Termination agreements in Australia and the employer's step-by-step process

The decision to end someone's employment rarely arrives as one clean moment. It usually lands as a redundancy decision after a restructure, a performance process that never recovered, or a relationship that both sides agree has run its course. Either way, the exit still has to be managed: notice, final pay, handover, and the possibility that a departing employee lodges a claim with the Fair Work Commission.

A termination agreement converts that exit into a signed, documented deal. It records the termination date, settles what the employee is paid, and typically includes a release of claims so both parties can move on. What it does not do is suspend the Fair Work Act 2009 (Cth). Minimum entitlements such as notice and accrued annual leave still have to be paid, and the Fair Work Commission can still hear an unfair dismissal or general protections application made within 21 days of the dismissal, even where a deed has been signed.

The prerequisites: what to have ready before you start

Work through these before you draft or say anything:

• A lawful reason for the exit: a genuine redundancy, documented performance or conduct, or a mutual decision that is genuinely voluntary. A termination agreement does not make a dismissal lawful; it documents one that already has a defensible basis.
• An award and enterprise agreement check: confirm which award or agreement covers the employee and what it requires for notice, redundancy consultation and the timing of final pay.
• The service record and balances: start date, length of continuous service, accrued annual leave and long service leave, and any unpaid wages, bonuses or commissions.
• A decision on the instrument: a simple agreement or a deed of release. Releases are usually done as deeds because a deed is enforceable even where the employee gives no separate consideration in return.
• Signing authority: if the employer is a company, who will sign. Under s 127 of the Corporations Act 2001 (Cth), a document can be executed by two directors, a director and a company secretary, or the sole director of a proprietary company that has no secretary.
• A spokesperson and a timeline: who runs the conversation, and how much time the employee will get to consider the offer.

Two checks trip employers up more than any others. The first is the redundancy consultation obligation in the applicable award or enterprise agreement, which must be completed before the exit is final. The second is the small business threshold: an employer with fewer than 15 employees (counting regular casuals) is exempt from NES redundancy pay, so the numbers look very different either side of that line.

The process: nine steps from decision to sign-off

Confirm the legal basis for the exit

Start by being honest about what the termination actually is. Under s 386 of the Fair Work Act 2009 (Cth), a person is dismissed if the employer ends the employment on its own initiative, or if the employee resigns but was forced to do so by the employer's conduct. A "mutual separation" is still a dismissal if the employer started it, and a deed does not convert that into a resignation.

If the exit is a redundancy, the dismissal is only a genuine redundancy if the job is no longer required to be performed by anyone because of changes in the operational requirements of the enterprise, and the employer has complied with any award or enterprise agreement obligation to consult, and it would not have been reasonable to redeploy the employee: s 389. If any of those limbs fails, the dismissal is not a genuine redundancy and the unfair dismissal protections apply in full.

Work out the minimum entitlements under the NES

Calculate the statutory floor before you put any number on the table. These are the entitlements a termination agreement cannot reduce.

Notice or payment in lieu

Under the National Employment Standards (NES), the minimum notice period is 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, with an extra week for employees over 45 with at least two years of service: s 117. The Fair Work Ombudsman confirms that payment in lieu must equal the full amount the employee would have earned working the notice period, including incentive payments, bonuses, loadings, allowances, overtime and penalty rates. No notice is required for serious misconduct, but accrued entitlements still must be paid.

Redundancy pay

Where it applies, NES redundancy pay ranges from four weeks for one to two years of service up to 16 weeks for nine to ten years, and 12 weeks once service passes ten years: s 119 and the Fair Work Ombudsman's table. It is calculated at the employee's base rate of pay for ordinary hours, excluding bonuses, loadings, allowances, overtime and penalty rates. It does not apply at all if the employee has less than 12 months of continuous service or the employer is a small business employer: s 121. The Fair Work Commission can also reduce redundancy pay on application where the employer has obtained other acceptable employment for the employee or genuinely cannot pay: s 120.

Annual leave and long service leave

Untaken annual leave must be paid out on termination at the amount that would have been payable had the employee taken the leave: s 90(2). Long service leave depends on state or territory legislation, so check the rules for the state where the employee worked.

Superannuation and tax

Superannuation guarantee is payable on final wages, but the ATO confirms it is not payable on employment termination payments or unused leave payments, because those amounts do not form part of ordinary time earnings. Genuine redundancy payments are tax-free up to a limit based on years of service for employees under pension age, and other termination payments are taxed as employment termination payments with concessional caps. Unused leave lump sums are reported separately, not as employment termination payments. Get payroll or tax advice on the specific numbers before you commit to them.

Choose a deed or a simple agreement and draft it

For an exit where the employee gives up claims, use a deed: it is enforceable without the employee receiving separate consideration, which is what makes a release work. The drafting should cover the essentials:

• Parties and role: full legal names, position, employment start date and termination date.
• Notice and final pay: whether notice is worked or paid out, and the agreed composition of final pay, including wages, annual leave, long service leave, redundancy pay and any ex gratia amount.
• Release of claims: the scope of the release, covering claims arising from the employment and its termination.
• Confidentiality, return of property and intellectual property: ongoing obligations, the return of devices, access cards, documents and data, and confirmation that company IP created during employment belongs to the business.
• Restraints and non-disparagement: tailored post-employment restraints and mutual promises not to make negative statements. The narrower and better targeted a restraint, the more likely a court will enforce it.
• References and announcements: agreed wording for internal and external communication, and whether a reference will be given.
• Warranties, governing law and execution: the employee's confirmation that property has been returned and obligations met, the governing state or territory, and correct execution blocks.

One drafting limit applies throughout: the agreement cannot contract out of the National Employment Standards. Modern awards and enterprise agreements must not exclude the NES (s 55(1)), and the Fair Work Ombudsman is explicit that an employment contract cannot provide less than the legal minimums. A clause that purports to pay below the NES floor is unenforceable to that extent.

Present the terms without pressure

Invite the employee to a confidential discussion, explain the business reason at a high level, and outline the proposed terms: notice or payout, any ex gratia amount, the release, the reference and the timing. Then put the offer in writing, allow a reasonable period to consider it, and encourage independent legal advice.

The way the offer is made matters as much as the document. A release obtained under pressure, or against an artificial deadline, is vulnerable if the employee later challenges it. Coercion around an exit can also be adverse action in its own right: dismissing, injuring or prejudicially altering an employee's position because of a workplace right is prohibited (s 342), and if a general protections claim is made, the employer carries the onus of proving the termination was not for a prohibited reason (s 361).

Negotiate the commercial terms

Expect the employee, often with advice, to come back on the money, the reference wording or the handover timing. Reasonable tweaks that preserve the core deal are usually worth making: clarifying the reference, staging the handover, or adjusting payment timing. The negotiation is also the moment to confirm the employee understands what the release covers, because an informed and voluntary signature is what makes the deed hard to attack later.

Execute the document correctly

Execution formalities decide enforceability. An individual signs in front of a witness, and a deed needs the additional formality of attested execution. A company executes under s 127 of the Corporations Act 2001 (Cth): by two directors, a director and a company secretary, or the sole director of a proprietary company with no secretary. Keep the fully signed original, note any conditions such as payment within a set number of days of execution, and make sure both parties receive a copy.

Run the handover and cut off access

Confirm the final day worked, or the garden leave arrangement if the employee stays employed and paid but away from work during notice. Remove system access on time, secure the return of all business property, and confirm deletion of company data from personal devices and cloud accounts. An inventory signed by both parties closes the loop and feeds the employee's warranty that property has been returned.

Pay final pay and report it to the ATO

Final pay must cover wages to the termination date, accrued annual leave, long service leave where it applies, notice or payment in lieu, redundancy pay if applicable, and any agreed ex gratia amount. Check the award for the timing of final pay, as many require payment by the last day of employment or the next regular pay day. Issue a payslip, finalise the employee's single touch payroll record with the ATO, and report unused leave lump sums and termination payments in the correct boxes.

Close out the post-termination obligations

Remind the former employee in writing of the continuing confidentiality, restraint and non-disparagement obligations, and action the agreed announcements. Then keep an eye on the calendar: if an unfair dismissal application arrives, it must be made within 21 days of the dismissal (s 394), and the same 21-day window applies to general protections applications involving dismissal (s 366). A deed does not stop the clock, and it does not stop an application being lodged.

Where exits typically get held up

The same problems recur across exits, and each one is worth checking before you finalise:

• The 21-day clock keeps running: negotiation time, "cooling off" periods and even the employee's independent advice do not pause the Fair Work Commission windows. An employee can sign a deed and still lodge an application within 21 days, so treat the deed as strong evidence, not a guarantee, and respond quickly if an application arrives.
• Releases that try to waive minimum entitlements: a release cannot extinguish accrued NES entitlements such as notice, annual leave or redundancy pay. Draft the release to settle claims, not to undercut the statutory floor, or the deed will be attacked at exactly the point you need it.
• "Redundancy" in name only: if the role continues under a new title, or consultation was skipped, the dismissal is not a genuine redundancy under s 389, and the unfair dismissal exclusion falls away.
• Informal execution: a deed signed without a witness, or a company document signed by one director where two signatures are required, may not be enforceable as a deed. Check the execution block before the meeting, not after the dispute.

When a lawyer should be in the room

A legal practitioner earns their fee at three points in this process. Before the offer: checking award coverage and consultation triggers, calculating the entitlements and tax treatment, and drafting the deed so the release is effective and any restraint is enforceable. During the negotiation: advising on what can be conceded without unravelling the release, and handling the back-and-forth without the pressure that would undermine the agreement. After signature: defending any application that arrives within the 21-day windows, where the quality of the process and the deed itself will be the first things examined. Getting the document and the process right up front is far cheaper than litigating a release that was never going to hold.

The check that decides whether the deed holds

The step that determines whether your termination agreement does its job happens before any document exists: the award and entitlements check. If the numbers on the page are below the NES floor, the redundancy is not genuine, or the employee was rushed into signing, no amount of careful release drafting will save the exit. Get that calculation right, run the process with a reasonable offer and time to consider, and the deed becomes what it is supposed to be: the clean, documented end of the relationship rather than the opening of the next dispute.

The core points to take with you are these. A termination agreement records the exit, settles the money and releases claims, but it does not replace the minimum entitlements under the Fair Work Act 2009 (Cth) or the Fair Work Commission's 21-day jurisdiction. Confirm the legal basis, calculate notice, annual leave and redundancy pay against the NES, draft a deed that cannot be read as contracting out of the floor, present it without pressure, execute it correctly, and pay final pay on time. Do that, and the exit is documented in a way that protects the business and lets both parties move on.