What must be paid at Termination

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Last Updated: Wednesday, 26 February 2025 14:19

When an employee is terminated, two situations may arise depending on the length of employment and if an entitlement to leave exists. Each is dealt with separately and may be cumulative - the calculated results of one is included in the calculation of the second. Refer Holidays Act sections 23,24,25 & 26.

In practice, a series of calculations done in stages as follows is all that is needed.

  1. The current pay must be calculated. It will include payment for the time worked until termination, plus payments for all outstanding (available) leave, Alternative days, Time in Lieu, and any Public Holidays that fall in the period from termination until the available leave is exhausted. i.e If the employee had 4 weeks available remaining, then he would be entitled to any public holidays occurring in the 28 days since termination, just as he would do as a working employee on leave.
    Leave payments would be at the greater of ordinary pay and the average rate calculated up to the previous pay.
    Sick leave is excluded. Payment for Long service leave owing will depend on the wording of the employee contract, but if paid out it is not normally considered part of gross earnings.

  2. Next the total gross earnings since the last leave anniversary must be determined. You may need to take into account that the exact anniversary date is unlikely to fall exactly on a pay period end. Payroll programs usually work in weekly or larger units which may vary the exact point at which the leave calculations are applied, and may or may not, include the current pay. Total gross earnings is the total of every pay, up to and including the current pay (with the leave owed and other payments) as calculated in step 1.
    There maybe some exclusions depending on contract wording and the nature of the payment. Outstanding Discretionary bonuses, Long Service leave payments are excluded, unless already paid and taken. Commissions, productivity, and incentive based bonuses are included if part of the contract. Non regular payments, such as staff wide Christmas bonus payments for a good year, are considered discretionary and not included. If in doubt, include it or get legal advice (which cost is the smaller?).
    KeyPay does not do the anniversary calculation until posting the pay period falling after the exact anniversary date to guarantee that a full year was completed. The start date for the new year is set to the beginning of that pay period, which ensures earnings for that period are included in the next leave year without a gap or overlap.

  3. Accrued leave (that earned since last anniversary) should next be calculated. Take the entitlement (4,5 or 6 weeks), divide by 52 and round to a whole number. (4 weeks = 0.08 or 8%.) Multiply this by the total gross earnings as determined in step 2. This is the amount owing for leave since the last anniversary.

  4. If the employee has been allowed leave in advance, the value paid for this time can now be deducted from the accrued leave value. It is possible for this to exceed the accrued value requiring a pay back to the employer from the current pay.

  5. The final gross pay is then the sum of:- the current pay, 8% of YTD gross earnings, less the amount paid for leave in advance.
    This is then taxed in the usual way. However, as it includes payment for leave, it should be calculated on a pay by pay basis. e.g If the pays are weekly and the employee had 4 weeks available and 2 weeks worth of accrued leave, the final payment represents 7 weekly pays. Divide the total owing by 7, work out the weekly tax and multiply that tax by 7. From April 2016 IRD advised that the leave component should be taxed as a lump sum.

In case it is not obvious, provided the leave in advance never exceeds the accrued value, the above calculations result in almost exactly the same money to the employee as if all leave (including in advance) had been taken and the employee just never returned. This means the Holidays Act just attempts to be fair, so there is no advantage or disadvantage to either party when employment ends.

With KeyPay all the above calculations are made instantly when an employee is terminated. All the user needs to do is determine from the available leave balance if a public holiday is due, pay it, select terminate, and enter the date of termination. A final pay calculation report showing each of the above calculated totals which can then be printed and shown to the employee. This final pay, prior to posting can still be changed, but the employee must be specifically selected by name first.

It has come to our attention that there is evidently provision for the employer to claim the cost of an employee who does not give the required notice, against his final pay. Certainly when the employer dismisses an employee on the spot, the employer is expected to include the employees earnings for the period of notice at the RDP in the final pay. We have assumed that not paying the employee for the notice period is the recovery of the cost, but this may be incorrect and the employer may be able to claim the cost of the wages that would have been paid. (e.g To pay for a temp while looking for a replacement employee.) Be aware that the payroll itself cannot know about this either way. To apply such a recovery one would need to enter a negative time in a suitably named rate slot to document the correct procedure.