Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
Letting someone go is never easy. But understanding your obligations around “severance” will help you manage change fairly, stay compliant and protect your business.
In Australia, employers often use “severance” as a catch‑all term for the payments and steps at the end of employment. Legally, though, several different concepts sit under that umbrella - such as notice, redundancy pay, accrued leave, and other entitlements.
In this guide, we’ll explain what severance means for employers, when redundancy pay is required, what to include in final pay, and the practical steps to handle separations properly. If you’ve been searching “what is severence,” you’re in the right place - we’ll break it down in plain English so you can move forward confidently.
What Does Severance Mean For Employers?
“Severance” isn’t a defined legal term in Australian employment law. Employers typically use it to describe the total package paid (and the steps taken) when employment ends - whether that’s due to redundancy, performance, mutual separation or end of a fixed term.
From a compliance perspective, severance can include:
- Notice or payment in lieu of notice
- Redundancy pay (if applicable under the National Employment Standards, or an award/enterprise agreement)
- Accrued but untaken annual leave and, where applicable, long service leave
- Any contractual bonuses or incentives that have been earned
- Other agreed terms (for example, garden leave, outplacement support, or a Deed of Release)
Put simply, severance is the combination of legal entitlements and any additional benefits you decide to offer to support a smooth and lawful exit.
When Is Severance (Redundancy Pay) Required?
Redundancy pay is a specific entitlement under the National Employment Standards (NES) when an employee’s job is genuinely no longer required to be done by anyone. It’s separate from notice and accrued leave, and it’s calculated based on the employee’s continuous service.
Genuine Redundancy
A genuine redundancy has three key elements:
- The employer no longer requires the person’s job to be performed by anyone due to operational changes (for example, restructuring, new technology, or a business closure).
- The employer has complied with any consultation obligations under an applicable award or enterprise agreement.
- It was not reasonable to redeploy the employee within the business or any associated entity.
Getting these steps right is critical. If a role still exists and is simply being refilled, or if consultation and redeployment are overlooked, you risk unfair dismissal claims.
Small Business Exemption
Under the NES, employers with fewer than 15 employees are generally exempt from paying redundancy pay. However, you still need to pay notice (or pay in lieu), plus accrued entitlements.
Always check the relevant modern award or enterprise agreement. Some instruments may contain redundancy-like benefits or specific consultation requirements that apply regardless of business size.
Who Is Covered (And Who Isn’t)?
Redundancy pay doesn’t apply to:
- Casual employees
- Employees with less than 12 months’ service
- Employees on fixed-term contracts that end as scheduled (unless the contract or instrument says otherwise)
- Apprentices and trainees (in many cases)
That said, these employees may still be entitled to notice (unless expressly excluded), and must receive any accrued entitlements as part of their final pay.
How Redundancy Pay Is Calculated
Redundancy pay is based on years of continuous service and paid at the employee’s base rate of pay for ordinary hours. Many employers find it helpful to run the numbers early to plan cashflow and timelines. For a quick approximation, try Sprintlaw’s redundancy calculator.
What Payments Are Included In An Employee’s Final Pay?
Whether you’re making a role redundant, ending a probationary period, or accepting a resignation, you’ll need to process final pay correctly and on time. The exact components will vary by scenario, but typically include:
- Outstanding wages up to the last day of work
- Notice or payment in lieu of notice (unless the employee works out their notice, or they’re dismissed for serious misconduct)
- Accrued but unused annual leave (and annual leave loading, if it usually applies for that employee)
- Accrued long service leave where applicable (state/territory laws apply)
- Redundancy pay (if required)
- Any other contractual or award entitlements that have been earned and fall due
Timing matters. Final pay deadlines can be set by an award or agreement, or by your contract. Even where no instrument specifies a timeframe, it’s best practice to pay promptly to avoid disputes.
For a deeper checklist of what to include and common timing rules, see our guide to calculating final pay.
Notice, Garden Leave And Pay In Lieu
Depending on the circumstances, you can:
- Ask the employee to work through their notice period
- Place them on garden leave (they remain employed and paid but don’t attend work)
- Make a payment in lieu of notice and end employment immediately
Your approach should align with the employment contract and any applicable industrial instrument.
Tax Treatment (High-Level)
Some termination amounts may be treated as employment termination payments (ETPs) for tax purposes. While we don’t provide tax advice here, it’s important to coordinate with your payroll or tax adviser to withhold the correct amount and issue the right payment summaries. Getting this wrong can create headaches for everyone.
How To Manage A Redundancy Or Separation Fairly
Clear processes make difficult situations smoother for your team and safer for your business. Here’s a practical approach you can tailor to your circumstances.
1) Confirm The Legal Basis
- Is this a redundancy, performance dismissal, capacity issue, end of probation, or mutual separation?
- Check the employee’s status (full-time, part-time, casual), length of service, and whether an award or enterprise agreement applies.
- Review the employment contract for termination clauses, notice, bonuses and post-employment restraints.
If it’s a redundancy, confirm the role is genuinely no longer required and that redeployment isn’t reasonable. If performance or conduct is the issue, ensure you’ve followed a fair process and have evidence to support the decision.
2) Plan Consultation And Communications
If an award or agreement applies, you’ll usually have consultation obligations for major workplace changes such as redundancies. This typically involves:
- Giving affected employees information about the changes (and the likely effect on them)
- Discussing measures to avert or mitigate adverse effects
- Genuinely considering feedback
Even where consultation isn’t strictly mandated, communicating respectfully and transparently can reduce risk and maintain trust with your team.
3) Map Out Entitlements And Timing
Work out the final pay components in advance so you can explain and pay them promptly. Include notice (or pay in lieu), accrued leave, redundancy pay if applicable, and any contractual amounts.
Decide whether the employee will work notice, move to garden leave, or receive pay in lieu. Be ready to provide a letter confirming the termination details, including last day, entitlements and return of property.
4) Prepare The Right Documents
- Termination letter detailing the reason, notice and entitlements
- Final pay statement and payslip
- Separation Certificate (if requested by the employee for Services Australia)
- A Deed of Release (if offering additional benefits or to document a mutual settlement)
Many employers use a Employee Termination Documents Suite to standardise these steps and reduce admin time.
5) Consider A Mutual Separation Or Settlement
In some situations, both parties may prefer to end employment by agreement. A mutual separation agreement can set out the terms, including any ex‑gratia payment, restraint obligations, non‑disparagement and confidentiality. Often, the agreement is formalised in a Deed of Release to give both sides certainty and closure.
6) Offboarding And Handover
Collect company property, revoke system access, and plan a handover of work. A friendly, professional send-off can preserve relationships and brand reputation - even in tough circumstances.
Common Risks And How To Avoid Disputes
Most termination disputes stem from process issues rather than the underlying decision. Here are common pitfalls and how to avoid them.
Not Consulting Or Considering Redeployment (Redundancy)
Where an award or enterprise agreement applies, failing to consult can make a redundancy look unfair - even if the role truly isn’t required. Document your consultation steps, assess reasonable redeployment options, and keep notes of the alternatives you considered.
Inadequate Notice Or Incorrect Final Pay
Underpayments and delayed final pays are a fast track to complaints. Cross‑check notice against the NES, any applicable instrument, and the contract. If you’re ending employment immediately, ensure the payment in lieu of notice is accurate and included with the final pay. Double‑check accrued leave balances and consider referencing our guide to final pay for a simple checklist.
Using “Redundancy” To Manage Performance
Redundancy is not a shortcut for performance or conduct issues. If the position still exists and the duties are being performed by others, you’ll need to follow a fair performance management process instead of relying on redundancy pay exemptions.
Overlooking Contractual Terms
Commission schemes, bonuses, and incentive plans often have complex vesting or eligibility rules. Review these carefully before finalising the termination amount to avoid disputes. Ensure any post‑employment restraints and confidentiality obligations are clearly restated in your exit letter or a Deed of Release.
Poor Documentation
Clear records support your decision and reduce risk. Keep copies of consultation notes, performance discussions (if relevant), notices, and signed documents. Many employers build templates into their termination documents process so nothing gets missed.
Accrued Leave On Exit
Employees remain entitled to their accrued annual leave when employment ends. Your obligations around paying out leave (including loading, if it ordinarily applies) are explained in our guide to annual leave on resignation. Long service leave is governed by state and territory laws, so check local rules for thresholds and pro‑rata entitlements.
Confidentiality, Restraints And Non‑Disparagement
Post‑employment obligations are only as strong as their drafting. If you’re offering extra benefits beyond minimum entitlements, it’s common to formalise those terms in a Deed of Release. This can include reaffirming confidentiality, non‑disparagement and any reasonable restraints of trade to protect your client relationships and IP.
Practical Tip: Use Plain, Respectful Language
Tone matters. Even when the law is on your side, a respectful approach helps avoid conflict. Be clear, accurate and empathetic in written communications - it goes a long way in de‑escalating tense situations.
Severance FAQs For Employers
Is “Severance” The Same As Redundancy Pay?
Not exactly. “Severance” is a general term employers use for the overall exit package. Redundancy pay is a specific NES entitlement that applies only to genuine redundancies (and not to small business employers, casuals, or employees with less than 12 months’ service).
Can We Offer Extra Benefits Instead Of Redundancy?
You must pay the minimum legal entitlements where redundancy pay applies. You can always offer additional benefits to support the transition - and it’s common to document any extra payments and protections in a Deed of Release so both sides have certainty.
What About Mutual Separation?
Sometimes both parties prefer to end employment by agreement. A mutual separation agreement can finalise the exit terms (and usually includes a release of claims) while preserving the relationship.
Should We Use Garden Leave?
Garden leave can be useful where you want to protect client relationships, sensitive information or team culture during notice. The employee remains employed and paid, but does not attend work or perform duties. Check the contract and ensure the arrangement is reasonable.
Key Takeaways
- “Severance” is a practical shorthand for the full exit package and process - legally, it spans notice, redundancy pay (if applicable), accrued leave and any agreed extras.
- Redundancy pay only applies to genuine redundancies and does not usually apply to small business employers (fewer than 15 employees), casuals or employees with less than 12 months’ service.
- Get the process right: consult where required, consider redeployment, and document decisions to reduce the risk of disputes or unfair dismissal claims.
- Final pay should include outstanding wages, notice or pay in lieu, accrued leave, and redundancy pay (if owed), paid promptly and correctly.
- Use clear documents - termination letters, a termination documents suite, and where appropriate, a Deed of Release - to protect your business and provide certainty.
- Respectful communication and a structured offboarding process help preserve relationships and reduce legal risk.
If you’d like a consultation on managing severance, redundancy or employee exits in your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.
