Voluntary Severance In Australia: What Employers Should Know

Offering voluntary severance can be a sensible way to reshape your workforce, reduce costs, or close a business unit while treating people fairly and managing legal risk.

But for small businesses, it’s not always obvious how to structure a voluntary severance program, what to pay, or which laws apply. The last thing you want is a well‑intentioned offer that accidentally triggers unfair dismissal claims, discrimination risks, or tax surprises.

In this guide, we’ll walk through how voluntary severance works in Australia from an employer’s perspective, when it’s worth considering, the steps to implement it properly, and the key documents you’ll likely need. We’ll also flag common pitfalls and compliance issues so you can proceed with confidence.

What Is Voluntary Severance (And When Should Employers Consider It)?

Voluntary severance is where you invite employees to express interest in leaving your business in exchange for an agreed package (usually a lump sum payment plus accrued entitlements). It’s typically used during restructures, downsizing, or when closing part of the business.

Unlike forced redundancy, voluntary severance gives employees a choice. You keep control of the selection criteria (and whether to accept an expression of interest), but you’re not dismissing anyone without consent.

When it can make sense for small employers

• You need to reduce headcount or costs, but want to minimise forced job losses.
• You’re restructuring and some roles will change significantly.
• There’s a need to refresh skills or shift to different operating hours, teams or locations.
• You want to avoid drawn‑out performance processes where there’s a clear mutual interest in separation.

Well‑designed programs set fair parameters, manage legal risk, and maintain morale by giving employees a genuine option and supportive exit path.

How Does Voluntary Severance Differ From Redundancy And Resignation?

It helps to be clear on the concepts so you choose the right path and communicate it accurately to staff.

• Voluntary severance: An employer‑initiated invitation where employees can opt to leave on agreed terms. You don’t have to accept every expression of interest. The role may remain or change (depending on your restructure plan).
• Genuine redundancy: The job is no longer required to be done by anyone and consultation obligations apply. For Fair Work purposes, genuine redundancy is defined in legislation and case law, including section 389 of the Fair Work Act. When properly managed, genuine redundancy can be a complete defence to an unfair dismissal claim.
• Resignation: The employee chooses to leave (without an employer incentive). Standard notice and final pay rules apply; no severance incentive is involved.

Voluntary severance often sits between resignation and redundancy. You can run it alongside a restructure where some roles may later be made redundant if you still need to reduce positions. If you do that, be careful to keep the processes and communications distinct so you don’t undermine a potential genuine redundancy later.

Step‑By‑Step: How To Offer A Voluntary Severance Program

A clear, fair process reduces legal risk and builds trust with your team. Here’s a practical sequence most small employers can follow.

1) Map your business case and parameters

• Clarify your restructure goals: headcount targets, budget, affected teams or locations, and timeframes.
• Decide criteria for considering expressions of interest (EOIs) - for example, skills you need to retain, critical roles you can’t lose, and any eligibility rules.
• Set your severance offer framework (e.g. a multiple of weeks per year of service, plus notice, plus accrued entitlements). Ensure it’s consistent with any enterprise agreement or Award obligations.

As you model costs, tools like a redundancy calculator can help you estimate potential outgoings where redundancy is in scope, though voluntary packages can be structured differently.

2) Prepare your communications

• Draft a staff‑wide announcement explaining the reasons for the program, the EOI window, privacy, selection criteria, and next steps.
• Prepare an EOI form and FAQs that set expectations (e.g. that not all EOIs will be accepted; decisions are at the employer’s discretion).
• Plan manager talking points so messaging is consistent and avoids promises.

3) Open the EOI process (and keep it fair)

• Provide a reasonable EOI window so employees can seek advice and make an informed decision.
• Protect confidentiality to avoid stigma for interested employees.
• Avoid any pressure that could be seen as coercion or adverse action.

4) Assess and decide

• Apply your criteria consistently and document reasons for accepting or declining EOIs.
• Consider operational continuity: you may need to stagger exit dates to manage handovers.
• Check visa, WHS, or safety‑critical roles where extra considerations may apply.

5) Make written offers and negotiate terms

• Issue a written offer outlining the severance payment, treatment of notice, leave and other entitlements, and any post‑employment obligations.
• Clarify whether you’ll require notice to be worked, paid as payment in lieu of notice, or if a short garden leave period will apply for handover and confidentiality.
• Allow reasonable time for the employee to get independent advice (this supports the enforceability of the agreement).

6) Execute the agreement and complete off‑boarding

• Use a well‑drafted separation document, commonly a Separation Agreement or a Deed of Release, that includes a release of claims, confidentiality, non‑disparagement, and return of company property.
• Pay all amounts due on time, reconcile leave balances, and confirm the termination date in writing.
• Document handover, revoke access, and provide certificates of service if requested.

Many employers frame voluntary severance within a mutual separation agreement, especially where the end of employment is amicable and both parties want clarity and closure.

What Should Go In A Voluntary Severance Agreement?

The agreement is where you lock in the bargain and manage risk. Getting this right matters.

Commercial terms

• Severance payment: State the gross amount or clear formula. Specify tax treatment and timing of payment.
• Notice: Confirm whether it’s worked, paid in lieu, or a mix. If paid in lieu, specify the period covered and confirm final date of employment.
• Accrued entitlements: Annual leave is paid out; long service leave depends on the relevant state or territory laws and length of service (add specifics in the schedule).
• Bonuses/commissions: Address any earned but unpaid amounts and pro‑rata arrangements if applicable.
• Benefits and handover: Clarify last day of benefits (e.g. health fund, car), handover expectations, and return of property (laptop, devices, files).

Risk management clauses

• Release of claims: A comprehensive release is standard and should cover statutory, contractual and common law claims to the fullest extent permitted by law.
• Confidentiality: Restate ongoing obligations to keep company information confidential, as well as the terms of the agreement (with permitted disclosures for legal or tax advice).
• Non‑disparagement: Mutual non‑disparagement helps protect your brand and team morale.
• Post‑employment restraints: If appropriate, confirm that existing restraint of trade obligations continue (and tailor them to be reasonable).
• Intellectual property: Confirm assignment of any IP created during employment and an obligation to assist with formalities.
• Warranties and acknowledgements: For example, the employee acknowledging they had time to obtain independent advice and enter freely into the agreement.

To make drafting simpler and consistent across cases, many employers rely on an Employee Termination Documents Suite so each separation uses approved, up‑to‑date templates.

Legal Risks And Compliance To Watch

Voluntary programs are not a legal “free pass”. Keep these risks on your radar from day one.

Unfair dismissal and constructive dismissal

If the process feels pressured or targeted, an employee might argue they were forced to resign. Avoid undue influence, document that participation is optional, and give people time to consider the offer. If you later proceed to forced redundancy for remaining roles, ensure it meets the criteria for a genuine redundancy (including consultation and redeployment considerations).

Discrimination and adverse action

Be careful with eligibility rules and selection decisions. Don’t exclude or favour people because of protected attributes (age, disability, sex, race, etc.) or because they exercised a workplace right (e.g., took personal leave). Keep objective business criteria and consistent documentation.

Consultation and Award obligations

If you’re proposing major workplace change, many modern Awards and enterprise agreements require consultation - even where participation is voluntary. Follow any required steps, provide written information, and consider feedback before making final decisions.

Redundancy entitlements

If a role is ultimately made redundant, statutory redundancy pay (and consultation obligations) may apply depending on size and service. Confirm how your voluntary package interacts with any redundancy entitlement to avoid double counting or underpayment. When planning costs, cross‑check settings using a redundancy calculator and consider nuances like redundancy and sick leave treatment.

Notice and final pay

Minimum notice still applies unless paid out as payment in lieu of notice. Pay final amounts promptly and issue required records. If you use garden leave for handover, make sure your contracts allow it (and consider a short garden leave clause in future contracts).

Tax and superannuation

Some termination payments attract different tax treatment and may not be superable, while other components are ordinary time earnings. Get payroll advice early, and be clear in your agreement about what each amount covers to avoid confusion later.

Health, safety and wellbeing

Restructures can be stressful. Maintain a psychologically safe process, offer EAP support where available, and treat people with dignity. This isn’t just good practice - it also reduces legal risk and reputational harm.

Key Documents Employers Usually Need

The right documents keep your process consistent and defensible. Depending on your situation, you may need some or all of the following.

• Voluntary Severance EOI Form: Sets out eligibility, the EOI process, confidentiality, and next steps.
• Offer Letter: Outlines the proposed package, timing, and any conditions before the formal agreement is executed.
• Separation Agreement or Deed of Release: A binding document capturing payments, releases, confidentiality and post‑employment obligations. Many employers prefer a deed format for certainty; see Deed of Release.
• Mutual Separation Agreement: Useful when the exit is by agreement rather than redundancy; a flexible format that can incorporate your severance package and releases, similar to a Mutual Separation Agreement.
• Separation Checklist and Handover Plan: Ensures access is removed, property returned, and handover completed smoothly.
• Employment Contract (future‑proofing): For remaining staff and new hires, make sure your Employment Contract supports garden leave, set‑off clauses (where lawful), confidentiality, IP assignment and reasonable restraints.
• Policy and Template Pack: Keeping a consistent suite, like an Employee Termination Documents Suite or Redundancy Document Suite, saves time and reduces errors across multiple exits.

Finally, if your program is part of a larger restructure and potential redundancies remain likely, keep your consultation templates and selection matrices aligned with genuine redundancy requirements to avoid unfair dismissal risk for any non‑voluntary outcomes.

Key Takeaways

• Voluntary severance is a practical option to restructure or reduce costs while giving employees a choice and maintaining morale.
• Keep your process clear and fair: define business needs, set selection criteria, communicate carefully, and document decisions.
• Use a robust Separation Agreement or Deed of Release to lock in payments, releases, confidentiality and post‑employment obligations.
• Plan for compliance from the start - consultation duties, notice and final pay, discrimination risks, and the rules for a genuine redundancy if it follows.
• Clarity on notice (worked, in lieu or garden leave), entitlements, and tax treatment will reduce disputes and payroll errors.
• Having the right template suite and up‑to‑date Employment Contracts makes future restructures faster, safer and more consistent.

If you’d like a consultation on designing or documenting a voluntary severance program for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.