Voluntary severance in Australia and running a program step by step

If your business is facing a headcount reduction, the closure of a business unit, or a restructure that will reshape your team, a voluntary severance program can feel like the fairest way to get there. Instead of selecting people for forced redundancy, you invite employees to express interest in leaving on agreed terms. Done well, it gives people a genuine choice, protects morale, and lets you hit your cost or structure targets with fewer contested exits.

When the program is finished you should have, for each departing employee, an enforceable separation agreement that locks in the payment, the release of claims and the post-employment obligations, plus a documented record of how each expression of interest was assessed. One assumption needs correcting up front: a voluntary severance payment is not automatically a tax-free genuine redundancy payment, and a voluntary exit does not release you from the minimum notice and final pay obligations under the Fair Work Act 2009 (Cth) (the Act). Both points shape how you structure the whole program, so keep them in mind as you work through the steps below.

Before you start: the prerequisites

There is no legislated procedure for voluntary severance in the way there is for a statutory lodgement, but the process only holds up if a few things are in place first. Work through these before you say anything to staff:

• A decided business case: Headcount or cost targets, the teams or locations in scope, and the timeframe, agreed at board or owner level before anyone is approached.
• A budget model: A package formula, for example a number of weeks of pay per year of service plus notice and accrued leave, tested against the employees who might take it up.
• A defined eligible group: Which roles can express interest and which are critical and off limits, so the business is not left unable to operate.
• A decision-maker and assessor: Who approves offers and who assesses expressions of interest, with a documented process so decisions are consistent.
• A check of applicable instruments: The modern award or enterprise agreement covering your staff, including any consultation obligations, and confirmation of which National Employment Standards (NES) apply.

The items that actually trip employers up are the last two. Consultation obligations in awards and agreements are easy to overlook when participation is voluntary, yet compliance with them is part of the test for a genuine redundancy under s 389 of the Fair Work Act. And the NES cannot be contracted out of: a signed separation agreement does not stop an employee later claiming unpaid notice or redundancy pay if the statutory test is met.

The voluntary severance process, step by step

The sequence below mirrors the obligations that will apply if the program does not deliver the exits you need and you end up dismissing people. Follow it in order and keep records at every stage.

Set the program parameters and budget

Decide the shape of the package before the first announcement, and write it down:

• Package formula: The gross severance amount, typically expressed as weeks of pay per year of service, plus treatment of notice, accrued annual leave, and any earned but unpaid bonus or commission.
• EOI window and binding terms: How long employees have to express interest, and whether an expression of interest commits either party. In practice it should not, because you will not accept every application.
• Selection criteria: The skills you need to retain, the roles excluded as critical, and any eligibility rules such as excluding employees still on probation or fixed term contracts.

The NES redundancy pay scale in s 119 of the Fair Work Act is a useful benchmark when you set the package, even though a voluntary package can be structured differently: 4 weeks of pay for one to two years of service, rising through 8 weeks at four to five years, 13 weeks at seven to eight years, to 16 weeks at nine to ten years, then 12 weeks at ten years or more. Note that s 121 of the Act disapplies the statutory scale for employees with under 12 months of service and for small business employers with fewer than 15 employees. If your voluntary package is less generous than the statutory scale would have been, you need to know why, because the comparison will matter if a departing employee later argues the exit was in substance a redundancy.

Check your award and agreement obligations

Most modern awards and enterprise agreements require the employer to consult before major workplace change, and that duty can apply even where participation in the program is voluntary. Take the steps seriously: s 389(1)(b) of the Fair Work Act requires compliance with consultation obligations before a dismissal can count as a genuine redundancy, and you may still need that defence for roles you later abolish.

Also confirm the NES floors that apply to every exit:

• Notice under s 117: The minimum period is 1 week for under one year of service, 2 weeks for one to three years, 3 weeks for three to five years, and 4 weeks for five years or more, with an extra week if the employee is over 45 and has at least two years of service. You can pay out the notice instead, but the payment in lieu must be at the full rate for the hours the employee would have worked during the notice period.
• Redundancy pay under s 119: If the program is a prelude to abolishing roles, the statutory entitlement can be triggered even where the exit looks voluntary, because the test turns on whether the termination was in substance at the employer's initiative because the job was no longer required. Model this cost before you commit to a package.

Announce the program and open expressions of interest

Prepare a staff wide announcement that sets out the reasons for the program, the window for expressions of interest, how confidentiality will be handled, and what happens next. Pair it with an expression of interest form and a set of FAQs that manage expectations, including that not every expression of interest will be accepted and that decisions rest with the employer.

Give employees a realistic window, measured in weeks rather than days, so they can seek advice and decide without pressure. Treat the process as confidential so interested employees are not stigmatised, and make clear that participation is optional. If the program sits alongside a broader restructure that may end in forced redundancies, keep the communications for the two processes distinct from the start, because conflating them can undermine a genuine redundancy defence later.

Assess expressions of interest against objective criteria

Apply the criteria you published, and document the reason for accepting or declining each expression of interest. Two legal risks concentrate here:

• Discrimination: s 351 of the Fair Work Act prohibits adverse action because of protected attributes including age, sex, disability, pregnancy, family responsibilities and religion. An eligibility rule that quietly screens out older workers, or an assessment that punishes someone who recently took personal leave, is a claim waiting to happen.
• Adverse action for exercising a workplace right: s 340 of the Act protects employees from adverse action because they have exercised a workplace right, such as taking personal leave or making a workplace complaint. Unlike unfair dismissal, a general protections claim carries no minimum service period, so even short service employees can bring one.

Keep your criteria to genuine operational needs, apply them the same way to everyone, and stagger exit dates where handovers require it.

Make written offers and allow time for advice

Issue a written offer to each accepted employee that states the gross severance amount, how notice will be treated, the final date of employment, and what happens to accrued leave. Where notice is paid out rather than worked, specify the period covered and confirm the termination date in writing, consistent with s 117. If you want a handover period, use garden leave only where the employment contract allows it.

Give the employee a reasonable period to obtain independent legal or financial advice. This is not just good practice. The employee's acknowledgement that they had time to take advice and entered the agreement freely is the clause that makes the release of claims harder to attack later.

Execute the separation agreement and complete the exit

The agreement, usually drafted as a deed of release, is where you lock in the bargain. It should cover the payment, the release of claims, confidentiality, mutual non-disparagement, any ongoing restraints, assignment of intellectual property created during employment, and the return of company property. A deed has the advantage of being enforceable without consideration, which is why most employers prefer it for exits that include a release.

Then complete the operational side: pay all amounts by the due date, reconcile annual leave and any long service leave entitlement under the relevant state law, confirm the termination date in writing, revoke system access, arrange handover, and provide a certificate of service if requested.

Where employers typically get held up

The same problems tend to recur across most programs. The common ones are:

• Blurring voluntary exit with genuine redundancy: If you describe a voluntary exit as a redundancy, the employee may later claim the statutory redundancy pay, and the tax treatment can also unravel. Keep the two concepts separate in every document and conversation.
• Underpaying the NES floors: Notice and accrued annual leave are statutory minimums, not negotiating chips. Payment in lieu must be at full rate for the whole minimum notice period, and a release clause cannot waive entitlements that have already accrued.
• Selection criteria that look discriminatory: The fastest way to turn a cost saving exercise into a general protections claim is to decline expressions of interest from the employees it would suit you to lose. Objective, documented, operational criteria are your only defence.
• Rushing the decision window: Pressure an employee to decide in 48 hours and a later dispute can characterise the exit as a forced resignation, which is treated as a dismissal for unfair dismissal purposes and carries none of the benefits of a clean voluntary exit.

Where a lawyer helps

A voluntary severance program is document heavy, and the documents are where the risk lives. A legal practitioner can:

• Map the obligations first: Review the applicable award and enterprise agreement, identify the consultation duties, and calculate the NES notice and redundancy entitlements for the affected cohort so the package is benchmarked correctly.
• Draft the documents: The announcement, expression of interest form, offer letter, and separation deed, with release wording that is enforceable and confidentiality and restraint clauses that are tailored to the roles involved.
• Advise on tax treatment: Confirm which components of the package are employment termination payments (ETPs), whether any part can qualify as a tax-free genuine redundancy payment, and how the concessional ETP caps apply, so the numbers in the offer letter survive scrutiny.
• Sequence the forced redundancy round: If roles remain after the voluntary window closes, structure the follow-up so that consultation, redeployment consideration and documentation keep the genuine redundancy defence available.
• Troubleshoot the edge cases: Visa holders, employees on parental leave, safety critical roles, and employees covered by an industry specific redundancy scheme all need individual attention before an offer is made.

Keep the voluntary program separate from genuine redundancy

The distinction between a voluntary exit and a genuine redundancy is the thing that determines whether the program holds up. It decides the tax treatment of the payment, whether statutory redundancy pay is owing, and whether you keep an unfair dismissal defence for the roles you later abolish. A voluntary severance payment is generally an employment termination payment, not a tax-free genuine redundancy payment, because a payment only qualifies as a genuine redundancy payment if the job is genuinely abolished and the employee is under age pension age; leaving voluntarily is the opposite of that. The ATO applies a tax-free limit to genuine redundancy payments, indexed each year, and any amount above it is taxed as an ETP, with amounts above the ETP cap taxed at the top marginal rate. Structure the program so the documents, the language and the records all respect that boundary, and the rest of the process tends to follow.

In summary: set the parameters and budget first, check the award, agreement and NES obligations before you announce anything, run a confidential and genuinely optional expression of interest process, assess against objective criteria, and document every decision. Then execute a properly drafted deed of release for each departure, pay the entitlements on time, and keep the voluntary process distinct from any redundancy that follows. Get the tax treatment confirmed by an accountant or lawyer before the offers go out, because the payment breakdown in the offer letter is what the ATO, and a tribunal, will look at first.