Severance pay explained

What severance pay means in Australia

"Severance" tends to turn up in employment contracts, in letters from larger employers and in overseas advice, while Fair Work guidance uses "redundancy pay". The Australian Taxation Office uses the word in a narrower sense. Its guidance on genuine redundancy lists a severance payment, meaning a number of weeks' pay for each year of service, as one part of a redundancy payout, alongside payment in lieu of notice and any gratuity or "golden handshake".

Because the term is used loosely, a "severance package" can mean just the redundancy pay or everything you're paid when you leave. If a letter or offer uses the word, it helps to ask for a breakdown so you can see which of these amounts it includes:

• Redundancy pay: the weeks of pay based on your length of service.
• Notice: either time you work out or a payment instead of it.
• Unused leave: annual leave, and long service leave if you qualify for it.
• Outstanding wages: pay for work you've already done.
• Any extra amount: a payment above your entitlements that the employer chooses or agrees to make.

The first two are tied to the redundancy itself. Unused leave and outstanding wages are owed whenever employment ends, whatever the reason, so they aren't a bonus for being made redundant. The guide to what you're owed when you're made redundant sets out the full redundancy pay scale and the first practical steps after the news.

When severance pay applies

Under the Fair Work Act, redundancy pay is owed when your employment ends at the employer's initiative because they no longer need your job done by anyone, or because the employer is insolvent or bankrupt. The Act excludes jobs that end through the ordinary and customary turnover of labour.

This means resigning doesn't bring an entitlement to redundancy pay, and neither does being dismissed for reasons connected to your performance or conduct, because the entitlement depends on the job itself no longer being needed. If your employer hires someone else to do the same role soon afterwards, that can raise a question about whether the redundancy was genuine, which is a separate issue from how much you're paid.

Who isn't entitled to redundancy pay

The NES redundancy entitlement doesn't apply if you:

• have less than 12 months of continuous service with the employer
• work for a small business employer, meaning one with fewer than 15 employees
• were employed for a specified period of time, a specified task or a season
• are dismissed for serious misconduct
• are a casual employee
• are an apprentice, or a trainee whose employment is limited to the length of the training arrangement.

If you started with an employer as a casual and later became permanent, the time you worked as a casual doesn't count towards the 12 months or towards the length of service used in the redundancy pay scale.

The small business exclusion catches people out, partly because the count isn't limited to one workplace. It includes everyone employed at the time, including the people being made redundant, casuals engaged on a regular and systematic basis, and employees of associated entities, which the Fair Work Ombudsman notes can include businesses based overseas. A shop with 10 staff that belongs to a larger group may not be a small business employer at all.

There are exceptions in the other direction, too. Some awards contain industry-specific redundancy schemes that can apply to small businesses, including those in building and construction, manufacturing and plumbing. Insolvency can also change the picture. If an employer is bankrupt or in liquidation and dropped below 15 employees because of redundancies made on or after 15 December 2023, it may still owe redundancy pay to the people it lets go afterwards, subject to rules about timing.

A fixed-term contract doesn't always rule out redundancy pay either. The Act says the exclusion doesn't apply if a substantial reason for employing someone that way was to avoid paying redundancy entitlements.

How the amount is worked out

Redundancy pay is calculated at your base rate of pay for your ordinary hours of work. It doesn't include bonuses or other incentive payments, loadings, allowances, overtime or penalty rates. If a large part of your usual income comes from shift penalties or overtime, your redundancy pay may be noticeably lower than your normal take-home pay would suggest.

For example, a hypothetical employee with three years and four months of continuous service, on a base rate of $1,500 a week for ordinary hours, would be entitled to at least 7 weeks under the NES, which comes to $10,500. That's in addition to their notice, unused leave and any wages still owing.

The scale steps down from 16 weeks to 12 weeks once someone reaches 10 years of service, and the guide to what you're owed when you're made redundant explains why. An employer covered by the NES can also apply to the Fair Work Commission to reduce the amount, or cancel it, if it finds you other acceptable employment or can't afford to pay. That option isn't available where the redundancy entitlement comes from an award or enterprise agreement.

When you could receive more than the minimum

The NES sets a floor. Your award or enterprise agreement may set a different redundancy entitlement, so it's worth checking the actual document, and the Fair Work Commission's website has a search for registered enterprise agreements. An employment contract can offer more than the NES, but it can't provide for less than the minimum entitlements in the NES or an applicable award or agreement.

Some employers also offer a payment above the minimum, particularly in a negotiated exit or a voluntary redundancy round. An offer like that is sometimes conditional on signing a deed of release. Legal Aid NSW describes a deed of release as a document in which one person gives up legal rights or claims in exchange for something, such as money, and recommends getting legal advice before signing one. Before you sign, it helps to be confident you aren't owed anything else, such as underpaid wages or leave, because the deed may stop you from pursuing it later.

How severance pay is taxed

A genuine redundancy payment is tax-free up to a limit that the ATO indexes each year, and how redundancy pay is taxed covers the full breakdown. For the 2026-27 income year, the limit is $13,598 plus $6,801 for each completed year of service. The tax-free treatment applies to the redundancy part of the payout, such as severance and payment in lieu of notice, and not to unused annual leave or long service leave, which are taxed separately. The ATO's definition of a genuine redundancy also requires that you're under Age Pension age when your job ends.

Checking your figure

The Fair Work Ombudsman's Notice and Redundancy Calculator works out redundancy pay and notice under the NES or your award using your dates of employment. It's easier to use once you have a written breakdown from your employer showing each amount, your last day and the rate used.

If the numbers don't match, the Fair Work Infoline on 13 13 94 can help you work out what you're owed. If you believe the redundancy wasn't genuine, the time limit is short: an unfair dismissal application to the Fair Work Commission must generally be made within 21 days of your employment ending.