Terminate an Employee with a Final Pay (NZ)

Overview

When employees are terminated, you will need to process a final pay for them to ensure that any leave that they are entitled to be paid, any deductions that they owe, and any recoverable deductions that need to be recouped are processed. 

A final pay is processed as a lump sum pay in Process Payroll.

Important: This functionality applies to PAYE employees in NZ portals only. The Final Pay options will not appear for NZ contractors or employees from other regions. 

By default, this functionality will be switched off in portals. Please contact our Support Team if you would like this to be switched on.

Before you Create a Lump Sum Final Pay

To ensure that an employee’s final pay is processed accurately, there are some important checks that you should complete prior to creating the lump sum pay.:

• Process all outstanding plays for the employee who is terminating. This will ensure that any leave accruals or deductions that need to be considered as part of the final pay are accurate at the time the pay is processed.
• Set a termination date in the Employment tab of the employee’s profile. Active jobs will need to be closed off before you will be able to set the termination date. 
• Check that the relevant leave categories have been configured to pay out on termination if this should apply to the pay.
• Check that the relevant deduction items have been configured to recover on termination if this should apply to the pay.

Configure Leave Categories for a Final Pay

All employees in NZ are entitled to leave, regardless of the length of their service. If these leave accruals are required to be paid out upon an employee’s termination, the associated leave categories will need to be configured to automate this as part of a final pay.

You can set a leave category to pay out when you first create it, or edit an existing category as required. To do this:

1. Go to Config > Leave > Add New Leave Category for new leave categories or select an existing leave category to update.
2. Tick the Payout on Termination checkbox, directly under the Negative Threshold dropdown field. For new leave categories, you will also need to configure the other settings that apply,
3. In the dropdown field that appears under the checkbox, select the pay item that should be used in a final pay to pay out the unused leave accrual. 
4. Tick the 'Pay an additional 8% gross pay on Termination' checkbox, if applicable
5. Click Save.

There are some exceptions where leave categories cannot be set to pay out on termination, depending on the Accrual Method set:

• Leave categories with an Accrual Method of Pay As You Earn cannot be set to pay out on termination, so this field will not appear.
• Leave categories with an Accrual Method of Periodic Lump Sum (eg Sick Leave) will instead have an option to Reset on Termination. When this is selected, any accrual will reset to 0 upon termination of an employee. 

You will need to repeat this process for each leave category that should be paid out on termination. 

Configure Deduction Items for a Final Pay

If an employee has deduction amounts that should be recovered on termination, the deduction items will need to be configured for this in Config > Payroll > Deductions. 

You can set the Recover on Termination status for all new deduction items and update existing items as required. 

The Recover on Termination checkbox will appear at the bottom of the Deduction Details section when you configure or edit a deduction item. 

Please note that the Recover on Termination option only applies to deductions with a Deduction Limits setting of Amount Limit or Pay Periods; this checkbox will not appear if the Deduction Limit is Unlimited.

Create a Lump Sum Final Pay

An employee’s final pay is managed in Payroll > Process Payroll > Process Payroll, by navigating to the employee’s pay cycle and then creating a lump sum pay. 

To set up a final pay for an employee:

1. Click Add Lump Sum Pay.
2. Search for the employee in the Employee field. You may need to tick the checkbox underneath to include Inactive Users, and will need to enter a minimum of two characters to activate the search filter. Once it appears, select the employee’s name from the dropdown list. 
3. Select Yes in the Final Pay field. Updating this field will revise the Lump Sum Pay window to show the fields you will need to configure for the Final Pay.
4. Select the Job that is linked to the final pay. This will revise the fields in the Lump Sum Pay popup so that you can configure the final pay. 
5. Tick the Include all payable leave balances checkbox to include the summarised leave balance payouts in the Final Pay. This list will include any leave that has been assigned to the employee that has also been configured to pay out.
6. Tick the Include outstanding payable deductions balance checkbox to include all relevant deductions OR select the individual deduction items that you would like to recover as part of the Final Pay.
   Ticking the parent checkbox will automatically select all the individual deduction amounts listed underneath. 
7. If you tick the Include outstanding recoverable deductions checkbox, any recoverable deductions against the employee will be recovered as part of the Final Pay.
8. Confirm the Termination Date, which is prefilled based on what has been entered in the employee’s Employment tab. The field is greyed out in the Final Pay and cannot be edited from within the Lump Sum Pay popup. 
9. Complete the Payroll Note and Pay Advice Note fields if there is any information that you would like to record.
10. Click Save to generate the Final Pay.

Please note that the payout and recovery checkboxes cannot be ticked if there are no associated items. For example, if an employee has no recoverable deductions outstanding, you will not be able to tick the Include outstanding recoverable deductions checkbox. 

If a deduction or leave balance is not appearing in the popup window, it is most likely that the item has not been configured to appear for inclusion upon termination. 

Restrictions on Creating a Final Pay

The Final Pay field will only appear for PAYE employees with a Termination Date set on their Employment tab. It does not apply to contractors or to employees from non-NZ regions. 

When you indicate that you are creating a Final Pay, you’ll see a warning banner in the popup window if there are any outstanding pays for the employee in Process Payroll, as a reminder to process these before you proceed with the Final Pay. 

If another Final Pay for an employee has been created in Process Payroll but has not been paid, the Final Pay dropdown will be greyed out and set to No. Once the existing Final Pay is paid, you will be able to create a second Final Pay.

Review a Final Pay in Process Payroll

Once the Final Pay is saved, it will appear in the Process Payroll report, denoted with a red FP icon. The Pay Period assigned to the pay is determined by the Termination Date that has been entered on the employee’s profile. 

You can expand the pay to view the specific items that have been included and make any manual adjustments that are necessary. 

Updates to the lump sum pay will record in the History. When a Final Pay is generated, this will show as created ‘by Termination Tool (Username)’ 

Tax, Contributions and ESCT

Please note that Tax, KiwiSaver and ESCT amounts will calculate automatically when the Final Pay is generated, with a breakdown of the tax and ESCT calculations.

• Tax will calculate in line with normal NZ lump sum calculations
• Contributions and their corresponding ESCT or KiwiSaver deductions will appear unless all pay items in the Final Pay have been set as exempt from KiwiSaver
• The ESCT rate that is applied is drawn from the employee’s profile for the relevant financial year.

Leave Calculations in a Final Pay

Any leave amounts that are included in a Final Pay will be recorded using the Pay Item that has been configured for the relevant leave category in Config > Leave. To confirm which Pay Item is being used for a particular leave category, check the Termination Pay Item field. 

The total leave amount that displays in the Final Pay will reduce the employee’s leave balance to 0 units (ie days, hours, or dollars). If a leave balance is currently negative, a negative amount will appear in the employee’s Final Pay. 

Deductions Calculations in a Final Pay

The Final Pay will include all deductions that have been set as Recover on Termination in Config > Payroll > Deductions. The total deduction amount that shows in the pay will reduce the outstanding deduction balance for the employee to $0. 

Please note that if a Final Pay has an overall negative total, paying it will create a recoverable deduction.

Outstanding Recoverable Deductions in a Final Pay

If the Final Pay has been configured to include a recoverable deduction, this will show in the pay summary. 

The full recoverable deduction amount will be included in the Final Pay as long as the employee’s Net Wages are greater than the total recoverable deduction. If their Net Wages are less than the total of the recoverable deduction, then the maximum amount that can be deducted will be included in the Final Pay, bringing the Net Wages to $0.

Final Pays and the Leave History Report

Once a Final Pay is fully processed and paid, all leave balances for an employee will zero out in the Leave History Report, as long as the ‘Includes all outstanding leave balances’ checkbox was ticked in the Final Pay. 

All balances will zero out regardless of whether they were paid to the employee or not. 

You’ll see three different possible descriptions for items in the Leave History Report.

• For leave that is paid out to the employee on termination: ‘Created a debit/credit as a result of leave balance paid out in termination final pay’.
• For leave that was not paid out to the employee on termination: ‘Created a debit/credit as a result of leave balance reduced to zero due to termination’.
• For leave such as ALIA taken that is offset by a Holiday Pay final amount: ‘Created a debit/credit as a result of leave taken in advance being offset in termination final pay’.

Tax Calculation Method on Termination

When an employee is terminated and the NZ Termination Tool is used (via Lump Sum), all earnings are taxed using the last two pay periods.

When Final Pay is flagged as "Yes", this uses the last two pay periods

• 2 x weekly pay period, multiplied by 26
• 2 x fortnightly pay period, multiplied by 13
• 2 x monthly pay period, multiplied by 6

The above calculation replaces the existing two steps highlighted below, where the tax calculation was previously calculated on the preceding 4 weeks' earnings