What Does Severance Mean in Australia?

“Severance” gets used a lot when businesses talk about ending employment, but what does it actually mean for you as an employer in Australia?

If you’re making changes to your team - whether due to restructuring, performance, or a mutual separation - getting severance right matters. Paying the right amounts, using the right documents, and following the right process can reduce legal risk and protect your business’s reputation.

In this guide, we unpack the severance meaning from an Australian employer’s perspective, explain where it fits with redundancy and other termination payments, and walk you through a practical, compliant approach.

What Does “Severance” Mean For Australian Employers?

In Australia, “severance” isn’t a specific legal term defined in the Fair Work Act. It’s a broad, everyday word that employers often use to describe the payments and terms offered when an employee’s employment ends.

In practice, severance can refer to any combination of:

• Statutory entitlements (like notice or redundancy pay under the National Employment Standards (NES))
• Accrued leave payouts (annual leave, and in some cases long service leave depending on state/territory laws)
• Contractual entitlements (benefits promised in the Employment Contract or policies)
• Ex gratia amounts (goodwill payments that go beyond legal minimums)
• Other agreed terms (for example, a release of claims, return of property, or extended benefits)

So when a team member asks about “severance”, they may be thinking about redundancy pay, a lump sum to end the relationship on agreed terms, or simply what they will receive when they leave. As an employer, it helps to be precise about each component you’re offering and why.

Severance Vs Redundancy Vs Other Termination Payments: What’s The Difference?

Because the word “severance” is used loosely, it’s worth separating the main concepts you’ll deal with when employment ends.

Redundancy Pay (NES)

Genuine redundancies can trigger redundancy pay under the NES. Amounts are based on the employee’s continuous service and are separate from notice. Small businesses (fewer than 15 employees) are generally exempt from NES redundancy pay, but you still need to meet other obligations such as notice, consulting under any applicable award, and paying accrued entitlements.

Notice Or Payment In Lieu

If you end employment, you must provide the required notice period or make a payment in lieu of notice. The minimum notice under the NES depends on the employee’s length of service (and age in some cases). Awards, enterprise agreements or contracts can set longer periods.

Accrued Entitlements

Accrued but unused annual leave is paid out. Long service leave may also be payable depending on state/territory rules and length of service. Personal (sick/carer’s) leave is generally not paid out when employment ends.

Ex Gratia Payments

These are discretionary, additional amounts you choose to offer. Businesses might include them to support a smooth exit, secure a release of claims, or recognise service. If you offer an ex gratia amount, make the basis clear and document it properly.

Other Scenarios

Not all departures are redundancies. Resignations, dismissals for conduct or capacity, and termination during probation follow different rules. In these scenarios, “severance” is often limited to notice (or pay in lieu) and accrued entitlements, unless you choose to offer extra terms.

When Do Employers Typically Offer Severance Packages?

There’s no one-size-fits-all. You’ll tailor your approach to the reason for ending employment, your obligations under the law and any industrial instruments, and your commercial goals.

Common Situations

• Organisational restructure (genuine redundancy)
• Mutual separation where both parties agree to end the employment on negotiated terms
• Senior executive exits where the contract or commercial considerations point to a negotiated package
• Managing risk where there is potential for a dispute and you want clarity and finality

In a redundancy, you’ll usually follow consultation obligations, search for redeployment options, and then pay NES redundancy (unless exempt) plus notice/leave entitlements. In a mutual separation, you might agree a tailored package and document it in an Employee Separation Agreement together with a release of claims.

What Should A Severance Package Include?

Think of a severance package as both a financial and a legal arrangement. You’re closing out entitlements, and you’re setting the terms that govern the exit.

Core Payment Components

• Notice or pay in lieu under the NES/contract
• Redundancy pay (if a genuine redundancy and your business is not exempt)
• Accrued but unused annual leave (and long service leave if applicable)
• Any contractual bonuses or incentives that have vested (check the Employment Contract and policies)
• Any ex gratia amount you decide to offer

Key Legal Documents

• Employee Separation Agreement: Records the agreed terms, including payments, post‑employment restrictions, confidentiality, and return of property.
• Deed of Release: Often used to finalise the relationship and include a release of claims. A deed offers stronger enforceability than a simple agreement.
• Employment Contract: Review it to ensure you meet its terms on notice, incentives, restraints and confidentiality.
• Policies and Award/Agreement: Confirm consultation steps, redundancy rules and any enhanced entitlements.

For some roles, you might also use garden leave to keep an employee away from the business during their notice period while still paying them. This can help protect confidential information and client relationships during handover.

How Do You Calculate Severance Amounts?

Start with what the law requires, then consider any extra amounts you need to pay under the contract or choose to pay as ex gratia. Keep a clear paper trail showing how you reached each figure.

1) Notice (Or Pay In Lieu)

Identify the correct notice period (NES minimums, plus any longer contractual or award requirement). If you pay in lieu, calculate the full amount that would have been earned during the notice period, including base pay and any elements required by the applicable instrument. If you’re paying in lieu, also consider the superannuation position - it’s common to check whether super is payable on that amount by referring to how “ordinary time earnings” and contractual terms apply, plus guidance like payment in lieu of notice and superannuation.

2) Redundancy Pay

If it’s a genuine redundancy and your business is not exempt, apply the NES redundancy scale to base rate of pay for the employee’s ordinary hours. Confirm award or agreement variations and any service that doesn’t count toward redundancy.

3) Accrued Leave

Calculate annual leave payout at the employee’s current rate. Long service leave rules differ by state and territory - check your jurisdiction’s legislation (and service history) carefully.

4) Contractual And Discretionary Components

Review any incentive plans and executive agreements to see what happens on termination (e.g. does a bonus vest, or lapse?). Decide whether you’ll include an ex gratia amount and on what basis.

5) Final Pay Timing

Many awards specify when you must pay final amounts. Even where not specified, pay promptly to avoid disputes. If you need a refresher on the process, have a look at the practical steps in calculating final pay.

A Step‑By‑Step Process To Offer Severance Confidently

Every business and situation is different, but the roadmap below helps you stay organised and compliant.

Step 1: Identify The Reason For Exit

Is it redundancy, performance/capability, misconduct, or mutual separation? The reason determines consultation steps, eligibility for redundancy pay, and the content of your documents.

Step 2: Check The Industrial Framework

Confirm the applicable modern award or enterprise agreement, the Employment Contract and your policies. Note any consultation processes, enhanced entitlements, notice requirements or procedural steps.

Step 3: Plan The Timing And Handover

Decide whether notice will be worked or paid in lieu, and whether you’ll use garden leave. Line up a handover plan to protect clients, systems and IP.

Step 4: Prepare The Package

Calculate statutory and contractual amounts, determine any ex gratia payment, and confirm tax/super treatment with your payroll provider or advisor. If there’s any doubt, it’s safer to clarify now rather than after issuing figures.

Step 5: Draft The Documents

Put the commercial terms into an Employee Separation Agreement or a Deed of Release (often preferred for finality). Include key clauses covering confidentiality, intellectual property, non‑disparagement, restraints (if applicable), mutual release, and return of property.

Step 6: Consult And Communicate

For redundancies, follow award/enterprise agreement consultation. In all cases, plan a respectful conversation, confirm next steps in writing, and give the employee a reasonable opportunity to review documents and seek advice.

Step 7: Process Final Pay

Pay notice (or pay in lieu), redundancy (if applicable), accrued leave and any other amounts on time. Arrange cancellation of access, return of property, and issue the necessary payroll and employment records. If requested, you may need to provide an employer separation certificate for Services Australia - check current requirements and timelines.

Step 8: Close Out Compliance

Update HR files, secure IP and confidential information, and ensure ongoing restraints and confidentiality obligations are understood. Keep copies of signed documents and calculations in case of future questions.

Legal Risks And Best‑Practice Tips For Employers

Handled well, a severance package can reduce the risk of disputes and protect your brand. Here are practical ways to stay on the front foot.

Be Clear On The Basis For Termination

Genuine redundancy has a specific meaning and process. If the role isn’t truly redundant or you skip consultation, you risk an unfair dismissal claim. If termination relates to performance or conduct, ensure your process and reasons are well‑documented and fair.

Use The Right Instrument

Where you’re seeking a release of claims and clear post‑employment terms, it’s common to use a deed. A well‑drafted Deed of Release can provide certainty for both parties.

Check Award/Agreement And Contract Alignment

Make sure your package meets or exceeds the highest applicable standard (NES, award/EA, contract). If the contract promises more than the statutory minimum, you’ll need to honour that.

Consider Superannuation And Tax

Different components can have different tax treatments (e.g., unused leave, genuine redundancy payments, ex gratia). Super rules can also differ, particularly for payment in lieu of notice. Coordinate with payroll early so payments are accurate and timely.

Document Restraints And Confidentiality

Severance is an opportunity to reinforce confidentiality and, where appropriate, reasonable restraints. These are often set out initially in the Employment Contract, but the separation documents can restate or confirm how they apply post‑employment.

Use Alternatives Where Appropriate

Sometimes a managed transition - for example, a short notice period on garden leave - protects your business just as well as a larger ex gratia sum. Choose the approach that best balances risk, cost and culture.

Mind The Details In Special Cases

Probation, casual conversion disputes, or complex incentive plans can change the analysis. If you’re ending employment early in the relationship, review your rights and obligations under termination during probation carefully before offering severance terms.

FAQs Employers Often Ask About Severance

Do We Have To Call It “Severance”?

No. What matters is that you meet your legal obligations and document what’s being paid and why. Many businesses simply describe “termination payments” and attach a schedule showing the breakdown.

Can We Exchange An Ex Gratia Payment For A Release Of Claims?

Yes, employers commonly offer a discretionary amount in exchange for a signed release in a deed. This can help both parties move on with certainty. Ensure the release is clearly drafted within a Deed of Release to reduce the risk of later disputes.

Is Super Payable On Severance?

Super can be payable on some components but not others. For example, whether it’s payable on payment in lieu depends on how the amount is characterised and the governing instruments - check your obligations against guidance like payment in lieu of notice and superannuation and get payroll advice if unsure.

How Do Redundancy And Leave Interact?

Redundancy pay is separate to annual leave payout. If redundancy coincides with personal leave questions, review your obligations carefully - our guide on redundancy and sick leave covers common employer scenarios.

What If We Want To End Employment Quickly?

Consider paying the required payment in lieu of notice and using a deed to finalise terms. Be sure all statutory and contractual entitlements are paid on time to avoid penalties and disputes.

Key Takeaways

• “Severance” in Australia is a practical term for the payments and terms you offer when employment ends - it can include notice, redundancy, accrued entitlements and any ex gratia amounts.
• Start with your legal minimums (NES, award/EA, contract), then consider commercial add‑ons; document everything clearly in an Employee Separation Agreement or Deed of Release.
• Match your process to the reason for exit: redundancies require consultation and may attract NES redundancy pay; probation or conduct terminations follow different rules.
• Calculate each component carefully and pay on time; double‑check super and tax treatment for items like payment in lieu and leave payouts.
• Protect your business by reinforcing confidentiality, IP protection and reasonable restraints, and consider options like garden leave to safeguard client and data relationships.
• A structured, respectful process and well‑drafted documents reduce risk and help both parties move on confidently.

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.