Can an Employer Withhold Pay After Termination?

 

Understanding if your employer can withhold pay after your employment ends—whether you’re casual, part-time, or full-time—is essential, as they are usually obligated to provide a final payment.

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

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

Per amendments made in 2024, any deductions from final pay must comply with stricter requirements:

• Employers may deduct up to one week’s pay if the employee has not provided the correct amount of notice, as long as the deduction is not unreasonable.
• Deductions must be authorised under the employee’s modern award, employment contract, or enterprise agreement, or otherwise agreed to in writing by the employee.
• Deductions are only permissible if they principally benefit the employee and are not made for the employer’s benefit.
• For employees under 18, deductions can only occur if a parent or guardian provides a written agreement.

These changes provide clearer limits on the types and amounts of deductions an employer can make, ensuring final pay accurately reflects the employee’s entitlements.

 

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.

Per the 2024 amendments, all deductions must:

• be limited to the agreed value or permitted by the relevant award or agreement,
• principally benefit the employee, and
• only apply to wages, not entitlements like leave.

 

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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