For Australian employers, severance pay constitutes a legal obligation under the Fair Work Act 2009 (Cth). Failure to comply can result in costly disputes, penalties, and reputational damage. If your business is planning workforce changes, understanding your obligations is essential.
What is Severance Pay?
So, what is severance pay? Severance pay, often referred to as redundancy pay, is payable when an employee’s position becomes redundant. It is separate from final wages, accrued leave, or notice periods, and applies primarily to permanent employees.
Who is exempt?
- Casual employees (except in some long-term arrangements).
- Employees terminated for serious misconduct.
- Employees of small businesses with fewer than 15 employees.
How to Calculate Severance Pay
Severance pay under the National Employment Standards (NES) is based on the employee’s continuous service. For example:
- 1–2 years: 4 weeks’ pay
- 3–4 years: 6 weeks’ pay
- 5–6 years: 7 weeks’ pay
- Up to 10+ years: 16 weeks’ pay
Contracts, awards, and enterprise agreements may increase entitlements, so review these carefully. Employers should also consider whether payments will be made as a lump sum or over time.
Avoiding Common Pitfalls
Many employers make mistakes that can lead to disputes or legal action:
- Misclassifying employees as casuals to avoid obligations.
- Failing to include accrued leave or notice periods in final payments.
- Not following required consultation processes for redundancies.
- Overlooking small business exemptions or special award clauses.
Mitigating Risk
- Maintain clear redundancy and termination policies.
- Document every step of the process and keep detailed records.
- Consult with a commercial/employment lawyer before implementing redundancies.
- Address disputes early and professionally to reduce risk of litigation.
Severance pay is a legal and financial responsibility for employers. Proper planning, careful calculation, and adherence to the Fair Work Act are essential to protect your business and minimise legal risk.
Engaging experienced employment law advisors before making workforce decisions is the best way to ensure compliance and safeguard your organisation. For further assistance, contact our office here.
