casual)
• whether the employee was a trainee or apprentice
• whether the employee was employed on a fixed-term contract
• the number of employees in the business at the time of termination, and
• the terms of the employee’s modern award, employment contract or enterprise agreement.

If an employee is entitled to redundancy pay, it is calculated based on the employee’s period of continuous service with the business and is paid at the employee’s base rate of pay for ordinary hours worked.

The Fair Work Act 2009 (Cth) sets out the redundancy pay period based on continuous service, which may vary between 4 – 12 weeks.

 

Employer Withholding Final Pay

 

In summary, an employee’s final pay is comprised of several components to be calculated at the time of termination, including wages, overtime, penalty rates, leave entitlements, bonuses, and redundancy pay.

There are rather limited circumstances in which an employer can deduct or withhold an employee’s final pay.

The amount deducted must be limited to the value of the deduction agreed to in writing, or otherwise permitted by the employee’s modern award, employment contract or enterprise agreement, must principally be for the employee’s benefit, and must only be deducted from the employee’s wages, and no other entitlements.

 

Contact Us

 

In summary, understanding the factors influencing an employee’s final pay is important, especially in scenarios where questions like ‘Can an Employer Withhold Pay After Termination?’ arise.

If you have a workplace problem or want to better understand final pay for employees, we have tools and information to help you resolve the dispute. We also offer a free, no-obligation 15-min consultation for all enquiries.

Please note that this article refers to South Australian legislation which is only applicable if you are employed in South Australia. Equivalent legislation may apply in other states and territories.

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