Severance Packages in Australia: What to Include and Offer Lawfully

Ending employment is never easy, but handling it well protects your business and your reputation.

When a role is no longer required, or you decide to settle a departure on agreed terms, a clear and compliant severance package can reduce risk, close out obligations cleanly and help everyone move forward.

In this guide, we’ll break down what a severance package means in Australia, when you might need to offer one, what to include, how to calculate each component, and a practical, step-by-step process to do it lawfully and respectfully.

What Is A Severance Package In Australia?

In Australia, a “severance package” generally refers to the total bundle of entitlements and benefits you offer an employee when their employment ends.

It’s not a single legal term defined in one law. Instead, it’s a practical way of describing what you pay and provide at separation, which can include both mandatory and discretionary items.

Typical components include:

• Statutory entitlements (e.g. accrued annual leave, long service leave where applicable)
• Notice pay or payment in lieu of notice
• Redundancy pay (if applicable under the Fair Work Act or an applicable award/agreement)
• A goodwill or ex gratia payment (optional)
• Benefits continuation for a short period (optional)
• A legally binding release of claims (usually via a Deed of Release)

Many employers also use a severance package to secure practical outcomes, such as return of company property, a confidentiality reminder, and agreed messaging about the departure.

Put simply, the severance package meaning is the overall “settlement” of the employment relationship - combining required entitlements with any additional payments or terms you choose to offer in exchange for closure and certainty.

When Are Employers Required To Offer Severance Pay?

There’s no blanket rule that says every departing employee must receive a severance package. However, certain payments are mandatory depending on the reason for termination and the employee’s circumstances.

1) Genuine Redundancy

If a job is genuinely no longer required and you follow the consultation and redeployment requirements, redundancy pay under the Fair Work Act may be owed (subject to exceptions for small business employers and other exemptions).

Redundancy pay is separate from notice and leave entitlements. The amount usually scales with the employee’s continuous service. If you’re unsure about figures, it’s worth reviewing how to calculate a redundancy payment under the Fair Work framework.

2) Termination For Other Reasons

Where employment ends for reasons other than redundancy (for example, performance, conduct after a fair process, or by mutual agreement), you’ll still need to pay out accrued entitlements and provide notice (or pay in lieu). Redundancy pay does not apply in these cases unless you are actually abolishing the role and meet the redundancy requirements.

3) Mutual Separation

Sometimes, both parties agree to end the employment with agreed terms and a release. In these cases, you might structure a tailored Employee Separation Agreement that sets out payments, benefits, confidentiality, restraints and a release of claims.

Even if it’s mutual, minimum entitlements and notice rules still apply unless a lawful agreement says otherwise (for example, offsetting notice with a payment).

What Should A Severance Package Include?

Every business and situation is different, but a well-planned package typically covers the items below. This section will help you decide what belongs in your offer and why.

Minimum Entitlements (Mandatory Items)

• Accrued Annual Leave: Must be paid out on termination. Leave loading may apply if it’s built into your contracts or award.
• Long Service Leave: Rules are state-based. If the employee meets the relevant threshold, pay it in line with your state or territory laws.
• Notice Of Termination: Provide the required notice period or pay in lieu. The length depends on service and sometimes age or contract terms. Many employers choose a clean payment in lieu of notice to end employment immediately and reduce disruption.
• Redundancy Pay (If Applicable): Payable if it’s a genuine redundancy and you’re not exempt.

Discretionary/Negotiable Items

• Ex Gratia Payment: A goodwill amount to facilitate a smooth exit and a binding release. This is optional and often linked to the employee signing a Deed of Release.
• Benefits Continuation: Short-term continuation of certain benefits (e.g. health cover if offered) or outplacement support.
• Garden Leave: If your contracts allow it, you may place the employee on garden leave during notice - they stay employed and paid, but don’t come to work.

Documentation And Protections

• Deed Of Release: A formal settlement deed where the employee releases claims in exchange for the agreed package, with confidentiality and non-disparagement terms.
• Return Of Property Checklist: Laptops, phones, access cards, files, and confidential information.
• Restraint And Confidentiality: Reinforce existing obligations or agree on new restraints (to the extent enforceable) in the release document.
• Communications Plan: A simple, agreed internal message to staff and external messaging if required.

Documenting these terms clearly helps prevent misunderstanding and reduces post-exit disputes. Many employers standardise the process using tailored termination documents prepared for their business.

How Do You Calculate The Key Parts Of A Severance Package?

Calculations can be straightforward once you confirm which components apply. Here’s how to think about each element.

1) Redundancy Pay

If it’s a genuine redundancy and you’re not exempt, redundancy pay is typically based on continuous service and set out in the Fair Work Act. Use your internal records to confirm service length, then calculate the amount in weeks’ pay. You can work through the steps for a compliant redundancy payment and ensure you’ve met your consultation and redeployment obligations first.

2) Notice Or Payment In Lieu

Check the contract, any applicable award or enterprise agreement, and the National Employment Standards (NES). If you choose to end employment immediately, you can make a lump sum payment in lieu of notice. Make sure you confirm whether contractual notice periods are equal to or higher than the NES and calculate accordingly.

3) Accrued Leave

Accrued but unused annual leave must be paid out. Long service leave depends on state or territory legislation and tenure. If applicable, also consider annual leave loading, which may be required under the employee’s contract or award.

4) Bonuses, Commissions And Incentives

Review the contract and incentive plan rules. Some payments are discretionary, others are tied to targets or payment dates. If the employment ends before the payout date, consider whether the employee is still eligible and document any agreed treatment in your separation terms.

5) Superannuation And Tax

Most termination payments do not attract super, but there are exceptions. Always check your obligations around super on termination payments and get payroll/tax advice to ensure PAYG withholding and any lump sum tax codes are handled correctly.

6) Final Pay Timing

Final pay should be processed promptly after the termination date. A structured approach helps you capture everything due - many employers follow a checklist similar to the steps in Sprintlaw’s guide to final pay.

Step-By-Step: Offering A Severance Package Lawfully

If you’re planning a redundancy or a negotiated exit, it helps to follow a consistent process. Here’s a practical workflow you can adapt to your business.

Step 1: Identify The Reason And Check The Rules

Be clear on why the employment is ending - redundancy, performance/process outcome, or mutual separation. The reason drives your obligations (e.g. consultation for redundancy, procedural fairness for conduct/performance) and which payments apply.

Step 2: Gather The Source Documents

• Employment Contract and any policies
• Applicable award or enterprise agreement
• Position description and organisation chart (for redundancy justification)
• Leave balances, service dates, incentive plan terms

This lets you cross-check minimum entitlements, notice, and any contractual extras.

Step 3: Decide On The Package Structure

List the mandatory items first (notice, accrued leave, redundancy pay if applicable). Then decide whether to add any ex gratia amount, short-term benefits, or outplacement support. If you want a release of claims, plan to document the offer using a Deed of Release or an Employee Separation Agreement.

Step 4: Prepare The Paperwork

• Letter setting out the offer or redundancy outcome
• Deed of Release or separation agreement
• Property return checklist and acknowledgements
• Any post-employment obligations (restraints, confidentiality reminders)

Consistency matters. Many small businesses streamline this with tailored termination documents they can reuse (and customise per role).

Step 5: Hold Your Meeting Respectfully

Schedule a private meeting to explain the decision and walk through the offer. Provide the documents, explain the key terms, and allow a reasonable period for independent advice before signing. Avoid pressuring someone to sign on the spot.

Step 6: Process Final Pay And Offboarding

Once signed (or once the termination is effective for non-negotiated exits), process the final pay, including any final pay items you identified. Collect company property, remove system access, and complete your payroll, tax and HR system updates. If relevant, align on the internal and external messaging to your team and customers.

Common Pitfalls (And How To Avoid Them)

Even with the best intentions, severance mistakes can be costly. Here are frequent missteps and how to steer clear of them.

1) Mixing Up Redundancy And Performance Issues

If there are performance concerns, but the job still exists, redundancy is unlikely to apply. Using redundancy to avoid a fair process can expose you to unfair dismissal risk. Be clear on the reason, follow the correct process, and only pay redundancy when it’s genuinely due.

2) Forgetting Notice Or Miscalculating Balances

Notice, leave balances and continuous service dates can be overlooked under time pressure. Cross-check your figures and make sure your payment in lieu of notice (if used) matches the correct period.

3) Not Linking Ex Gratia To A Release

If you’re offering a discretionary amount, you’ll generally want a binding release of claims in return. Document it via a well-drafted Deed of Release or separation agreement that fits your business and the situation.

4) Overlooking Post-Employment Duties

Remind departing employees about confidentiality and any reasonable restraints in the contract or release. Consider whether garden leave is appropriate (and permitted by contract) to protect client relationships and sensitive information during the notice period, guided by your understanding of garden leave.

5) Missing Super, Tax Or Award Nuances

Different payments can be taxed differently and super may or may not apply. Confirm your payroll treatment for termination payments and super, and check any award or enterprise agreement obligations that may affect the payout.

6) Rushing Consultation On Redundancy

For genuine redundancies, the consultation and redeployment steps matter. Failing to consult or consider redeployment can lead to disputes (even if a redundancy payment is made). Take the time to do it properly and keep good notes.

7) Inconsistent Templates

Using ad hoc letters and outdated clauses can undermine your position. Standardise your approach with current, tailored termination documents and a short internal playbook that your managers can follow.

Severance Package FAQs For Employers

Is a severance package legally required in Australia?

The package itself isn’t a single legal requirement. However, minimum entitlements (like notice, accrued leave and, for genuine redundancies, redundancy pay) are mandatory. Many employers add discretionary amounts and secure a release to finalise the separation.

What’s the difference between severance pay and redundancy pay?

Redundancy pay is a specific statutory entitlement when a role is genuinely no longer required and the criteria are met. “Severance pay” is a broader, informal term that may include redundancy pay plus other items like notice, leave payouts and any ex gratia amounts.

Can we make a severance package conditional on signing a release?

You can make any discretionary or ex gratia components conditional on signing a release. Mandatory entitlements must be paid regardless. A well-drafted release helps protect your business and close out claims.

What if we want to resolve things by mutual agreement?

Agreeing terms in a tailored Employee Separation Agreement can be a practical way to manage risk, set out payments and finalise obligations - especially where no redundancy applies but both parties want a clean exit.

How quickly should we pay the final amounts?

Process final pay promptly after termination. Build your workflow and checklist so nothing is missed - notice in lieu, leave balances, any redundancy amount and correct tax treatment for each component of the package.

Key Takeaways

• A severance package is the bundle of payments and terms you offer at separation - combining mandatory entitlements with any discretionary amounts or benefits.
• Redundancy pay only applies for genuine redundancies; otherwise, you’ll still owe notice (or pay in lieu) and accrued leave, plus any contracted amounts.
• Structure your offer clearly: mandatory items first, then any ex gratia amounts linked to a binding release through a Deed of Release or separation agreement.
• Calculate each component carefully, including notice, accrued leave, any redundancy payment, and the correct treatment of super and tax on termination amounts.
• Use consistent, up-to-date documents - many employers standardise this with tailored termination documents they can adapt quickly.
• A respectful, lawful, step-by-step process helps reduce disputes and protect your brand during a challenging transition.

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