"Severance pay" is a phrase every employer uses and no statute defines. In Australia there is no single legal entitlement called severance pay. When people use the term, they are usually describing the bundle of payments an employee may be owed when employment ends: notice or payment in lieu of notice, redundancy pay where the role is genuinely gone, accrued annual leave, and sometimes long service leave and negotiated extras. Each of those payments has its own trigger, its own calculation and its own exceptions, and getting any of them wrong can turn a commercially sensible decision into an underpayment claim or an unfair dismissal application.
This article walks through how termination payments actually work: who is involved, where the money comes from, what triggers each payment, how the amounts are calculated, the traps that commonly appear, and where a lawyer earns their keep.
Who is involved and where the money comes from
Severance-style payments are not paid from one pot, and they do not come from one law. The floor is set by the National Employment Standards (NES) in Part 2-2 of the Fair Work Act 2009 (Cth), which contain the minimum notice period, the redundancy pay scale and the annual leave payout rule. On top of that floor, a modern award or enterprise agreement can add requirements, such as consultation duties for major workplace change or annual leave loading. The employment contract can go further again, but it cannot undercut the NES minimums. The correct payout for any employee is the highest of these sources that applies to them, which is why a "standard" severance figure can be right for one employee and wrong for the next.
A handful of actors sit around this process:
- The employer: decides the termination pathway and is responsible for working out and paying the correct final amount on time.
- The employee: is entitled to the minimums and can challenge a dismissal through the Fair Work Commission.
- The Fair Work Ombudsman: enforces the minimum entitlements and can investigate underpayment after the fact.
- The Fair Work Commission: hears unfair dismissal applications, where "genuine redundancy" is a defence the employer must establish.
- The Australian Taxation Office: sets how each component of a termination payout is taxed, which affects what a "tax-free redundancy" figure really means.
When each payment is triggered
The key to understanding severance pay is that each component has its own trigger. The first question is always why the employment is ending: resignation, redundancy, performance or conduct, the end of a fixed-term contract, or a negotiated mutual exit. Each reason produces a different bundle of payments, and the same termination can produce several components at once, or none of them, depending on the reason and the employee's length of service.
Notice and payment in lieu of notice
When an employer ends the employment, s 117 of the Fair Work Act 2009 (Cth) requires written notice of the day of termination and a minimum notice period based on continuous service: one week for up to a year of service, two weeks for one to three years, three weeks for three to five years, and four weeks beyond five years. An employee over 45 with at least two years of service gets an extra week.
The employer can instead terminate immediately and pay in lieu of notice, as long as the payment is at least what the employee would have earned at the full rate of pay for the hours they would have worked through the notice period. The Fair Work Ombudsman's guidance is that payment in lieu must be made before or on the day of termination.
Notice under the NES applies to employer-initiated terminations. When an employee resigns, notice requirements usually come from the award, agreement or contract instead. The Act also carves certain categories of employees out of the NES notice and redundancy rules entirely, so an employee's category needs to be checked rather than assumed.
Redundancy pay
s 119 of the Fair Work Act 2009 (Cth) creates redundancy pay when employment is terminated at the employer's initiative because the employer no longer requires the job to be done by anyone, or because of insolvency or bankruptcy. The amount is set by a scale based on continuous service and is paid at the employee's base rate for ordinary hours:
- 1 to 2 years of service: 4 weeks
- 2 to 3 years: 6 weeks
- 3 to 4 years: 7 weeks
- 4 to 5 years: 8 weeks
- 5 to 6 years: 10 weeks
- 6 to 7 years: 11 weeks
- 7 to 8 years: 13 weeks
- 8 to 9 years: 14 weeks
- 9 to 10 years: 16 weeks
- 10 years or more: 12 weeks
Periods of casual employment do not count towards the continuous service used in this scale. Section 121 excludes the entitlement entirely for employees with less than 12 months of continuous service and for small business employers, and a modern award can add further exclusions.
Redundancy pay is about the role disappearing, not the person. Under s 389, a dismissal is a genuine redundancy only if the employer no longer requires the job to be performed by anyone because of changes in the operational requirements of the enterprise, and the employer has complied with any award or agreement consultation obligations. It is not a genuine redundancy if it would have been reasonable to redeploy the person within the enterprise or an associated entity. That definition matters because genuine redundancy is a defence to an unfair dismissal claim, and the employer bears the onus of establishing it.
Accrued annual leave
Annual leave is the component that is almost always payable. Under s 87, employees accrue four weeks of paid annual leave per year, or five weeks for shiftworkers defined in an award or agreement, and under s 90(2) any untaken leave must be paid out when employment ends at the amount that would have been payable had the employee taken it. If annual leave loading applies during employment, the Fair Work Ombudsman's position is that it must also be included in the termination payout, even where the award or contract says otherwise. Sick and carer's leave is not paid out on termination.
Long service leave
Long service leave sits outside the NES and is governed by state and territory legislation, so the rules genuinely vary. Whether a departing employee is entitled to a pro-rata payment, and after how many years of service, depends on the state or territory where the employee works and the reason the employment ended. Where the entitlement exists it forms part of the final payout, but the trigger and the scale need to be checked against the relevant state law rather than assumed.
Contractual and discretionary amounts
Finally, there may be amounts owed only because someone agreed to them: an ex gratia payment, a payment for a release of claims, or the negotiated sum in a mutual separation arrangement. These are optional, which is how a payout becomes a risk-management tool rather than a payroll exercise. The limits matter: the parties cannot contract out of the NES minimums, and a deed of release cannot stop the Fair Work Ombudsman from acting where there has been an underpayment.
The small business exemption
For a small or medium business, the small business carve-out is usually the first question. Under s 23, an employer is a small business employer at a particular time if it employs fewer than 15 employees at that time. Three counting rules catch employers out:
- Regular casuals count: casual employees are included in the headcount if they are regular and systematic, but not otherwise.
- Associated entities count together: related companies are treated as one employer for the count.
- The person being dismissed counts: the departing employee, and any other employees being dismissed at the same time, are included in the 15.
If the employer is a small business employer at the time of the redundancy, no redundancy pay is owed, subject to special rules that can reimpose the obligation where the business becomes bankrupt or goes into liquidation. Notice and accrued annual leave are still owed, and the dismissal can still be challenged if it is not a genuine redundancy, so the exemption removes the redundancy payment but not the process obligations.
Calculating the final payout in practice
Putting it together, a final payout typically needs to cover:
- Outstanding wages and allowances: amounts owing up to the last day of employment, including ordinary hours, overtime, penalty rates and allowances under the award, agreement or contract.
- Notice or payment in lieu: the NES scale, plus any more generous award or contract terms.
- Accrued annual leave: untaken leave plus leave loading where it applies.
- Long service leave: where the relevant state or territory rules entitle the employee to it.
- Redundancy pay: where the redundancy is genuine, no exclusion applies and the employee has more than 12 months of continuous service.
Timing is a legal requirement in its own right. Most awards require final pay within seven days after the last day of employment, and where no award or agreement rule exists the Fair Work Act still requires payment at least monthly. Payment in lieu of notice must be made before or on the day of termination.
Tax treatment is where "how much do we pay" and "how much do they keep" diverge. A genuine redundancy payment is tax-free up to a limit that is indexed on 1 July each year, calculated as a base amount plus an additional amount for each completed year of service, with the excess taxed as an employment termination payment (ETP) at concessional rates up to the ETP cap, which is $245,000 for 2024-25 and $260,000 for 2025-26. Unused annual leave and long service leave lump sums are not part of the tax-free redundancy amount and are taxed separately, so a quoted "tax-free redundancy" figure should never include the leave components.
Where terminations go wrong
Most disputes are not really about the dollars. They come from misclassifying the reason for termination or missing a step in the process:
- A redundancy that is not one: If the employee is replaced, the duties are redistributed in a way that still needs doing, or it was reasonable to redeploy the person, the dismissal is not a genuine redundancy. The employer has then paid out a redundancy that was never properly owed, and the employee can challenge the dismissal as unfair.
- Performance and conduct exits dressed up as redundancies, and vice versa: If the role still exists, redundancy pay does not apply; the exit may still require notice and accrued entitlements. Announcing a redundancy before verifying that the role is genuinely gone is one of the fastest ways to create exposure.
- Consultation skipped: Many awards require consultation about major workplace change before a redundancy decision is finalised. Failing to consult can destroy the genuine redundancy defence regardless of how real the restructure was.
- Headcount mistakes: Counting only permanent staff, forgetting associated entities or forgetting the person being dismissed can push an employer over the 15-employee line and into redundancy pay territory it assumed it was exempt from.
- Fixed-term endings assumed to be free of obligations: A genuine fixed-term contract that ends by its own terms is not a redundancy, but rollovers and extensions can create continuous service, and the structure needs to genuinely reflect the work being done.
Where a lawyer helps
The point at which a lawyer earns their fee is before the decision is communicated, not after the claim lands. A lawyer can verify the employee's award and agreement coverage, work out which of the buckets above apply and in what amount, check consultation obligations, and advise on whether the exit should be structured as a redundancy, a performance-based termination or a negotiated mutual separation with a deed. Where a discretionary payment is on the table, the deed needs to be drafted so the release actually covers the claims the employer is worried about while staying on the right side of the minimum standards. If the exit has already gone wrong, a lawyer can also respond to a Fair Work Commission application or an Ombudsman inquiry and negotiate a resolution.
The classification decision is the one that counts
The most expensive mistake in this area is not miscalculating a week of pay. It is announcing a termination reason that the facts cannot support, then discovering the mistake after the announcement, because the payment follows the classification and the classification follows what was said and done first. Get the reason right and verify the employee's coverage before you communicate anything, and the payout calculation becomes a mechanical exercise. Get it wrong, and the amount you owe is the least of the problem: the consultation failures, the unfair dismissal claim and the regulator's interest all flow from that first classification decision. That is why the conversation worth having early is not "how much do we pay" but "what is this termination, exactly, and what does this employee's coverage actually require". A short consultation before anything is announced can be the difference between a clean exit and a contested one, and it is usually far cheaper than unwinding a redundancy that was never one.