How to pay a termination payment in NZ

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When the payroll process for terminating an employee is complex and the following is our understanding of the steps that should be considered in calculating a final pay for an employee. This information has been sourced from the [www.employment.govt.nz] website and given its complex nature we suggest confirming any questions with the department of labour or independent legal advice.

Steps Involved in Calculating a Termination Pay

The following is a list of the steps that are taken when calculating a final pay for an employee.

1. Notice Period Payout

Check to see if there is a notice period applicable for the employee - this will be in their employment contract.

Employee gives required notice If the employee gives the required notice the employer must pay the employee to the end of their notice period. If the employer asks the employee not to work the full notice period then the employer must pay the employee instead of notice. Payment instead of notice can only be made if it’s in the employment agreement or is mutually agreed between the parties. If the employee asks the employer to waive all or some of their notice period then, if the employer agrees, they won’t need to pay the employee for this time.

Employee doesn’t give the required notice If an employee gives less than the agreed amount of notice, the employer doesn’t have to pay the employee for time after the last day they actually worked.

The employer may also be able to deduct pay in lieu of notice from any amount already owed to the employee.

For a termination pay calculation, the notice period is paid at the rate specified in their employment agreement.

2. Annual Leave Payout

If the employee has any annual leave owed (ie they have worked in excess of 12 months and accrued 4 weeks leave) then they are to be paid this leave (less any leave that has already been taken). This leave is paid at the Ordinary Weekly Pay or Average Weekly Earnings rate (ie which ever of these rates is greater = the rate used to calculate Annual Leave Payout)

3. Payment for Public Holidays in Termination Process

Where an employee has an annual leave balance owing (per step 2) the employer must factor this leave into their termination pay calculations. In effect, the number of weeks owed is added on to the termination date and if there is a Public Holiday (Stat Day) that falls in that extended period then the employee must be paid for that day if they would have been otherwise working.

If through the termination process an employee is entitled to be paid for a Public Holiday then this is paid at either their relevant daily pay or average daily pay (which ever is the greater).

4. Payment for any Alternative Days owed

If the employee is owed any Alternative Days (which had not been paid prior to termination) then these need to be paid out in the final pay. These are paid at either their relevant daily pay or average daily pay (which ever is the greater).

5. Payment for any other in Lieu or Contractual Payments

If there any other time in lieu payments or other contractual agreements (ie that are included in the employee's employment contract) they need to be considered in the final pay calculation as additional gross earnings.

6. Payout for 8% of earnings since anniversary date (or start date)

The employee's termination needs to include a payout of 8% of gross earnings since their annual holidays anniversary date (less any amount paid for taking any of this year’s annual holidays in advance or paid on a pay-as you-go basis) including all the payments above.

So in the instance that they have not worked 12 months it would be paid at 8% of their gross earnings (including any additional gross earnings incurred in steps 1 to 5 above).

In the instance that they have worked 12 months or more, they are paid at 8% of gross earnings since their anniversary date (including any additional gross earnings incurred in steps 1 to 5 above).

7. Payment for any non-taxable reimbursements

Check to see if the employee is owed any reimbursement payments (eg expense claims not yet paid).

8. Payment for any non-taxable compensation

Check to see if there are any non-taxable compensation payments due (eg court awarded settlements etc).

9. Calculate the final pay

Calculate the final pay (with PAYE tax, ACC etc) and make the net payment to the employee.

Example of a Termination Pay Calculation

The following example is from the www.employment.govt.nz website.

Jason finishes work on Friday 16 October. Jason has been paid up to Tuesday 6 October. He has three days’ unused alternative holidays and is entitled to four weeks’ paid annual holidays. He last became entitled to annual holidays on 25 June. Jason’s final payment is made up of:

• his pay for the period worked since the previous pay period, (eight days’ pay for Wednesday 10 October through to Friday 16 October)
• payment of four weeks’ annual holiday pay calculated at the rate of the greater of OWP and AWE
• payment for his three accrued alternative holidays for working on Friday 16 October at the rate of RDP or ADP (if applicable)
• an additional day’s payment for Labour Day at RDP or ADP (if applicable). This is because it falls during the four weeks’ notional annual holidays extension added to the end of his employment to reflect annual holidays entitlement owing.
• 8% of his gross earnings since 25 June.

These gross earnings include:

• the four weeks’ annual holidays paid out
• the payment for the alternative holidays
• the payment for the public holiday.

Related Pages

• Termination Pays NZ