Creating a Severance Agreement in Australia: Employer’s Guide to Legal Compliance

Ending employment is one of the tougher parts of running a business. You want to support your team, protect your business from disputes, and stay compliant with Australian employment law. A clear, carefully drafted severance agreement (often called a settlement deed or deed of release) can help you do all three.

If you’re wondering what “severance” actually means in Australia, what payments you may need to make, and how to put together a compliant, enforceable document, you’re in the right place. This guide breaks down the key concepts in plain English and outlines the steps to prepare a legally sound agreement.

Whether you’re restructuring, managing a sensitive exit, or planning ahead, having a simple roadmap makes a big difference. Below, we’ll cover the essentials and highlight where getting tailored advice can give you extra confidence.

What Is a Severance Agreement in Australia?

In Australia, “severance” is a broad term describing the end of employment. From a legal standpoint, most employers documenting an agreed exit will use a deed of release or settlement deed rather than a generic “severance agreement.” The goal is the same: set out what each party will do and reduce the risk of future disputes.

Severance Pay vs Termination Pay vs Redundancy Pay

• Termination Pay: All amounts owed when employment ends, such as final wages, accrued but unused annual leave, and any payment in lieu of notice (if applicable).
• Redundancy Pay: A minimum entitlement under the National Employment Standards (NES) for eligible employees whose role is genuinely made redundant (subject to exemptions, including some small businesses). Use our redundancy calculator to get a feel for amounts.
• Severance Payment (Ex Gratia): Any additional, discretionary amount you agree to pay (often in exchange for a release of claims). This is separate to statutory entitlements.

Using the right term matters. “Redundancy pay” is a statutory entitlement if criteria are met. A discretionary “severance payment” (sometimes called ex gratia) is a commercial decision that typically sits inside a settlement deed.

What Does a Severance Agreement Do?

A severance agreement records the terms of an agreed exit and commonly includes the end date, entitlements, any extra payments, confidentiality, the return of property, post-employment restraints (if any), and a release of claims. When drafted correctly, it provides clarity, reduces legal risk, and helps both parties move on.

When Should You Use a Severance (Settlement) Agreement?

There’s no general law requiring a severance agreement for every departure. However, it’s highly recommended when you need certainty and closure around the exit. Common scenarios include:

• A genuine redundancy (especially for mid-to-senior roles or complex restructures).
• A negotiated exit where you offer benefits beyond minimum entitlements (e.g. an ex gratia payment or extended benefits).
• Sensitive performance or conduct matters resolved by agreement (without admissions).
• Senior or key employees where restraints, confidentiality, and IP protection are critical.

In higher-risk exits, a formal deed of release or settlement deed is best practice because deeds provide stronger enforceability than simple agreements. For more detail on how these documents work, see Creating a Deed of Release and Settlement.

What To Include In a Legally Sound Severance Agreement

Every exit is different, but most robust agreements cover the following:

• Parties and Role Details: Names, position, start date, and service period.
• End Date: The date employment will end (or has ended).
• Notice Arrangements: Whether the employee will work out notice or receive payment in lieu of notice (PILON), and the exact duration or amount.
• Statutory and Contractual Entitlements: Final pay items (e.g. outstanding wages, unused annual leave) and any long service leave payout if applicable under state law.
• Redundancy Pay: If a genuine redundancy, specify the entitlement under the NES (noting any applicable small business exemption or other carve-outs).
• Ex Gratia/Additional Payments: Any discretionary “severance” amount, including timing and any conditions (for example, returning property or complying with ongoing confidentiality).
• Tax and Superannuation: State how amounts will be taxed and whether superannuation applies to particular components (for instance, see guidance on payment in lieu of notice and superannuation). It’s sensible to make clear the employee’s responsibility to obtain personal tax advice.
• Property and Access: Return of devices, keys, cards, documents and removal of systems access on or before the end date.
• Confidentiality and IP: Ongoing obligations not to use or disclose confidential information and to assign or confirm ownership of intellectual property (as relevant).
• Restraints (If Required): Reasonable non-solicitation or non-compete restrictions by scope, duration, and geography. Overly broad restraints risk being unenforceable.
• Release of Claims: A mutual (or one-way) release that is carefully drafted so it does not purport to waive non-excludable statutory rights.
• Non-Admission and Non-Disparagement: Clarify that neither party admits liability and set respectful communication expectations.
• Practicalities: How and when payment will be made, confidentiality around the agreement itself, and a dispute resolution mechanism.

Because some rights cannot be contracted out of, getting an employment lawyer to review your draft is a smart investment. If you need a structured set of exit documents, Sprintlaw’s Employee Termination Documents Suite and Redundancy Document Suite are designed for Australian employers.

Legal Requirements You Must Meet First

A settlement deed isn’t a shortcut around legal obligations. Before you finalise terms, make sure the underlying process and payments meet Australian law.

1) Notice of Termination (or PILON)

Under the NES, employees are entitled to minimum written notice based on length of service (or payment in lieu). Check the contract, Award or enterprise agreement for any higher requirement, and confirm the details in your agreement. If you’re paying instead of requiring the employee to work the notice period, see how payment in lieu of notice works in practice.

2) Redundancy Entitlements

If the role is genuinely redundant and the NES applies, redundancy pay may be required unless an exemption applies (for example, some small businesses with fewer than 15 employees). It’s helpful to cross-check against your figures using how to calculate your redundancy payment and ensure any consultation obligations in an Award or enterprise agreement are met.

3) Accrued Entitlements and Final Pay

Pay outstanding wages up to the end date and any accrued but unused annual leave. State-based long service leave may also be payable depending on jurisdiction and service. Include these items clearly in the agreement and on the final payslip.

4) Awards, Enterprise Agreements and Contracts

Check applicable industrial instruments for additional steps, such as consultation, redeployment options, or enhanced payments. The deed should reflect that these prerequisites have been satisfied.

5) General Protections and Fair Process

Ensure the reason for termination is lawful and the process is fair. A settlement deed can’t cure a dismissal that breaches the Fair Work Act’s general protections or unfair dismissal provisions, and attempting to do so may create further risk. If you’re unsure, it’s best to speak with an employment lawyer early.

6) Tax and Superannuation Treatment

Different components of termination payments can be taxed differently, and superannuation may or may not apply. For example, super treatment for PILON differs from redundancy pay. Your agreement should describe how amounts will be treated for tax and super, and encourage the employee to obtain their own tax advice.

7) Employment Separation Certificate (When Requested)

An Employment Separation Certificate is not automatically required in every exit. Typically, employees or Services Australia may request it to assess eligibility for payments. If you’re asked to provide one, here’s a quick overview of employer separation certificates and what they include.

Step-By-Step: How To Prepare and Finalise a Severance Agreement

1. Review the Employment Framework: Start with the employment contract and any Award or enterprise agreement. Confirm notice, redundancy, and other entitlements.
2. Map the Entitlements: Calculate final wages, accrued leave, notice (worked or paid), and any redundancy pay. If you’re proposing an ex gratia amount, decide how it will be structured and timed.
3. Check Tax and Super: Identify how each component will be taxed, and whether super applies to specific items like PILON. Reference your approach in the deed and coordinate with payroll to execute correctly.
4. Draft the Deed: Use plain English and set out all terms clearly - payments, dates, property return, confidentiality, restraints (if any), and the release. Ensure the release does not purport to waive non‑excludable statutory rights.
5. Compliance Cross‑Check: Sense‑check the document against the NES and any industrial instruments, and confirm the underlying process (consultation, redeployment consideration, decision rationale) stacks up.
6. Offer Time and Independent Advice: Provide the employee with a reasonable period to consider the deed and the opportunity to obtain independent advice. Avoid undue pressure or short-fuse deadlines.
7. Execute Properly: Deeds have specific execution requirements. Arrange signatures in the correct form and ensure payment timeframes are practical and met.
8. Close Out Practical Steps: Confirm return of property, remove system access, deliver the final payslip, and handle references or communications as agreed.

If the exit is complex or sensitive, consider engaging a lawyer to draft or review the deed. If you need a comprehensive settlement document, Sprintlaw can prepare a tailored deed as part of our deed of release and settlement guidance.

Common Mistakes To Avoid

• Skipping the process check: A deed won’t fix a procedurally unfair or unlawful dismissal. Ensure the reason and process are compliant before you propose terms.
• Mixing up entitlements: Be clear on what’s statutory (e.g. NES redundancy, notice) vs ex gratia. Don’t label statutory entitlements as “severance.”
• Overreaching restraints: Non-compete or non-solicit terms must be reasonable in scope, geography and duration to be enforceable.
• Unclear tax/super handling: Ambiguity leads to disputes and payroll errors. Spell out how payments will be treated and when they’ll be made.
• Requiring on‑the‑spot signing: Pressure can undermine the enforceability of the deed. Provide reasonable time and encourage independent advice.
• Not documenting property and access: Missing device returns, data deletion, or access removal can create security and confidentiality issues.
• Using the wrong template: Overseas or generic “severance” templates often don’t align with Australian law. Use a document that reflects the NES and local enforceability rules.

Key Takeaways

• In Australia, a “severance agreement” is typically a settlement deed or deed of release that documents the exit terms and reduces risk for both parties.
• Get the foundations right first: confirm notice or payment in lieu of notice, redundancy entitlements (if any), and accrued leave before you finalise the deed.
• Be accurate with terminology: redundancy pay is a statutory entitlement under the NES; any extra “severance” is usually an ex gratia payment negotiated between the parties.
• Address tax and superannuation clearly in the deed and coordinate with payroll - rules differ for components like PILON and redundancy payments.
• Offer reasonable time for the employee to consider and obtain independent advice, and avoid exerting pressure that could undermine enforceability.
• For sensitive or senior exits, consider tailored documents such as an appropriate deed of release and ensure any restraints are reasonable.
• An Employment Separation Certificate is only required when requested by the employee or Services Australia - see our overview of employer separation certificates if asked to provide one.

If you’d like a consultation on drafting or reviewing a severance (settlement) agreement for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.