Payment in lieu of notice of termination — issues arising

Analysis

Payment in lieu of notice of termination — issues arising

A common inquiry from employers relates to the amount of money employees should receive as compensation when their employment is terminated without being given the required minimum period of notice. The key issues ordinarily come down to the types of additional payments an employer must pay when paying in lieu of notice.

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A common inquiry from employers relates to the amount of money employees should receive as compensation when their employment is terminated without being given the required minimum period of notice. The key issues ordinarily come down to the types of additional payments an employer must pay when paying in lieu of notice.
 
Many employers may comply with the termination provisions contained in the applicable industrial instrument or contract of employment; however, there is a statutory obligation in this regard of which many employers may not be aware. This article identifies the types of payments that may be required to be included in any compensation payment when a termination of employment by the employer occurs without giving the required period of notice.
 
Source of legal obligation
 
The statutory minimum periods of notice of termination of employment required to be given by the employer are prescribed by s661 of the Workplace Relations Act. This provision provides an employee with an entitlement to receive (or be compensated for) a minimum period of notice when given by the employer, based on the employee’s continuous service with the employer. The relevant periods of notice under the Workplace Relations Act are:
  • not more than one years continuous service — at least one weeks notice
  • more than one year but not more than three years continuous service — at least two weeks notice
  • more than three years but not more than five years continuous service — three weeks notice
  • more than five years continuous service — four weeks notice.
 
The minimum period of notice is increased by one week if the employee is over 45 years of age and the employee has completed at least two years continuous service with the employer. These minimum periods of notice do not apply to an employee when the employee terminates the employment. For the required amount of notice required to be given by an employee, reference should be made to the applicable industrial instrument or contract of employment to determine the necessary notice period(s).
 
Exclusions
 
There are certain categories of employees who are exempt from the statutory minimum notice provisions under the Workplace Relations Act. This means the minimum notice provisions for these employees are subject to the relevant notice provisions contained in the applicable industrial instrument or contract of employment.
 
These include:
  • an employee on a probation period
  • a casual employee
  • daily hire workers in the building and construction industry or the meat industry
  • seasonal workers in the meat industry
  • employees employed for a specified period of time (eg an apprenticeship) or a specified task
  • a trainee whose traineeship agreement is for a specified period of time.
 
Payment in lieu of notice
 
Section 661 of the Workplace Relations Act provides that an employer who fails to give the proper period of notice on termination is required to pay compensation in lieu of notice to the employee. The required amount of compensation must at least be equal to, or greater than, the amount the employee would have received had the period of notice been worked by the employee. The amount of compensation is calculated on the basis of:
  • the employee’s ordinary hours of work (even if not the employee’s standard hours); and
  • the amounts ordinarily paid to the employee in respect of those hours, including allowances, penalties and loadings; and
  • any other amounts payable under the employee’s contract of employment.
 
It is the third requirement under the notice provisions that causes the most confusion for employers.
 
Meaning of ‘other amounts payable under employee’s contract of employment’
 
The interpretation of this term has been the subject of a number of Q&As published on WorkplaceInfo. The Federal Court of Australia has interpreted this term to mean:
‘The following [listed below] are the types of payments that are usually omitted from termination pay by employers but which should have been included because of this term.’
Superannuation Guarantee
 
The confusing issue for employers in the case of employer superannuation contributions with respect to payment in lieu of notice is that some years ago, the Australian Tax Office issued a superannuation guarantee ruling (SGR 94/4) that identified the types of payments included or excluded from the employee’s ordinary time earnings (OTE) on which the 9 per cent employer contribution is to be calculated for the purposes of the Superannuation Guarantee legislation.
 
The ruling states that any payment in lieu of notice is NOT included in an employee’s OTE for SG purposes, therefore, most employers do not include this payment when paying in lieu of notice. However, s661(5)(c) of the Workplace Relations Act requires, as part of the compensation in lieu of notice to include the 9 per cent SG calculation in the termination pay because it is an amount payable under the employee’s contract of employment’ which would have been paid had the employee worked the notice period. This means the equivalent SG calculation is payable under employment law (Workplace Relations Act) as part of termination pay, not superannuation law (SG). The odd aspect of this interpretation is that the equivalent 9 per cent SG is payable to the employee, not the employee’s relevant superannuation fund account. This interpretation was confirmed some years ago in a decision by the Federal Court of Australia in Furey v Civil Services Association of WA (Inc) [1999] FCA 1492 (29 October 1999).
 
Overtime
 
In determining which amounts for overtime should be included in any payment in lieu of notice, the distinction requires a determination of what ‘would’ the employer have been liable to pay if the period of notice had been worked by the employee, not what the employer ‘may’ have become liable to pay.
 
For example, an employee who has rostered overtime (common in seven-day continuous shift operations) or there is a guarantee of overtime, such as the contract of employment prescribes (say) a 45-hour week or the employee is paid an ‘overtime allowance’, then payments related to this type of overtime would need to be included in the amount of compensation in lieu of notice.
 
Accrued entitlements
 
Although there is no precedent case law determining the meaning of this term in relation to other conditions of employment, the amount of compensation may be affected by calculations of accrued entitlements that would have been payable had the employee worked the period of notice.
 
Entitlements such as pro rata annual leave, pro rata long service leave and redundancy pay may be affected when extending the period of notice to the date termination would have occurred had the employee worked the notice period. It should be noted, as with SG calculations, that any amounts paid as compensation in this circumstance are regarded as part of the payment in lieu of notice requirement of the Workplace Relations Act, not a payment of pro rata annual leave, long service leave or redundancy pay, as the case may be.
 
For example, an employee in New South Wales who has completed four years and 11 months service with the employer and is over 45 years of age would be entitled to four weeks notice or payment in lieu. If the employee had worked the period of notice, the employee would have been entitled to pro rata long service leave under the state legislation. Because of s661 of the Workplace Relations Act, the employer may be liable to pay the equivalent long service leave amount as part of the compensation in lieu of notice because it is an amount the employee would have received had the notice period been worked by the employee. Once again, it would be an amount that would be considered part of the payment in lieu of notice, not payment under the NSW Long Service Leave Act. This may also have taxation implications because of the change in nature of the relevant termination payment.
 
Extra notice
 
Where an employer pays a greater amount of compensation in lieu of notice than required under the minimum provisions of the Workplace Relations Act, the types of payments mentioned above would only relate to the minimum statutory period of notice.
 
For example, an employer who provides three months pay in lieu of notice to an employee who has a minimum entitlement of (say) five weeks pay in lieu of notice under the Workplace Relations Act would only be required to pay the above payments with respect to five weeks pay rather than the total thirteen weeks payment in lieu of notice. The balance would be subject to the termination of employment provisions under the individual’s contract of employment.
 
 
Source: Paul Munro, IR Consultant.
 
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