Payroll
How the end-of-service settlement is calculated
The formula behind the indemnity, the accrued leave payout, loan deductions and net payable on an end-of-service settlement, with a worked example.
3 min readLast updated
In this article
When you select Calculate on a new settlement, the system works out the entitlement from three things on the employee's record: the joining date, the current basic salary and the leave balances, plus their active loans. This article sets out the exact rules so you can check every figure in the Settlement Breakdown.
See the figures
Open People › Payroll › End of Service.
Open a settlement with Actions › View, or select New Settlement and then Calculate to preview one.
The rules
Figure | How the system calculates it |
|---|---|
Years of Service | The time from the joining date to the Termination Date, in years with the fraction (for example 7.25). The screen also stores the years, months and days. |
Basic Salary | The basic salary on the employee's record when you calculate. Allowances are not included. |
Indemnity | Half a month of basic salary for each of the first five years, and a full month for each year after five, both pro-rated for part years. |
Accrued leave | The remaining days of all the employee's leave balances for the termination year × basic salary ÷ 30. The label shows the number of days. |
Outstanding Loans | The outstanding balance of every active loan of the employee. |
Gross Settlement | Indemnity + accrued leave + Notice Period + Other Entitlements. |
Total Deductions | Outstanding loans + Other Deductions. |
Net Payable | Gross settlement − total deductions, never below zero. |
In formula form:
Indemnity = (Basic ÷ 2) × min(Years, 5) + Basic × max(0, Years − 5)
The preview you see before saving shows the gross from indemnity and leave only; the notice period and other entitlements are added when you enter them, and the saved settlement carries the final totals.
A worked example
Basic salary 8,000, joined on 1 January 2019, termination date 1 January 2026 (7 years), 12 days of leave remaining, one active loan with 3,000 outstanding, no adjustments:
First five years: 8,000 ÷ 2 × 5 = 20,000.
Remaining 2 years: 8,000 × 2 = 16,000.
Indemnity: 36,000.
Accrued leave: 12 × 8,000 ÷ 30 = 3,200.
Gross Settlement: 39,200. Total Deductions: 3,000. Net Payable: 36,200.
What the formula does not do
The reason does not change the amount. Resignation, termination, retirement, death, end of contract and other all use the same formula. There is no reduced entitlement for resignation and no minimum service period. If your labour law or the employment contract sets a different entitlement, enter the difference in Other Entitlements or Other Deductions.
No final month's salary. The last month is paid by the payroll run, prorated to the leaving date.
No salary history. The calculation uses today's basic salary, not an average. Check the employee's salary before you calculate.
All leave types count. Remaining days from every leave balance of the termination year are added together. If some leave types are not payable on leaving, deduct their value through Other Deductions.
Common questions
Why does the gross not change when I add Other Deductions? Deductions reduce the net, not the gross. They appear in Total Deductions.
The loans are larger than the settlement. Net Payable shows zero and the remainder is not shown separately. Settle the balance with the employee before you mark the settlement paid. See Settle an employee's end of service.