Superannuation
‘Termination’ is currently one of the most searched terms on the Internet. This highlights two key points. First, more people are aware of concepts such as termination by notice, mutual consent and redundancy. Second, and more importantly, employers and employees should familiarise themselves with their rights and responsibilities. One of those responsibilities is knowing when to pay superannuation on an employee’s termination payments.
Under the Superannuation Guarantee scheme, an employer is obliged to pay a superannuation contribution of 9.5% of an employee’s ordinary time earnings (OTE). The employee is entitled to this if they:
- earn $450 or more per month (before tax); and
- is over 18 years old or under 18 years but works over 30 hours per week.
The Australian Taxation Office (ATO) defines OTE as the amount that an employee earns during their ordinary hours of work. This includes allowances, commissions, shift loadings, bonuses, annual leave loading and over-award payments. To identify the employee’s ordinary hours of work, an employer should refer to:
- the employment agreement;
- the relevant industry award (if there is no agreement); or
- the Fair Work Act 2009 (Cth).
The Fair Work Act 2009 (Cth) states that ordinary hours of work for a full-time employee is 38 hours. For an employee who does not work full-time, it is less than 38 hours per week.
Termination payments
Termination payments, or ‘final pay’, is what the employer owes to an employee when their employment has terminated. The Fair Work Ombudsman states that when an employment relationship ends, the employer must pay:
- wages or other remuneration still owing;
- additional payments in lieu of the notice of termination;
- accrued annual or long service leave entitlements;
- future accrued annual leave; and
- redundancy entitlements (if eligible).
Superannuation paid on termination payments
Superannuation guarantee is payable on an employee’s OTE. The employer must pay superannuation on termination payments even if the employee received a lump sum instead of working through the notice period. The reason is that a termination payment made instead of notice is part of OTE. In other words, the lump sum is part of the ordinary wage that the employee would have earned if they worked until the notice period.
Superannuation not paid on termination payments
Generally, termination payments do not include superannuation benefits. Certain termination payments are not part of an employee’s OTE. The ATO says that termination payments for unused annual leave, extended service leave or sick leave are not OTE. In these circumstances, the employer can refuse to pay superannuation.
The employer goes into liquidation, bankruptcy or is insolvent
When an employer goes bankrupt, insolvent, or a company goes into liquidation, employees can seek assistance from the Fair Entitlements Guarantee (FEG). The FEG is a scheme where employees can receive financial support for any unpaid entitlements. These include wages, annual leave, and payment instead of notice, but does not include superannuation.
Employee’s right if the employer does not pay superannuation
There are no specific mechanisms allowing employees to pursue an employer for failing to provide minimum superannuation contributions. However, the employee may inform the ATO who will assess this as a ‘shortfall’. The ATO will require the employer to pay a tax that may exceed the amount the employer would have contributed to the employee’s superannuation.
Conclusion
An employer and employee should familiarise themselves with their rights and responsibilities. To do this, refer to the terms of the employment contract or the relevant award. Are you still unsure or need clarification on your obligation to pay superannuation? In that case, it may be wise to contact our employment lawyers.
