Voluntary Severance: What Employers Need To Know In Australia

When you’re running a small business, staffing decisions can quickly become one of the most difficult (and high-risk) parts of the job.

Sometimes you genuinely need to reduce headcount because work has slowed down, you’re restructuring, or you’re moving part of the business in a new direction. But just because the business reasons are clear, it doesn’t mean the legal process will be simple.

That’s where voluntary severance can come in. A well-run voluntary severance program can help you reduce roles in a more collaborative way, lower the chance of disputes, and protect your reputation with the team who stay.

But “voluntary” doesn’t automatically mean “risk-free”. You still need to think about redundancy rules, consultation requirements, discrimination risks, notice and final pay, tax treatment of payments, and the paperwork you’ll rely on if things are questioned later.

Below, we’ll walk you through what voluntary severance is in Australia, when it makes sense, and how to structure it so it actually helps your business (instead of creating new problems).

What Is Voluntary Severance (And How Is It Different From Redundancy)?

Voluntary severance is where you invite employees to express interest in leaving the business in exchange for a severance package (often an enhanced payment or additional benefits).

It’s commonly used when:

• your business needs to reduce costs or restructure, but you’d prefer to avoid forcing people out;
• you have multiple employees doing similar work and it’s not clear whose role should be made redundant; or
• you want to reduce the risk of a contested redundancy process by offering a negotiated, agreed exit.

Is Voluntary Severance Still A “Redundancy”?

Often, yes. In many cases, a voluntary severance program is simply a method of selecting employees for redundancy.

That matters because if the underlying reason is that roles are no longer required, you may still need to follow redundancy obligations under the Fair Work Act 2009 (Cth), the National Employment Standards (NES), and any applicable modern award or enterprise agreement.

In other words, voluntary severance can be a more employee-friendly approach, but it doesn’t automatically remove legal duties like:

• consultation obligations (especially under awards and enterprise agreements);
• genuine redundancy requirements (including considering redeployment); and
• paying the correct minimum entitlements (and, in some cases, redundancy pay).

Why Small Businesses Use Voluntary Severance

From a small business perspective, voluntary severance can be attractive because it:

• reduces conflict by giving employees choice;
• protects morale compared to sudden forced redundancies;
• creates a clearer timeline for transition and handover; and
• can lower legal risk when paired with good documentation and a fair process.

But the strategy only works if it’s structured carefully. A rushed “who wants to leave?” email can create confusion, claims of unfair pressure, or even discrimination issues.

When Does Voluntary Severance Make Sense (And When Doesn’t It)?

Voluntary severance is usually most effective when you have a genuine need to reduce roles, but you have some flexibility about which roles go.

Common Scenarios Where Voluntary Severance Works Well

• Restructure or changed operations: you’re changing how work is done (for example, automating admin tasks), so you need fewer employees in a particular function.
• Downturn in work: revenue has dropped and staffing levels aren’t sustainable.
• Duplicate roles: after a merge or internal change, you have overlap in responsibilities.
• Location changes: a site is closing or moving and you need fewer people in that area.

Situations Where Voluntary Severance Can Create Extra Risk

• You don’t actually need roles to end: if the job is still required but you’re trying to move out a particular person, that’s not redundancy, and it can increase unfair dismissal risk.
• You target specific “types” of employees: for example, hinting that older employees “should consider” taking a package can raise discrimination concerns.
• You need to keep critical skills: voluntary exits can backfire if your best performers accept the offer and you’re left without capability.

If you’re unsure whether the business reason is a redundancy situation, it’s worth getting advice early. It’s far easier (and cheaper) to structure a clean process than to fix one after someone challenges it.

Key Legal Issues To Get Right Before You Offer Voluntary Severance

Even though the employee is “volunteering”, you’re still dealing with the end of an employment relationship. That brings a few core legal areas into play.

1. Consultation Obligations (Awards And Enterprise Agreements)

Many modern awards require employers to consult employees (and sometimes their representatives) about major workplace changes, including restructures and redundancies.

Consultation usually means you need to:

• tell employees about the proposed change and why it’s happening;
• discuss the expected impact (including likely terminations);
• genuinely consider feedback; and
• look at ways to reduce negative effects (including redeployment).

If you skip consultation, you may create avoidable legal exposure and employee relations damage, even if the severance is presented as “voluntary”.

2. Genuine Redundancy And Redeployment

Where the termination is a redundancy, one of the big legal questions is whether it’s a genuine redundancy (including whether redeployment was reasonable).

Even in a voluntary severance process, it’s smart to think through:

• what roles are no longer required and why;
• whether you have suitable alternative roles the person could move into; and
• how you’ll document these considerations.

3. Redundancy Pay And Other Minimum Entitlements

If redundancy pay applies, you need to ensure the employee receives at least the minimum redundancy pay under the NES (unless a small business redundancy exemption or another exception applies). Modern awards and enterprise agreements can also change redundancy-related obligations, so it’s important to check what applies before you finalise any offer.

Many employers also offer an “enhanced” severance amount as the incentive to accept voluntary severance. If you’re planning your costs, it can help to estimate likely outcomes using a redundancy calculator, but keep in mind awards, contracts and circumstances can change the final figure.

Also remember: redundancy pay is only one part of final pay. Final pay commonly includes accrued annual leave and other entitlements, depending on the contract and award.

4. Notice, Or Payment In Lieu

If the employee is exiting quickly, you may need to provide notice or pay the employee instead of requiring them to work out the notice period.

Where you use payment in lieu of notice, you’ll want to ensure it’s allowed under the employment contract or the relevant industrial instrument (such as a modern award or enterprise agreement), and that it’s calculated correctly.

5. Discrimination, Adverse Action, And “Pressure” Risks

A voluntary severance offer should be a genuine choice.

Risks tend to arise when:

• employees feel they were pressured, threatened, or misled;
• the offer is only made to (or is strongly directed at) a protected group (age, sex, disability, pregnancy, etc.);
• the employee recently exercised a workplace right (for example, made a complaint, requested flexible work, or took personal leave), and then receives a severance “suggestion”.

A good rule of thumb: if you wouldn’t feel comfortable explaining the process to a regulator, it probably needs adjusting.

6. Tax Treatment, PAYG Withholding And Superannuation

Severance and redundancy-related payments can have different tax outcomes depending on what is being paid and why. For example, some amounts may be treated as an employment termination payment (ETP), some may be concessional (such as certain genuine redundancy components), and different PAYG withholding treatment can apply. Superannuation also has its own rules (for example, whether super is payable on particular components of final pay depends on the nature of the payment and the applicable rules/instruments).

Because tax treatment is fact-specific and can materially affect the net amount an employee receives (and what you need to withhold and report), it’s a good idea to check the ATO guidance and/or speak with your accountant or payroll adviser before you make offers or finalise calculations.

How To Run A Voluntary Severance Program In A Small Business (Step-By-Step)

Voluntary severance doesn’t need to be complicated, but it does need to be structured. Here’s a practical framework many small businesses follow.

1. Get Clear On The Business Case (And The Roles In Scope)

Start with the “why” and document it internally. For example:

• What change is happening?
• What costs or operational issues are you addressing?
• Which parts of the business are affected?
• How many roles are likely to be reduced?

This helps you stay consistent, and it’s useful if your decision-making is later questioned.

2. Check The Employment Landscape: Contracts, Award Coverage, Policies

Before you communicate anything, review:

• employment contracts (termination clauses, notice provisions, confidentiality obligations);
• modern award / enterprise agreement obligations (especially consultation and redundancy provisions); and
• any internal restructure or redundancy policy (if you have one).

If you’re not confident your documents are up to date, it can be worth reviewing your Employment Contract template and broader employment documentation before starting the process.

3. Decide What You’re Offering (And Keep It Simple)

A voluntary severance package often includes:

• minimum legal entitlements (notice, redundancy pay if applicable, accrued leave);
• an additional severance amount (the “incentive”);
• an agreed final date; and
• practical benefits (for example, an agreed reference or transition support).

Try to avoid vague promises. If it’s part of the package, document it clearly.

4. Communicate The Offer Carefully

Your communications should be clear, consistent, and respectful.

It’s usually a good idea to:

• make the offer to a defined group (based on role category, team, location, etc.);
• give employees a reasonable period to consider the offer;
• encourage them to seek independent advice if they wish; and
• avoid one-on-one “hard sell” conversations.

One practical tip: communicate the criteria and timeline in writing, then follow up with an optional Q&A meeting. This reduces the risk of mixed messages.

5. Plan For “Too Many Yeses” (Or The Wrong Yeses)

This is a common small business issue. You might offer voluntary severance hoping for a handful of expressions of interest, and then find that:

• more employees accept than you can afford; or
• employees with critical skills accept, creating operational risk.

To manage this, many voluntary severance offers are made on the basis that acceptance is subject to employer approval. If you use that approach, be careful: you still need to apply approval decisions fairly and consistently, and you should be prepared to explain your rationale if asked.

6. Confirm The Exit In A Signed Agreement

A voluntary severance arrangement should be documented properly. This usually includes a separation deed (or settlement deed) setting out:

• what will be paid (and when);
• the final employment date;
• confidentiality and non-disparagement obligations (where appropriate); and
• a release of claims (as far as legally possible).

Depending on the situation, you might use a mutual separation agreement approach, or a more formal Deed of Settlement if risk is higher.

What Documents Should You Have In Place For Voluntary Severance?

Running a clean voluntary severance process is much easier when your employment documents are already in good shape. The right paperwork also helps you avoid misunderstandings about what was offered and what was agreed.

Common documents to consider include:

• Employment Contract: sets the baseline rules for notice, termination, confidentiality, and other key terms (many issues in exits come from unclear contracts).
• Voluntary Severance Offer Letter: explains who the offer applies to, what’s included, the response deadline, and that it’s subject to approval (if applicable).
• Calculation Sheet For Final Pay: a clear breakdown of how severance, redundancy, notice, leave and other amounts were calculated (and, where relevant, how tax withholding was applied).
• Deed / Separation Agreement: the signed document confirming the exit terms and reducing the scope for future disputes.
• Internal Process Notes: records of business reasons, consultation steps, redeployment considerations, and selection/approval decisions.

As part of the exit process, you may also need to provide an employment separation certificate in relevant circumstances (for example, where it’s required for certain government processes).

Common Mistakes Employers Make With Voluntary Severance (And How To Avoid Them)

Voluntary severance can be a great tool, but small mistakes tend to have outsized consequences. Here are a few issues we regularly see.

Trying To Use Voluntary Severance As A Shortcut For Performance Management

If the real issue is conduct or performance, severance may feel like the easiest way to avoid a difficult conversation. But if the role still exists and you’re simply trying to remove a particular employee, you can create unfair dismissal and adverse action risk.

In those situations, you may instead need a proper performance management process or different termination pathway (and it’s worth getting advice before taking steps that can’t be undone).

Inconsistent Offers And Messaging

If different employees are told different things about what’s on the table, it can quickly undermine trust and open the door to dispute.

Try to keep:

• the offer terms standardised (unless there’s a clear reason for differences);
• communications centralised (one email template, one timeline); and
• decision-making documented.

Not Checking Award Obligations

Even sophisticated small businesses get caught out here.

Awards can impose consultation requirements and sometimes contain redundancy-related provisions that sit alongside the NES. If you skip these steps because the severance is “voluntary”, you can inadvertently create compliance issues.

Overlooking What Happens If Nobody Volunteers

This is important operationally and legally.

If not enough employees accept voluntary severance, you may need to move to an involuntary redundancy process. Plan ahead for:

• how you’ll select roles/people if needed;
• how consultation will be handled; and
• what the timeline looks like.

Having a clear Plan B can prevent rushed decisions later.

Key Takeaways

• Voluntary severance can be an effective way to reduce headcount while protecting morale and lowering the risk of conflict, but it still needs a structured process.
• In many cases, voluntary severance is still connected to redundancy, meaning you may need to comply with consultation obligations, genuine redundancy rules, and minimum redundancy pay (noting small business exemptions and award/EA terms can materially change entitlements).
• You should plan the program carefully, including eligibility, offer terms, timing, and what happens if too many (or too few) employees accept.
• Make sure you handle notice and final pay correctly, including whether you’ll use payment in lieu of notice and whether it is permitted under the relevant contract/instrument.
• Document the exit properly with a signed agreement (often a separation agreement or deed) to reduce future dispute risk.
• Getting advice early can help you avoid common pitfalls like inconsistent messaging, award non-compliance, and discrimination or adverse action claims. You should also factor in the tax treatment of termination payments and get accountant/ATO guidance where needed.

If you’d like help setting up a voluntary severance process or documenting an agreed exit, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.