How Employers Should Handle Severance Pay In Australia

If you’re running a small business or startup, few situations feel as high-stakes (and time-sensitive) as ending someone’s employment. Even when a decision is commercially necessary, it can quickly become complicated if you’re not sure what “severance pay” means in Australia, what you have to pay, and when you can pay less (or nothing at all).

To make it even trickier, many people search for “serverance pay” (a common misspelling) when they really mean redundancy pay, notice, or a termination payout. In practice, “severance pay” is often used as an umbrella term for the money paid to an employee when their employment ends.

In this guide, we’ll walk you through what people usually mean by “serverance pay” in Australia, how it interacts with redundancy and notice, and the practical steps you can take to reduce legal risk while treating your team fairly.

What Does “Serverance Pay” Mean In Australia (And What Does It Usually Include)?

In Australia, “severance pay” isn’t a single, standalone legal entitlement with one fixed definition. Instead, when someone refers to severance pay (or searches for “serverance pay”), they’re often talking about one or more of the payments that may be due when employment ends.

From an employer perspective, it helps to break this down into clear “buckets” of payments. Depending on the circumstances, severance pay may include:

• Notice of termination (or payment instead of having the employee work out the notice period)
• Redundancy pay (where the role is genuinely no longer required)
• Accrued entitlements (like unused annual leave, and sometimes long service leave depending on the state/territory rules)
• Other contractual or discretionary payments (for example, a negotiated ex-gratia amount as part of an exit package)

One key point: what you owe can come from multiple sources, including the Fair Work Act 2009 (Cth), a modern award, an enterprise agreement, and the individual employment contract.

That’s why it’s risky to use a one-size-fits-all approach. A “standard severance” payment that seems reasonable for one employee can be incorrect for another if they’re under a different award, have different service length, or are being terminated for different reasons.

When Do You Have To Pay Severance Pay (And When Don’t You)?

Whether you must pay severance pay depends on why employment is ending and what legal instruments cover the employee.

1) Redundancy (Role No Longer Required)

If employment ends because the role is no longer required (for example, restructure, loss of funding, automation, or closing a business unit), you may need to pay redundancy pay in addition to notice and accrued entitlements.

However, redundancy pay is not automatically payable in every redundancy scenario. For example, there are small business carve-outs and other exceptions (more on that below).

If you’re trying to estimate the likely cost early (for budgeting and planning), a redundancy calculator can be a helpful starting point. Just remember you’ll still need to check the employee’s coverage (award/enterprise agreement/contract) to confirm the final position.

2) Resignation

If the employee resigns, you generally do not pay redundancy pay. In most resignations, “severance” amounts are usually limited to accrued entitlements (like unused annual leave) and any other amounts owed under the contract or award.

It’s also important to manage final pay correctly when someone resigns, including what happens with unused leave: annual leave on resignation.

3) Termination For Performance or Misconduct

If you terminate employment due to performance issues or misconduct, redundancy pay generally doesn’t apply (because the role still exists). But you may still owe notice (or payment in lieu) and accrued entitlements, depending on the circumstances and the seriousness of the conduct.

Even where you believe termination is justified, the bigger risk for a small business is often process risk (for example, lack of warnings, unclear expectations, inconsistent treatment, or not complying with an applicable award or contract).

4) End Of A Fixed-Term Contract

If a fixed-term contract reaches its genuine end date and isn’t renewed, this is often treated differently to a redundancy. That said, fixed-term arrangements can be complex in practice (including where there have been extensions/rollovers, or where the contract structure doesn’t reflect the reality of ongoing work).

Fixed-term contracts are also subject to specific Fair Work rules and limitations, so it’s important the arrangement is set up correctly from the start. Getting the structure and wording right upfront in your Employment Contract can reduce disputes later about what was “agreed” and what payments are due at the end.

Redundancy Pay: The Part Of Severance That Causes The Most Confusion

When people talk about severance pay in Australia, they’re often thinking about redundancy pay in particular.

Redundancy pay is generally linked to:

• the employee’s length of continuous service;
• whether the redundancy is a genuine redundancy (i.e. the job is no longer required to be performed); and
• whether an exception applies (for example, a small business exemption, or the employee falls into a category where redundancy pay isn’t payable).

For small businesses and startups, the practical issues are often:

• Is this actually a redundancy? (Or are we just replacing the person / changing reporting lines / splitting duties?)
• Have we consulted properly? (Many awards include consultation obligations about major workplace change.)
• Do we qualify as a small business employer? (Headcount can matter, and it’s not always as simple as “we’re a startup, so we’re small.”)

If you’re unsure, it’s worth pausing and getting advice before communicating final outcomes. Once redundancy is announced (or paid), it can be difficult to unwind mistakes.

Small Business Exemption (Why It Matters For Startups)

Many startups operate with lean teams, so the small business redundancy exemption is often front of mind. Under the Fair Work Act, a “small business employer” is generally an employer with fewer than 15 employees at the time of the redundancy (and in many cases this headcount can include regular and systematic casual employees).

That said, you still need to be careful about:

• how you count employees (including regular casuals in some contexts);
• whether an award or enterprise agreement applies and adds consultation or notice requirements; and
• ensuring the termination is genuinely about the role no longer being required.

Even where redundancy pay isn’t payable, you usually still have to manage notice and pay accrued entitlements correctly.

Notice Periods And Payment In Lieu: A Core Part Of “Serverance Pay”

Notice is one of the most common parts of severance pay, because it applies in many terminations (not just redundancies).

In simple terms, you either:

• give the employee notice and allow them to work through it, or
• terminate immediately and provide payment in lieu of notice.

Payment in lieu is common for small businesses because it gives you a clean break (and reduces operational risk, especially if the relationship has deteriorated). But you must do it correctly.

As a starting point, here’s how payment in lieu of notice generally works, including why the wording in your contract can matter.

Be Careful With Awards, Enterprise Agreements, And Contracts

Notice entitlements can be impacted by:

• the National Employment Standards (NES) under the Fair Work Act;
• any applicable modern award or enterprise agreement (which can add rules); and
• the employment contract (which can provide more generous notice than the NES, but generally can’t undercut minimum entitlements).

For startups, a common risk is that you’ve used a generic contract that doesn’t match the employee’s classification or award coverage. This can cause underpayment issues (including for notice) that only surface at termination time.

Final Pay Checklist: What Should Be Included In A Severance Calculation?

Even if redundancy pay is not part of the picture, you’ll almost always need to calculate a final payout. A clean, well-documented final pay process is one of the best ways to prevent disputes and protect your reputation as an employer.

Here’s a practical checklist of what your “serverance pay” calculation may need to include (depending on circumstances):

1) Outstanding Wages And Allowances

• Pay up to the employee’s last day of employment (or through the notice period, if paid in lieu).
• Include ordinary hours, overtime, penalty rates and allowances that are owed under the award/enterprise agreement/contract.

2) Notice Or Payment In Lieu

• Confirm the minimum notice under the NES and any award/contract terms.
• Decide whether the employee works the notice period or you pay it out.

3) Accrued Annual Leave (And Leave Loading If Applicable)

• Unused annual leave is generally paid out on termination.
• If leave loading applies (often due to an award or enterprise agreement), make sure you handle that correctly.

4) Long Service Leave (Where Applicable)

Long service leave rules vary by state/territory and can depend on the reason for termination and length of service.

For example, if you operate in Queensland and you’re dealing with pro-rata long service leave questions, it’s worth understanding the basics of pro-rata long service leave.

5) Redundancy Pay (If It’s A Genuine Redundancy And No Exception Applies)

• Confirm whether redundancy pay applies.
• Calculate based on continuous service and applicable rules.
• Don’t forget consultation obligations that may exist under an award.

6) Any Contractual/Discretionary Amounts (If You’re Negotiating An Exit)

Sometimes businesses choose to offer an additional payment as part of a settlement or mutual separation arrangement. This can be used to resolve a dispute or reduce the risk of certain claims, but it should be documented properly (and handled carefully in communications).

In these situations, the “severance package” becomes a legal risk-management tool, not just a payroll exercise. Keep in mind that deeds can’t generally exclude some rights and obligations (for example, you can’t contract out of the NES minimums), and they won’t prevent a regulator from taking action.

How To Reduce Risk When Paying Severance Pay In A Small Business

Severance payments often become contentious not because of the dollars, but because of uncertainty and poor process. For small businesses and startups, a few practical steps can dramatically reduce the risk of an underpayment dispute or an unfair dismissal claim.

1) Get Clear On The Reason For Termination Before You Act

Redundancy, performance, misconduct, end of contract, resignation - each pathway has different legal implications.

If you’re not sure which category you’re in, slow down and clarify first. A “performance termination” dressed up as a redundancy (or vice versa) is one of the fastest ways to create legal exposure.

2) Check Award Coverage Early (Not On The Last Day)

Awards often contain requirements around:

• consultation (especially for redundancy/major change);
• minimum notice;
• classifications and pay rates; and
• leave loading and allowances.

If you only look at the award when you’re finalising severance pay, you may find issues that should have been addressed months earlier.

3) Keep Employment Paperwork Tight From Day One

The easiest termination is the one you prepared for upfront.

That means having:

• a properly drafted Employment Contract that matches the role and your business reality;
• workplace policies that align with how you manage performance and conduct; and
• clear documentation of role requirements and changes over time.

This isn’t about being overly formal - it’s about making sure expectations and processes are clear while the relationship is still healthy.

4) Communicate Carefully (Especially In Redundancy)

What you say (and how you say it) matters.

For redundancies, be careful not to:

• announce outcomes before consultation (where required);
• make statements that suggest the person is being removed for performance reasons; or
• promise specific severance amounts before you’ve verified entitlements.

5) Consider A Mutual Separation Agreement For Higher-Risk Exits

Sometimes, the best commercial outcome is a clean, agreed departure documented in writing (often via a deed), especially where you’re offering a discretionary amount above minimum entitlements.

This can be particularly relevant where:

• you’re paying a discretionary amount above minimum entitlements;
• there’s a dispute about performance or role changes; or
• you want confidentiality/non-disparagement obligations as part of the exit.

These arrangements need careful drafting and should be approached thoughtfully to avoid undue pressure or misleading statements. They also won’t “sign away” everything in every scenario, so it’s important to get advice on what can (and can’t) be settled.

Key Takeaways

• In Australia, “serverance pay” is commonly used to describe a combination of termination payments, including notice (or payment in lieu), redundancy pay (where applicable), and accrued entitlements like annual leave.
• Redundancy pay is only one part of severance pay, and it usually depends on whether the redundancy is genuine and whether an exception applies (which can be especially relevant for small businesses and startups, including the under-15-employee exemption).
• Notice and payment in lieu are common in many terminations, so your employment contract and any applicable award/enterprise agreement matter when calculating final pay.
• A solid final pay checklist should cover outstanding wages, notice, annual leave (and leave loading if applicable), long service leave (where applicable), and redundancy pay (if required).
• Termination payments can have different tax and payroll treatments (for example, unused leave, redundancy components and other amounts may be treated differently), so you should also confirm the right treatment for your situation.
• The best way to reduce severance pay disputes is to get the termination reason right, check award coverage early, and keep your employment paperwork and processes clear from day one.

If you’d like help managing severance pay, redundancies, or employment terminations in your small business or startup, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.