Severance Pay in Australia: Key Obligations for Employers

If you’re planning a restructure or facing a downturn, understanding severance pay (often called redundancy pay) is essential.

Handled well, redundancies can be a respectful, compliant way to adjust your workforce. Handled poorly, they can lead to legal risk, costly claims and damage to your brand.

In this employer-focused guide, we break down what severance pay means in Australia, when it applies, how to calculate it, and the key steps and documents to stay compliant and protect your business.

What Is Severance Pay In Australia (For Employers)?

“Severance pay” in Australia usually refers to redundancy pay under the National Employment Standards (NES) in the Fair Work Act. Redundancy pay is money you must pay an eligible employee when you decide their job is no longer needed due to changes like restructuring, technology or business closure.

It’s different from other termination amounts such as:

• Notice (or payment in lieu of notice)
• Accrued entitlements (e.g. annual leave, and sometimes long service leave depending on state/territory rules)
• Any additional contractual or award obligations

When people ask “what is severance pay in Australia?” they’re usually asking about the redundancy component that sits alongside those other final pay elements.

When Do You Have To Pay It (And When Not)?

Redundancy pay is generally payable when:

• The employee’s job is genuinely redundant (their role is no longer required to be performed by anyone).
• You’ve complied with any consultation obligations under an applicable modern award or enterprise agreement.
• There is no reasonable redeployment opportunity within your business or an associated entity.

However, redundancy pay is not payable in some common scenarios, including where the employee is:

• Employed by a small business employer (fewer than 15 employees, counting regular and systematic casuals) - the NES redundancy pay exemption applies.
• A casual employee.
• On a fixed-term contract that ends on the agreed date (and isn’t terminated early).
• Terminated for serious misconduct (note: you still need to follow a fair process).
• Employed for a very short period and doesn’t meet the minimum service for redundancy under the NES (e.g. under 12 months of service for redundancy pay).

Also be mindful of special cases, such as transfers of business, where service may carry over, and probationary endings. Ending employment during probation can still involve other obligations, so it’s worth reading up on termination during probation before making a decision.

Finally, note that a stand down is not a redundancy - it’s a temporary measure in limited circumstances. If you’re considering that pathway, review your obligations for standing down an employee and make sure it’s appropriate for your situation.

How To Calculate Severance Pay And Final Pay

Employers often ask “how much is severance pay?” Under the NES, redundancy pay is calculated based on the employee’s continuous service and base rate of pay for ordinary hours. The Fair Work Act includes a table of weeks’ pay owed at different service milestones (e.g. 1+ years through to 9+ years), with a higher cap at longer service bands.

To work out the total final payment, consider these components:

• Redundancy pay (severance): Weeks of pay per the NES table, multiplied by the employee’s base rate for ordinary hours.
• Notice (or pay in lieu): Based on the NES and any applicable award/contract. If you prefer to end employment immediately, you may choose payment in lieu of notice instead of working through the notice period.
• Accrued entitlements: Unused annual leave must be paid out; long service leave depends on state or territory rules and length of service.
• Other amounts: Any contractual entitlements, bonuses or commissions that have crystallised under the employment contract or applicable policy.

To sanity-check calculations, many employers use a tool alongside their own payroll system. You can cross-check using Sprintlaw’s redundancy calculator to get an estimate of the redundancy component.

Tax And Superannuation On Termination

Some termination components are subject to tax concessions and special rules. The treatment can differ between redundancy pay, notice in lieu, and leave payouts.

A frequent question is whether you must pay superannuation on termination amounts. The answer depends on the component: redundancy pay is typically not ordinary time earnings, but some amounts (like pay in lieu of notice) may be. For a breakdown, see our guide on superannuation on termination payments and check with your payroll adviser to ensure correct treatment.

Timing And Payslips

Final pay should be made promptly in line with any award, enterprise agreement or contract requirements. Provide a clear payslip breakdown so the employee understands each component and tax treatment.

A Compliant Redundancy Process: Step By Step

Getting the process right is just as important as calculating the dollars. A genuine redundancy requires consultation and a fair process to reduce the risk of unfair dismissal or general protections claims.

1) Plan And Document The Business Case

Identify the operational reasons for change (e.g. restructure, technology, closure). Prepare a brief internal paper explaining which roles are affected, why, and proposed timelines. Keep this factual and business-focused.

2) Identify Consultation Obligations

Check any applicable modern award or enterprise agreement for consultation requirements. These often require you to inform affected employees of the proposed changes, invite feedback, and consider alternatives.

3) Notify And Consult With Employees

Meet with affected employees and explain the proposal, the reasons and the timeline. Provide materials in writing. Invite feedback and genuinely consider it. If there’s a union or elected representative, include them as required.

4) Explore Redeployment

Before finalising redundancy, consider whether there are reasonable redeployment opportunities within your business or associated entities. Keep notes of the roles considered and outcomes.

5) Confirm Redundancy And Issue Letters

If the role is genuinely redundant and no redeployment is available, issue a termination letter confirming the redundancy, the final day of employment, and the components of final pay.

6) Pay Entitlements And Provide Records

Process the payment promptly, include a payslip breakdown, and provide any required records (e.g. separation certificate if requested). In some cases, you may agree a mutual separation pathway with a deed to clarify obligations going forward; if so, consider an Employee Separation Agreement.

If this feels complex, you’re not alone. Many employers engage legal help to prepare the right suite of letters and ensure each step is compliant - Sprintlaw’s Redundancy Document Suite is designed for this.

What Legal Documents Should You Have In Place?

Well-drafted contracts and policies make redundancies smoother and reduce risk. Key documents include:

• Employment Contract: Sets clear terms for notice, redundancy interaction with policies, bonuses/commission and post-employment obligations.
• Redundancy And Consultation Letters: Written notices that meet award/enterprise agreement requirements and clearly communicate each step.
• Redundancy Calculation Sheet: An internal worksheet showing how each component was calculated for accuracy and consistency.
• Separation Agreement (Deed): In some cases, a deed of release can document terms like garden leave, release of claims and return of property.
• Workplace Policies: Clear policies on redeployment, consultation and record-keeping help ensure consistent application across your team.

If your existing contracts are out of date, refreshing your Employment Contract template now can pay dividends later - especially around notice, incentive schemes and confidentiality.

Common Mistakes And Risk Hotspots For Employers

Here are the pitfalls we see most often - and how to avoid them.

• Skipping consultation: If an award or enterprise agreement applies, consultation isn’t optional. Build in the time and document it carefully.
• Confusing performance issues with genuine redundancy: If performance is the real reason, follow a performance management process. Don’t “mask” it as a redundancy.
• Poor redeployment checks: Genuine redundancy requires no reasonable redeployment option. Keep a record of roles considered and why they weren’t suitable.
• Incorrect calculations: Miscalculations on redundancy, notice in lieu, or leave payouts are common. Cross-check against the NES and use tools like the redundancy calculator.
• Tax and super errors: Components often have different tax and super rules; verify each element against your payroll guidance and the rules for termination payments and super.
• Process shortcuts: Rushing can increase the risk of unfair dismissal claims. Map the process, assign responsibilities and stay consistent.
• Not aligning contracts and policies: Ensure terms about notice, incentives and post-employment obligations are consistent and enforceable - and know when payment in lieu of notice is the better option.

If you’re unsure, get a short advice upfront - a quick check can prevent costly rework later.

FAQs: Quick Answers For Busy Employers

Is “Severance Pay” The Same As Redundancy Pay?

In Australia, yes - most employers use “severance pay” to refer to NES redundancy pay. It’s distinct from notice (or pay in lieu), and from payouts of accrued leave.

How Much Severance Pay Am I Entitled To Pay?

Use the NES service bands to calculate redundancy pay. Then add notice (or pay in lieu), plus any accrued leave and contractual amounts. For a quick cross-check, try the redundancy calculator.

Do Small Businesses Have To Pay Severance Pay?

Employers with fewer than 15 employees (including regular and systematic casuals) are generally exempt from the NES redundancy pay component, but still need to manage notice and accrued entitlements correctly.

Can We End Employment Immediately?

Yes, provided you comply with process and pay the right amounts. Many employers choose payment in lieu of notice to bring the employment to an immediate end after the consultation and decision.

Should I Use A Separation Deed?

It’s common where you want clarity on releases, confidentiality and return of property. Our overview of Employee Separation Agreements explains what to include.

Key Takeaways

• In Australia, “severance pay” generally means NES redundancy pay, paid when a job is genuinely redundant and no reasonable redeployment is available.
• Work out the full final pay by combining redundancy pay, notice or payment in lieu of notice, accrued leave, and any contractual amounts.
• Small business employers (fewer than 15 employees) are usually exempt from the redundancy pay component, but must still follow a fair process and pay other entitlements.
• Compliance is about process as much as numbers: consult under the award/EA, consider redeployment, and document decisions carefully.
• Use solid documents - an up-to-date Employment Contract, redundancy letters and, where appropriate, a Separation Agreement - to reduce risk.
• Double-check tax and super treatment for each termination component using guidance on termination payments and super before you run payroll.

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