How Voluntary Redundancy Works, a Guide for Australian Employers

What voluntary redundancy is for

Redundancy happens when a business no longer needs an employee's job to be done by anyone. The Fair Work Ombudsman lists the usual drivers: new technology that does the work instead, a downturn in sales, closure, relocation interstate or overseas, or a restructure after a merger or takeover. It is always about the needs of the business, never about how the employee performed.

Voluntary redundancy is one way to manage that situation. Instead of the employer selecting which employees to let go, the business invites employees to volunteer for a redundancy package. The employee who accepts agrees to end the employment in exchange for a payment, and the employer gets the headcount reduction it needs without a forced selection process.

This article walks through how voluntary redundancy actually operates in Australia: who makes the offer and how, what consultation the business must run first, when a redundancy is genuine and why that matters, what the employee must be paid, how the payout is taxed, and where the process typically goes wrong.

Why "voluntary" changes less than you think

The employer and the employee usually want the same thing from a voluntary redundancy: a clean exit, an agreed payment, and no hard feelings. That alignment is the main reason businesses use this route.

But there is no separate "voluntary redundancy" scheme in Australian law. Every redundancy, voluntary or not, is tested against the same statutory rules, and three things in particular do not change because an employee volunteered:

• Genuineness: the job must genuinely no longer need to be done by anyone, because of a change in the operational requirements of the business.
• Consultation: the employer must comply with the consultation obligations in the applicable modern award or enterprise agreement.
• Tax: the tax-free treatment of the payout depends on the redundancy being genuine, not on what the package is called.

An employee volunteering does not waive these requirements, and the employer cannot force anyone to accept a voluntary redundancy: the acceptance has to be the employee's choice.

Stage 1: The offer and the package

Voluntary redundancy usually appears when a business has decided it needs to cut a certain number of roles but does not want to choose who goes. In practice, offers are often directed at longer-serving or senior employees first: their packages are the largest, and the business wants to preserve goodwill with people it values. But any employee can be invited.

The employer sets the terms of the offer. The statutory entitlements covered in Stage 4 below are a floor, not a ceiling, and businesses frequently offer an enhanced package: more weeks of pay than the National Employment Standards (the NES) require, in exchange for the employee's agreement, usually recorded in a deed of release. The deed typically confirms the payment, records that the employment ends by agreement, and releases the employer from further claims. An employee who signs without understanding what they are giving up can lose the right to challenge the dismissal later, which is why employees are commonly advised to get independent legal advice before signing.

The employer is not obliged to accept every volunteer. If the business needs particular skills to keep operating, it can decline a volunteer or accept only some of them. The selection decision is a commercial one, provided the underlying redundancy remains genuine.

Stage 2: Consultation before the decision is locked in

Consultation is not optional. Under s 389 of the Fair Work Act 2009 (Cth), a dismissal is only a case of genuine redundancy if the employer has complied with any obligation in the applicable modern award or enterprise agreement to consult about the redundancy.

The Fair Work Ombudsman summarises what consultation involves, and it should happen as soon as possible after the decision to make major changes:

• Notify: tell the affected employees about the proposed changes.
• Inform: give clear information about the changes and their expected effects.
• Discuss: talk through strategies to reduce the negative effects on employees.
• Consider: genuinely consider employees' ideas and suggestions.

Consultation has to occur while the decision can still be influenced, not after everything has been settled. A business that announces the restructure and takes volunteers the same day has not consulted. That failure has consequences: the redundancy is not genuine, and the employee keeps the right to apply for an unfair dismissal remedy. It also destroys the goodwill the voluntary route is meant to preserve.

Stage 3: The genuine redundancy test

The heart of the process is the statutory test in s 389 of the Fair Work Act 2009 (Cth). A dismissal is a case of genuine redundancy when:

• the employer no longer required the job to be performed by anyone, because of changes in the operational requirements of the enterprise; and
• the employer complied with the award or agreement consultation obligations.

It is not genuine if it would have been reasonable in all the circumstances to redeploy the employee within the employer's enterprise or the enterprise of an associated entity. That redeployment limb is applied seriously. In Helensburgh Coal Pty Ltd v Bartley [2024] FCAFC 45, the Full Court of the Federal Court upheld a finding that dismissals were not genuine redundancies because it would have been reasonable to redeploy the employees into work that was then being performed by contractors. For a business, the redeployment question is not limited to vacant positions on an org chart: if the work the redundant employee could do is being done by someone else, including a contractor, and it was reasonable to move the employee into it, the redundancy may not be genuine.

Two practical traps follow. First, a "voluntary redundancy" is not genuine if the role continues to exist. If the employee's duties are simply redistributed among the remaining staff and the work is still being done, the position has not disappeared. Second, the label on the package does not matter: the Fair Work Commission looks at what actually happened, not what the paperwork calls it.

If the dismissal is not a genuine redundancy, the employee can apply for an unfair dismissal remedy. Under s 394 of the Fair Work Act 2009 (Cth), the application must be made within 21 days of the dismissal taking effect, unless the Commission allows a further period in exceptional circumstances. For small business employers, those with fewer than 15 employees, the Small Business Fair Dismissal Code also applies: a dismissal consistent with the Code is not an unfair dismissal.

Stage 4: What the employee is paid on exit

If the redundancy is genuine and the employee is covered by the national workplace relations system, the NES sets the statutory floor. Under s 119 of the Fair Work Act 2009 (Cth), redundancy pay is calculated at the employee's base rate of pay for ordinary hours, excluding bonuses, loadings, allowances, overtime and penalty rates. The scale depends on continuous service:

• 1 to 2 years: 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

The drop after 10 years of service surprises many people. The NES minimum actually falls to 12 weeks at that point, which is why longer-serving employees are often covered by award or agreement terms that provide more, and why enhanced packages are common for senior staff.

The NES exceptions matter when the offer is being put together. Per the Fair Work Ombudsman, an employee does not get redundancy pay if they:

• have less than 12 months of continuous service;
• are a casual employee;
• are an apprentice or a trainee employed only for the length of the training arrangement;
• were employed for a specific period, project or season; or
• were terminated for serious misconduct.

Small business employers generally do not have to pay redundancy pay under the NES at all. A small business is one with fewer than 15 employees, counted at the time of the redundancy, including full-time and part-time staff, casuals engaged on a regular and systematic basis, and employees of associated entities. There is an exception for businesses that became small through insolvency-related downsizing on or after 15 December 2023. Some awards also contain industry-specific redundancy schemes that apply instead of the NES and can require payments even from small businesses: the Fair Work Ombudsman's redundancy pay page lists the Black Coal, Building and Construction, Joinery, Manufacturing, Plumbing and Timber awards among them.

Notice of termination still applies on top of redundancy pay. Under s 117 of the Fair Work Act 2009 (Cth), the employer must give written notice of the day of termination, with a minimum period of 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 for more than five years. Employees over 45 with at least two years of service get an extra week. Payment in lieu of notice at the full rate is an alternative, and in practice the notice period is usually paid out as part of a redundancy package rather than worked.

The final pay also includes any outstanding entitlements: unused annual leave, long service leave under state law where it has accrued, and unpaid wages. One further mechanism to know about: under s 120 of the Fair Work Act 2009 (Cth), an employer can apply to the Fair Work Commission to have redundancy pay reduced if it obtains other acceptable employment for the employee or genuinely cannot pay. The reduction is a decision for the Commission, not something the employer can impose unilaterally, and the power only applies where the entitlement comes from the NES.

Stage 5: Tax treatment of the payout

For the employee, tax is often the part that makes or breaks the package. Under the Income Tax Assessment Act 1997 (Cth), a genuine redundancy payment is tax-free up to a limit that the ATO indexes each income year. The limit is calculated by reference to years of service: a base amount plus an additional amount for each completed year of service. Anything above the limit forms part of the taxable component of an employment termination payment (an ETP), which is taxed separately from ordinary income at concessional rates.

Two cautions for an employer who wants the package to be tax-effective. First, the tax-free treatment only applies if the redundancy is genuine. If the "redundancy" is really a retirement incentive or a way to remove a particular employee, the payment may not qualify and the employee's tax bill changes significantly. Second, different parts of the payout are treated differently: unused annual leave and long service leave are taxed as accrued leave payments, not as part of the ETP. Because the indexed figures change each year and the interaction between the package, the ETP cap and the employee's age can be complex, the current numbers should be confirmed with a tax adviser before the offer is finalised, not after.

Where voluntary redundancies go wrong

The failure points cluster around genuineness and process:

• No real redundancy: Offering a package to an employee whose role will keep existing, or whose duties will simply be absorbed by the remaining staff, is a dismissal dressed up as redundancy. It carries unfair dismissal risk and loses the tax treatment.
• Consultation skipped: Announcing the restructure and taking volunteers without the award or agreement consultation process means the redundancy is not genuine under s 389.
• Redeployment ignored: As Helensburgh Coal Pty Ltd v Bartley shows, the Commission looks at whether it was reasonable to redeploy the employee, including into work being done by contractors.
• The 21-day clock: An employee who believes the dismissal was not genuine has 21 days to apply to the Fair Work Commission, so a business facing a challenge needs its records of the consultation and the genuineness analysis in order quickly.
• Mass redundancies: If the business is considering making 15 or more employees redundant, it must give Services Australia written notification of the proposed dismissals before they occur, under s 530 of the Fair Work Act 2009 (Cth). Failure to comply can attract penalties.

There is also the "ordinary and customary turnover of labour" carve-out in s 119: redundancy pay is not payable where the end of the job is due to ordinary staff turnover patterns rather than an operational restructure. It rarely arises in a genuine voluntary redundancy scenario, but it is a common point of confusion.

When to bring in a lawyer

A lawyer is most useful at three points in a voluntary redundancy. Before the offer, to review whether the redundancy will be genuine, structure the consultation so it actually satisfies the award or agreement, and draft the offer and the deed of release. During negotiation, to make sure the deed does not overreach and the statutory entitlements are correctly calculated on top of any enhanced payment. And if an unfair dismissal application lands, because the business's contemporaneous records of the consultation and the genuineness analysis are its main defence, and they need to be assembled within tight time limits. A tax adviser should confirm the current tax-free limit and ETP treatment before the final figures are set.

The genuineness check decides whether the exercise works

A voluntary redundancy is not a private exit deal between an employer and an employee. It sits inside a statutory framework, and the point where value and risk concentrate is the genuineness check in s 389: the role must have disappeared for operational reasons, consultation must have happened, and redeployment must have been properly considered. Get that right, and the process delivers what both sides want: a clean exit, an agreed payment, and no claim afterwards. Get it wrong, and the business loses the tax-effective structure, faces an unfair dismissal application within 21 days, and pays for the mistake twice. The cheapest insurance is to run the consultation properly and document the analysis early, before the offers go out.