What Is Severance Pay? A Guide for Australian Employers and Employees

When employment ends-whether it’s due to redundancy, restructuring, or a business closing its doors-severance pay can offer a much-needed buffer for Australian employees and clarity for employers. But this area of employment law can often feel confusing: What does “severance pay” actually mean? Who is entitled to it, and how is it calculated? Whether you’re an employer planning for change or an employee wanting to understand your rights, understanding severance pay is crucial.

In this practical guide, we answer the question “How do you define severance pay?”-explaining how it works under Australian law, what payments are required upon termination, and your next steps to ensure compliance and fairness. Whichever side of the table you’re on, we’ll help you get across the essentials so you can navigate transitions with confidence.

What Is Severance Pay?

Let’s start with the basics: how do you define severance pay in Australia?

Severance pay (often called “redundancy pay”) is a lump sum payment made to an employee whose job is made redundant. In Australia, it refers to the financial compensation employers must provide to eligible employees when their job is terminated because the position is no longer required. This is different from dismissals due to performance or misconduct-severance pay is only triggered by a genuine redundancy.

The main goals of severance pay are:

• To provide financial support to workers as they seek new employment
• To recognise long service and contribution to the organisation
• To comply with the minimum entitlements set by the Fair Work Act 2009 (Cth)

It’s important to understand that severance pay is a legal requirement, not just a “goodwill gesture”, provided certain criteria are met.

Who Is Entitled to Severance Pay in Australia?

Not all employees are automatically entitled to severance pay. The Fair Work Act 2009 sets out the framework for redundancy and associated payments, but several factors can affect eligibility:

Key Criteria for Severance Pay Entitlement

• Size of the Employer: Generally, employers with fewer than 15 employees are not required to provide redundancy pay (they are considered “small businesses” under the Fair Work Act).
• Type of Termination: Severance pay is only required if the job is made “genuinely redundant”-that is, the job itself no longer exists, not because of performance issues.
• Minimum Period of Service: Employees must have served at least 12 months continuously to be eligible for severance pay.
• Exemptions: Some categories-such as casuals, apprentices, employees on fixed-term contracts, and small business employees-are not entitled to severance pay.

For full details on how redundancy differs from other types of terminations (such as resignation or for cause), see our guide to redundancy versus termination.

How Is Severance Pay Calculated?

Once you define severance pay and determine who is eligible, the next big question is: how is it calculated?

The Statutory Formula Under the Fair Work Act

The Fair Work Act provides a clear table that sets out redundancy pay amounts based on the employee’s continuous period of service with the employer:

Years of Continuous Service	Severance Pay (weeks of base pay)
At least 1 year but less than 2 years	4 weeks
At least 2 years but less than 3 years	6 weeks
3–4 years	7 weeks
4–5 years	8 weeks
5–6 years	10 weeks
6–7 years	11 weeks
7–8 years	13 weeks
8–9 years	14 weeks
9–10 years	16 weeks
10+ years	12 weeks

(Note the drop after 10 years is due to accrued long service leave entitlements.)

What Is “Base Rate of Pay”?

Severance pay is calculated using the employee’s base rate of pay for ordinary hours (excluding bonuses, allowances, loading, overtime, or penalty rates). This ensures all employees are treated consistently.

Need help with the maths? We recommend checking out Sprintlaw’s Redundancy Calculator for an easy way to estimate payments owed.

Other Payments: What Else Is Owed When Employment Ends?

Besides severance pay, employers are also required to pay out:

• Any notice periods (or payment in lieu of notice)
• Untaken annual leave or long service leave (where applicable)
• Any outstanding wages up to the last day of work
• Superannuation contributions up to the last day

For a full rundown of other end-of-employment payments, see our guide to employment termination payments.

What Types of Dismissal Do (and Don’t) Trigger Severance Pay?

This is one of the most common questions for employers: “What kind of termination requires severance pay?”

• Genuine Redundancy: Yes – severance pay is required.
• Dismissal Due to Misconduct: No – if an employee is terminated for serious misconduct, severance pay is not required.
• Resignation or Retirement: No – if an employee voluntarily leaves, there’s no severance.
• End of Fixed-Term Contract: No – if the contract comes to its scheduled end, no severance is owed.
• Small Business Employer (fewer than 15 employees): No – these businesses are generally exempt from the statutory requirement (though it’s still best practice to clarify this in employment contracts and policies).

Are There Exceptions to Severance Pay?

Yes, several. Australian law sets out clear cases where severance pay does not apply, including:

• Small business employers: If you have fewer than 15 staff, the redundancy pay section of the Fair Work Act does not apply to you.
• Employees with less than 12 months’ service: The minimum service period must be met.
• Casual, fixed-term, or seasonal employees: Severance pay does not apply.
• Employees hired for a specific task/project/season: If the role was always temporary or project-based, severance pay is not required.
• Apprentices and trainees: Not entitled to severance pay under the Fair Work Act.

Always review employment contracts and relevant Modern Awards for any terms that set out more generous conditions than the statutory minimum–these will take precedence if they benefit the employee.

How Should Employers Manage Severance Pay Obligations?

If you’re an employer, navigating redundancy and severance pay requires careful planning and legal compliance. Here’s what best practice looks like.

Step 1: Identify Genuine Redundancy

Ensure the redundancy is genuine (the job is no longer needed or the business is undergoing changes) and that alternatives have been considered (such as redeployment).

Step 2: Communicate Transparently

Early and honest communication with employees is crucial. Explain the business reasons and clarify their rights.

Step 3: Calculate and Document Severance Pay

Use the Fair Work Act formula (or any higher amount in contracts/Awards). Document the calculations to show compliance if questioned.

Step 4: Provide the Notice or Payment in Lieu

Meet notice period or payment in lieu of notice requirements as per the Act and contract terms.

Step 5: Pay All Outstanding Entitlements

• Redundancy/severance pay
• Unused annual and/or long service leave
• Wages earned up to the last day
• Superannuation (if applicable)

Use a redundancy calculator to confirm your calculations.

Step 6: Issue Documents and Exit Formalities

Provide a termination letter, an employment separation certificate (if applicable), and record all steps to maintain transparency in case of a dispute.

Seeking advice on your specific employment contracts or negotiating variations? An employment lawyer can help you manage risk and avoid unfair dismissal claims.

What Legal Documents Should Employers Have in Place?

Having the right documents ensures clarity for both parties and helps avoid disputes. Key documents include:

• Employment Contract: Clearly sets out rights on redundancy, notice periods, and payment terms.
• Redundancy Letter/Notice: Gives advance notice of redundancy and the reasons.
• Separation Certificate: Confirms the reason for ending employment, often required for Centrelink.
• Deed of Release/Settlement (if offered): Confidentially settles any outstanding claims in exchange for agreed payments-for more on this type of document, see our guide to release and settlement deeds.
• Redundancy/Severance Calculator: To document and communicate how severance pay was calculated.

Employers should also ensure compliance with up-to-date Fair Work requirements and review any applicable Modern Awards or Enterprise Agreements for redundancy rules that go above the legal minimums.

Key Tips for Employees Facing Redundancy

• Check Your Entitlements: Review the length of your service and check your contract/Award to see if you meet eligibility.
• Demand Written Notice: Request a letter confirming redundancy and details of all payments owed.
• Use a Calculator: Use an online redundancy calculator to check the amounts, especially if you disagree with your employer.
• Consider Time Off: You may be entitled to time off to attend interviews-for more about this and other entitlements, see our article on employee leave rights.
• Seek Advice If Unsure: If you think your redundancy is not genuine, or you are not being paid correctly, seek legal or union help. Disputes can be resolved via the Fair Work Commission.

What If the Business Can’t Afford Severance Pay?

Sometimes businesses genuinely struggle to pay the required redundancy amounts. In special cases, the Fair Work Commission can grant a reduction (or waiver) if paying severance would:

• Threaten the business’s viability, or
• The employer finds other acceptable employment for the worker

This is not a loophole but a strict exception-businesses should seek formal legal advice before applying for a reduction or failing to pay severance. Failing to comply with legal obligations can lead to significant penalties.

Common Severance Pay Myths (and the Facts)

• Myth: Small business owners never need to worry about severance pay.
  Fact: Usually exempt, but not always-check your situation, contracts, or Awards.
• Myth: Severance pay includes superannuation.
  Fact: Super is not paid on redundancy payments-it’s only calculated on ordinary time earnings, not the lump sum.
• Myth: Payment in lieu of notice can replace severance pay.
  Fact: These are separate entitlements-you may be owed both. Read more about payment in lieu of notice here.
• Myth: Severance is only for full-time staff.
  Fact: Part-time employees are also eligible (if they meet other criteria).

What Are the Risks of Not Paying Severance?

If a business fails to correctly pay severance pay, risks include:

• Unfair dismissal claims via the Fair Work Commission
• Fines or penalties for non-compliance with the Fair Work Act
• Reputational harm and loss of trust from current and former staff
• Potential court action to recover unpaid amounts

A proactive, transparent approach-supported by the right legal agreements-can avoid these pitfalls and help protect your business relationships as well as your bottom line.

Key Takeaways

• To define severance pay in Australia: it’s a legally required payment to eligible employees when a job becomes redundant.
• Eligibility depends on business size, length of service, and type of employment, with exemptions for small businesses and certain other categories.
• Calculate severance pay using the statutory formula outlined in the Fair Work Act-base weekly rate multiplied by years of service up to a maximum.
• Employers must also pay out notice, unused leave, and other entitlements on termination, not just redundancy pay.
• Best practice: Use contracts and well-documented processes to manage and record all redundancy payments.
• Disputes and penalties can arise if severance is mishandled, so seeking professional advice early is recommended.

If you would like a consultation on managing severance pay or redundancy in your workplace, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.