Severance pay in Australia and employer obligations when employment ends

"Severance" is not a term the Fair Work Act uses, but it describes something every Australian employer will eventually do: end an employment relationship and pay the employee what they are owed. The legal obligations sit in the National Employment Standards (NES) in the Fair Work Act 2009 (Cth), and they cover notice, redundancy pay, accrued leave and the timing of final pay. Getting any of them wrong can turn a difficult conversation into an unfair dismissal claim, an underpayment complaint or an investigation by the Fair Work Ombudsman.

This guide sets out the payment and process obligations that apply when employment ends, who they apply to, the thresholds that trigger them, and the consequences of missing them. It is written for owners and managers of small and medium businesses, not for lawyers.

Who the obligations apply to

The NES notice and redundancy pay obligations in Division 11 of the Fair Work Act 2009 (Cth) apply to most private sector employees in the national system, which covers almost all employers other than unincorporated sole traders in some states. But the obligations are not universal, and the thresholds matter more than the general rule:

• Redundancy pay requires 12 months' service: an employee with less than 12 months' continuous service has no NES redundancy pay entitlement at all (s 121 of the Fair Work Act).
• Small business employers are exempt from redundancy pay: an employer with fewer than 15 employees is a small business employer and does not owe NES redundancy pay (s 23 and s 121). Counting employees is not as simple as it sounds: regular casuals count, associated entities are treated as one employer, and the departing employee is counted.
• Casual employees have no NES notice or redundancy pay entitlement: their continuous service still counts toward the entitlements of employees who convert to permanent employment (s 123).
• Apprentices and fixed-term workers: apprentices are excluded from redundancy pay under the NES, and employees on genuine fixed-term, task or seasonal contracts are excluded from both notice and redundancy pay when the contract ends as scheduled, unless the arrangement was a sham designed to avoid the obligations (s 123).
• Notice is not required for serious misconduct: other entitlements such as accrued annual leave must still be paid.
• Awards and enterprise agreements can add to these rules: check the applicable instrument, because it may impose consultation duties, longer notice, or redundancy payments that exceed the NES, and it may remove the small business exemption.

The exclusion for redundancy pay does not mean nothing is owed. Notice, accrued annual leave and other entitlements generally still apply, so a casual or a short-service employee should not simply be shown the door without working through the checklist below.

Give notice or payment in lieu of notice

Unless the employee is excluded by s 123 of the Fair Work Act 2009 (Cth), you must not terminate employment without giving written notice of the termination day, and the notice period must be at least the minimum set out in s 117:

Add one extra week if the employee is over 45 and has completed at least 2 years' continuous service (s 117(3)). The period is measured at the end of the day notice is given, and it can only be calculated on the employee's actual continuous service, not an estimate.

You have three ways to run the notice period:

• Have the employee work it out: they remain employed, paid and performing duties until the last day.
• Place them on garden leave: the employee stays employed and paid but does not attend work or perform duties. Garden leave is a creature of contract, not statute, so it only works if the contract or a signed agreement permits it, and the arrangement must be reasonable.
• Pay in lieu of notice: payment in lieu must be at the full rate of pay for the hours the employee would have worked through the notice period, and it must be paid before or on the day of termination (s 117(2) and Fair Work Ombudsman guidance). You cannot defer it to the next pay cycle.

Pay redundancy pay when the role is genuinely gone

Redundancy pay is a distinct NES entitlement, separate from notice and from accrued leave. Under s 119 of the Fair Work Act 2009 (Cth), it is owed when employment is terminated at the employer's initiative because the employer no longer requires the job to be done by anyone, other than due to the ordinary and customary turnover of labour, or because of the employer's insolvency or bankruptcy.

The amount is based on continuous service and is paid at the employee's base rate of pay for ordinary hours, which excludes bonuses, loadings, allowances and overtime rates (s 119(2)):

The scale's peak at 16 weeks and its drop to 12 weeks for 10 or more years of service surprises many employers, so read the table rather than assuming the amount keeps growing. For a worked example, an employee with 6 years' service on a base rate of $1,500 a week is entitled to 11 weeks' pay, or $16,500.

The genuine redundancy test

Redundancy pay is only part of the story. The Fair Work Commission will treat a dismissal as a genuine redundancy, and therefore outside unfair dismissal law, only if all three elements of s 389 are met:

• The employer no longer requires the person's job to be performed by anyone, because of changes in the operational requirements of the enterprise. If the role still exists and someone else does the work, it is not a redundancy.
• The employer has complied with any consultation obligations in the applicable modern award or enterprise agreement.
• It would not have been reasonable in all the circumstances to redeploy the employee within the business or an associated entity.

If the role is genuinely gone but you skipped consultation, or a reasonable redeployment opportunity existed that you did not offer, the dismissal is not a genuine redundancy, the redundancy pay exemption for unfair dismissal falls away, and the employee can challenge the termination.

Exclusions and the small business exemption

No redundancy pay is owed where the employee has less than 12 months' continuous service, or where the employer is a small business employer, under s 121. But there is an important hole in the small business exemption: since the 2024 amendments, a small business employer that becomes bankrupt or goes into liquidation must still pay redundancy pay where the employment was terminated within six months before the insolvency (s 121(4)). The exemption also does not apply where an award or enterprise agreement provides its own redundancy scheme, so never assume "fewer than 15 employees" is the end of the analysis.

Finalise pay correctly and on time

Final pay must include everything the employee has earned but not yet received. The Fair Work Ombudsman lists the core components:

• Wages for hours worked, including penalty rates and allowances
• Accrued but untaken annual leave, paid at the amount the employee would have received had they taken the leave, including annual leave loading where it would have been paid during employment (s 90(2) of the Fair Work Act). Leave loading must be paid out on termination even if the award, agreement or contract says otherwise
• Payment in lieu of notice, if the employee is not working out their notice
• Redundancy pay, if it applies
• Accrued or pro rata long service leave, where the relevant state or territory law provides for it
• Any other contractual amounts that have fallen due, such as commissions or bonuses

Sick and carer's leave is not paid out when employment ends. Timing rules come from the applicable instrument: most modern awards require final pay within 7 days of the last day of employment, and payment in lieu of notice must be made before or on the day of termination. Where no instrument sets a deadline, the Fair Work Act requires pay at least monthly, but best practice is to pay as soon as possible after the last day, and in any event promptly enough to avoid a dispute.

If the employee needs to claim income support, Services Australia may require an Employment Separation Certificate. The employer is asked to complete it when the employee stops work, so have the details of the termination and any termination payments ready.

Consult and consider redeployment

Where a modern award or enterprise agreement applies, it will almost always contain a consultation clause requiring you to notify affected employees of major workplace changes, discuss measures to avoid or reduce the adverse effects, and genuinely consider their responses before deciding. Compliance is not optional: it is one of the three limbs of the genuine redundancy test in s 389, so a redundancy implemented without consultation is not a genuine redundancy for unfair dismissal purposes.

For larger scale change, separate obligations kick in. An employer that decides to dismiss 15 or more employees for economic, technological, structural or similar reasons must notify and consult any registered employee associations representing affected members before carrying out the dismissals, or the Fair Work Commission can make orders (s 531).

Redeployment is the element employers most often underestimate. The test is whether it would have been reasonable to redeploy the employee within the enterprise or an associated entity, which can include a role with different duties that the employee could perform with reasonable retraining. Document what you considered and why it was not reasonable.

The tax treatment of termination payments

Payments on termination are not all taxed the same way, and payroll mistakes here are common. Under ATO rules, the tax-free part of a genuine redundancy payment is not part of an employment termination payment (ETP). For the 2026-27 income year the tax-free limit is $13,598, plus $6,801 for each complete year of service, indexed annually (ATO tables). A genuine redundancy for tax purposes requires the job to be abolished, the decision to be the employer's, and the employee to be under age pension age.

Amounts above the tax-free limit are ETPs, taxed concessionally up to the ETP cap of $270,000 for 2026-27, with amounts above the cap taxed at the top marginal rate. Payment in lieu of notice and ex gratia "golden handshake" amounts can also be ETPs, while unused annual leave, long service leave and the tax-free redundancy component are not ETPs and are taxed separately. The interaction is intricate enough that you should coordinate the final pay calculation with your payroll provider or a tax adviser before paying, and report the amounts correctly on the employee's income statement.

What happens if you get it wrong

The consequences of a botched exit are practical as well as financial:

• Unfair dismissal claims: a dismissal is unfair if it was harsh, unjust or unreasonable and was not a genuine redundancy or consistent with the Small Business Fair Dismissal Code (s 385). Employees need a minimum employment period of 6 months, or 12 months for small business employers, to bring a claim (s 383), but the Commission can order reinstatement or compensation, plus costs in some cases.
• Underpayment complaints: the Fair Work Ombudsman can investigate missed notice, redundancy pay or leave payouts, issue compliance notices, and take court action seeking penalties, back-pay orders and legal costs. Penalties apply per contravention, and deliberate or systemic conduct attracts significantly higher maximums.
• General protections claims: if the dismissal is connected to a workplace right or a protected attribute, the employee can bring an adverse action claim, and the employer bears the onus of proving the dismissal was not for a prohibited reason.
• Disputes over contractual extras: commission schemes, bonuses and restraint clauses are only enforceable if the contract supports them, and a poorly documented exit makes every disputed amount a negotiation.

A compliance checklist for endings

Before the termination letter goes out, work through this list:

• Confirm the basis: redundancy, performance, mutual separation or end of a fixed term. Each path has different obligations, and "redundancy" cannot be used as a shortcut for a performance problem.
• Count the heads: total employees, including regular casuals, associated entities and the departing employee, to test the 15-employee threshold and the 12-month service rule.
• Pull the instrument: check the award or enterprise agreement for notice, consultation and any redundancy scheme that overrides the NES defaults.
• Notice and payment in lieu: give written notice or pay in lieu at the full rate before or on the termination day.
• Consultation: consult where required and record the consultation, the redeployment options considered and the reasons they were not reasonable.
• Final pay: include wages, annual leave and loading, redundancy pay and any long service leave, and pay within the instrument's deadline, usually 7 days.
• Prepare the paperwork: termination letter, final payslip, separation certificate if requested, and a signed release or deed where extra benefits are offered.
• Property and access: collect property and revoke access on the last day, and handle the handover before the employee leaves.

When to get a lawyer involved

The straightforward exit, a resignation or an end-of-contract with full entitlements paid, rarely needs legal input. Involve an employment lawyer before you commit to a position where the stakes are higher: a genuine redundancy where consultation or redeployment is contested, a dismissal of a long-serving employee, an offer of extra benefits in exchange for a release of claims, post-employment restraints, or any exit where the employee has already raised a dispute. A practitioner can check the award obligations, draft the deed or release so the claims are actually settled, and advise on the unfair dismissal risk before you send the letter, which is far cheaper than defending the claim later.

The first check to run before any exit

The threshold that catches employers by surprise is the headcount. The small business exemption looks simple, but the 15-employee test counts regular casuals, treats associated entities as one employer, includes the departing employee, and since the 2024 amendments no longer protects a small business that becomes insolvent within six months of the terminations. Before you assume the exemption applies, count the employees properly and check the award for its own redundancy scheme. The other check is the reason itself: write down why the role is no longer required, what consultation you ran and which redeployment options you considered, because the genuine redundancy test in s 389 is the difference between a lawful exit and an unfair dismissal application.