Voluntary Separation Payments: Employer Obligations In Australia

If you run a small business, there may come a time when you and an employee agree it’s best to part ways - but you want to do it on good terms, minimise disruption, and reduce the risk of a dispute down the track.

That’s where voluntary separation payments can come in.

These payments are often used when an employee is leaving by agreement (rather than being managed out through a formal termination process), and you want to recognise their service or smooth the transition. But it’s not as simple as “pay them something extra and move on”.

In Australia, the way you structure a voluntary separation payment can affect your legal risk (including unfair dismissal risk), tax outcomes, and what you need to document properly.

Below, we’ll walk you through what voluntary separation payments are, when they can make sense for small businesses, and how to approach them in a compliant, practical way.

What Is A Voluntary Separation Payment?

A voluntary separation payment is a payment you offer to an employee as part of an agreed exit from your business.

It’s typically offered where:

• the employee is leaving “voluntarily” in the sense that the exit is agreed (rather than a unilateral termination by you), and
• you’re paying something in addition to what they’re strictly owed as part of final pay (although it can be packaged together).

It’s worth noting that “voluntary separation payment” isn’t a defined legal category under Australian employment law. It’s a practical label people use for an agreed additional payment made on exit, and the legal risk depends on the facts and the documentation.

Depending on the circumstances, a voluntary separation payment may be described as:

• an “ex-gratia” payment (a payment made without admitting legal liability),
• a separation/settlement amount paid under a deed,
• an incentive to resign, or
• a component of a broader exit arrangement (for example, where the employee is being redeployed, stepping down, or leaving after a workplace issue).

It’s important to be clear on what the payment is and what it is not. In most cases, it is not the same as:

• Final pay (wages owed up to the last day, plus accrued entitlements like unused annual leave),
• Payment in lieu of notice (where you pay the notice period instead of having the employee work it) - see payment in lieu of notice,
• Redundancy pay (where a job is no longer required to be done by anyone), or
• Commission/bonus entitlements already earned under the contract or policy.

In other words: a voluntary separation payment is usually a negotiated payment. Because it’s negotiated, documentation matters.

When Might A Small Business Offer A Voluntary Separation Payment?

Small business owners usually consider a voluntary separation payment when they’re trying to achieve one or more of these goals:

• Reduce legal risk of a dispute (for example, a threatened unfair dismissal claim or adverse action claim).
• Maintain goodwill - particularly if the employee has long service, is customer-facing, or holds important relationships.
• Achieve a quicker, cleaner exit than a drawn-out performance management or investigation process.
• Support operational change (restructure, change in roster needs, different skill requirements) without escalating tension.

Common Scenarios We See

Every business is different, but voluntary separation payments often come up in situations like:

• Performance concerns where you don’t want (or don’t have time) to run a long performance management process, or you’re unsure if your documentation is strong enough.
• Role changes or restructure where redundancy is possible, but you’d prefer a mutually agreed exit rather than a formal redundancy process.
• Workplace conflict where the relationship has broken down and keeping the employee creates ongoing risk or disruption.
• Health-related issues where you want to handle the situation carefully and avoid anything that could be construed as discriminatory.

Even if you’re confident you can “manage it internally”, it’s worth remembering: exit arrangements are one of the most common places small businesses get caught out, especially where communications are informal and not properly recorded.

Voluntary Separation Payment Vs Redundancy: What’s The Difference?

This is a common point of confusion, and getting it wrong can create major compliance issues.

Redundancy is about the role - specifically, that the job is no longer required to be done by anyone. It’s not about the employee being a “bad fit”. If you’re calling something a redundancy, you need to be able to show the position is genuinely no longer required (and that you followed required steps like consultation where applicable).

A voluntary separation payment, on the other hand, is about a mutually agreed departure. It can happen in a redundancy context (for example, you offer an employee an incentive to exit sooner), but it can also happen in many other contexts.

Why The Label Matters

It’s not just semantics. The classification of the payment and the reason for separation can impact:

• the employee’s legal rights and potential claims,
• your obligations under the Fair Work Act and any applicable award/enterprise agreement,
• tax treatment and reporting, and
• how defensible your exit is if it’s later challenged.

If you’re considering a “voluntary redundancy” style offer, it’s still important to check whether the underlying circumstances are actually redundancy, and to calculate likely redundancy exposure. Many businesses use a redundancy calculator early, so they know what a reasonable package might look like before negotiating.

How To Structure A Voluntary Separation Payment (Without Creating More Risk)

If you’re going to offer a voluntary separation payment, the key is to structure it in a way that is clear, properly documented, and consistent with your broader employment law obligations.

Here are the main elements small businesses should think about.

1. Confirm What The Employee Is Already Owed

Before you negotiate anything extra, you should be able to clearly set out:

• wages owed up to the last day of work,
• unused annual leave and leave loading (if applicable),
• any accrued long service leave (depending on the state/territory and circumstances),
• any notice period obligations (or whether you will pay it out), and
• any contractual entitlements (commission, bonus, reimbursements).

Think of this as the “baseline” - the voluntary separation payment is usually the negotiated amount on top of baseline entitlements.

2. Decide What You Want The Payment To Achieve

Be honest internally: what problem are you trying to solve?

• If it’s a speed and certainty problem, you may offer a smaller amount but make it conditional on a quick resignation date and return of property.
• If it’s a legal risk problem, you’ll usually want a stronger written agreement that includes confidentiality and releases (more on this below), while keeping in mind there are limits on what can be “signed away”.
• If it’s a reputation/goodwill problem, you may build in supportive terms (for example, a reference letter or agreed statement to staff/customers).

The “right” voluntary separation payment looks different depending on what outcome you’re aiming for.

3. Consider Payment In Lieu Of Notice As Part Of The Package

Some exits involve the employee working out notice. Others involve an immediate finish date, with you paying out notice instead.

If you’re paying notice, make sure you’re doing it correctly and consistently with the contract, award and the Fair Work Act. This is often documented as payment in lieu of notice.

From a practical standpoint, many businesses prefer a clean break (especially where there are sensitive issues). But the documentation needs to clearly distinguish:

• what amount is notice pay,
• what amount is unused leave and other accrued entitlements, and
• what amount (if any) is the voluntary separation payment / ex-gratia component.

4. Put It In Writing (And Use The Right Document)

Verbal exit deals are risky. Memories fade, people talk, and disputes can escalate quickly - especially if the employee later feels they were pressured or misled.

Depending on the situation, you might document a voluntary separation payment in:

• a resignation letter (where the resignation is clearly voluntary and the payment terms are clearly stated),
• a written separation agreement, or
• a deed of release/settlement (often used where you want stronger protections like confidentiality and mutual releases).

When the stakes are higher, it’s generally worth using a more formal settlement-style document rather than relying on email exchanges.

Also keep in mind that a deed or release can’t exclude or reduce an employee’s minimum legal entitlements (like award/NES minimums) and it generally can’t prevent an employee from making certain statutory claims (including general protections/adverse action claims). A well-drafted document can still be very helpful for reducing risk, but it’s not a “magic shield”.

5. Keep Your Employment Contracts And Policies In Mind

Before you offer a separation payment, check what your existing paperwork says - especially the employee’s Employment Contract.

Some employment contracts include specific clauses on notice, confidentiality, IP, return of property, and post-employment restraints. A voluntary separation arrangement should work alongside these terms (not accidentally contradict them).

If you have workplace policies (like IT usage, confidentiality, or conduct policies), check whether the proposed exit requires you to reinforce any obligations (for example, return of devices, access removal, deletion of business data).

6. Watch Out For “Voluntary” In Name Only

One of the biggest risks with a voluntary separation payment is when the arrangement is described as “voluntary”, but the employee later argues they had no real choice.

In some cases, a “resignation” can still be treated as a dismissal if the employee was pressured, misled, given an ultimatum, or effectively left with no reasonable alternative but to resign (sometimes called a forced resignation or constructive dismissal).

To reduce this risk, you should be careful about:

• how you communicate the offer (avoid threats or ultimatums),
• giving a reasonable time for the employee to consider it,
• encouraging independent advice (especially for larger payments or senior roles), and
• keeping a written record of key communications.

This is especially important where there are performance issues, misconduct allegations, or anything that could later become an adverse action or discrimination claim.

What Legal Issues Should You Consider Before Making A Voluntary Separation Payment?

Even when the exit is “mutual”, there are still legal obligations you need to keep front of mind.

Unfair Dismissal And General Protections Risk

A voluntary separation payment is often used to reduce the risk of claims - but it doesn’t automatically eliminate it.

Whether a claim is available can depend on factors like:

• the employee’s length of service,
• whether you are a “small business employer” under the Fair Work Act,
• the reasons for the separation,
• how the separation was communicated, and
• whether the employee says they were forced to resign.

That’s why the paper trail and the structure of the agreement matter so much.

Final Pay Compliance

No matter what you negotiate, you still need to correctly pay what the employee is legally entitled to - including their accrued leave and minimum notice (if applicable).

If you’re unsure what to include in the final payment and when it should be paid, it’s worth tightening up your process early. Final pay disputes are common, and they often become a “gateway” issue into larger claims.

Confidentiality, IP And Return Of Property

If the departing employee has had access to sensitive information (customer lists, pricing, supplier terms, marketing plans), you should ensure post-employment obligations are clear.

This is often addressed in:

• the employment contract confidentiality and IP clauses, and/or
• a deed of release/settlement with specific confidentiality and return-of-property provisions.

If you’re relying heavily on your contract, it’s a good time to sanity-check whether it’s fit for purpose and up to date.

Payroll, Tax And Record-Keeping Considerations

Voluntary separation payments can have tax and reporting implications. This article isn’t tax advice - the tax outcome depends on the nature of the payment and the termination circumstances, so it’s a good idea to speak to your accountant or payroll provider.

At a practical level, it’s important to:

• classify the components of the payment correctly (entitlements vs ex-gratia vs other components),
• ensure payroll is processed correctly, and
• keep clear records of how amounts were calculated and agreed.

Your accountant or payroll provider will often be involved here, but the legal documentation should align with how you process the payment.

What Documents Should Small Businesses Use For A Voluntary Separation Payment?

When you’re managing a separation, the “right” document depends on what you’re trying to achieve and the risk profile of the situation.

Common documents and clauses include:

• Exit letter or separation letter: a simple written confirmation of resignation date, final pay items, and any agreed additional payment.
• Deed of settlement/release: often used for higher-risk exits, usually including confidentiality and non-disparagement terms, plus releases to the extent legally effective.
• Employment contract: your starting point for notice, confidentiality, IP, and return of property - see an Employment Contract.
• Workplace policies: supporting documents that set expectations about conduct, devices, data, and procedures during and after employment.

A Practical Tip: Decide Your “Non-Negotiables” Before You Make The Offer

Before the conversation happens, it helps to identify what terms you won’t compromise on, such as:

• return of all business property (keys, laptop, phone, uniform, documents),
• removal of access to systems and accounts,
• confidentiality obligations, and
• a clean written resignation and (where appropriate) a properly drafted settlement document setting out the agreed terms.

This reduces the chance that you agree to something in the moment that creates bigger issues later.

Key Takeaways

• A voluntary separation payment is a negotiated payment used to support a mutually agreed exit, usually paid in addition to minimum legal entitlements like wages and accrued leave.
• Voluntary separation payments can help small businesses achieve a quicker, cleaner exit - but they need to be structured carefully to reduce disputes about whether the resignation was truly voluntary (and to avoid a “forced resignation” argument).
• Don’t confuse a voluntary separation payment with redundancy; redundancy is about the role no longer being required, and it carries its own legal steps and payment obligations.
• Clearly separate and document the components of the exit package (final pay, unused leave, notice pay, and any ex-gratia/voluntary separation component).
• Written documentation is critical - but remember settlement wording can’t override minimum legal entitlements, and there are limits on what rights and statutory claims can be released.
• Your existing employment contract and policies matter, and a separation arrangement should work alongside them rather than accidentally undermining them.

If you’d like help preparing a voluntary separation payment arrangement or managing an employee exit the right way, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.