Redundancy Payments Explained: Essential Australian Insights

Redundancies are never easy. Whether you’re an employer restructuring your team or an employee facing change, it helps to understand exactly what a redundancy payment is, when it’s owed, and how it’s calculated in Australia.

In this guide, we break down the rules in plain English, step through calculations, and flag common pitfalls so you can approach redundancy with confidence and care.

What Is A Redundancy Payment In Australia?

A redundancy payment (often called severance) is a payment an employer may need to make when a role is genuinely no longer needed. This can happen due to business downturn, new technology, a merger, or restructuring.

Under the National Employment Standards (NES), eligible employees are entitled to a minimum redundancy pay based on their continuous service with the employer, unless an exception applies (more on those below). Redundancy pay is separate from other termination entitlements (like notice and unused leave).

What Counts As A “Genuine Redundancy”?

A redundancy is generally genuine when:

• The employer no longer requires the job to be done by anyone; and
• The employer has complied with any applicable consultation obligations (usually under an award or enterprise agreement); and
• It wasn’t reasonable to redeploy the employee within the business or an associated entity.

If a dismissal is not a genuine redundancy, it could give rise to an unfair dismissal claim. It’s crucial to document your decision-making process and consultation steps.

How Is Redundancy Pay Calculated?

Redundancy pay is based on the employee’s base rate of pay for ordinary hours and their length of continuous service (the NES sets a scale of weeks that increases with service). It does not include overtime, penalty rates, bonuses or allowances.

To get a quick estimate, you can use a simple redundancy calculator, and for a deeper walkthrough of the numbers and service thresholds, see how to calculate your redundancy payment.

Base Rate Of Pay

Use the employee’s base rate (hourly or weekly) for ordinary hours. If the employee’s hours vary or they’re on a salary, convert to a weekly base rate.

Continuous Service

Count continuous service with the employer (excluding certain unpaid periods). Breaks in service can be tricky, so double-check situations like approved unpaid leave, stand down and transfers within a group.

Part-Time Or Variable Hours

For part-time employees, use their part-time base rate. If hours vary, you may need to look at a representative average. The key is to base the calculation on ordinary hours, not occasional overtime.

Tax Treatment (High-Level)

Genuine redundancy payments can receive concessional tax treatment up to a tax-free threshold, with the balance taxed at preferential rates. Other termination components (like payout of leave) are taxed differently. Because tax settings change and personal circumstances vary, it’s best to check current thresholds with your accountant before processing payroll.

What Else Is Paid On Termination (Beyond Redundancy Pay)?

Redundancy is just one component of the final payout. In most cases, you’ll also need to address notice, unused leave, and other entitlements.

Notice Or Payment In Lieu Of Notice

Employees are entitled to statutory notice (and sometimes more if a contract or award says so). If you don’t want them to work through the notice period, you can usually make a payment in lieu of notice equal to what they would have earned during that time. The length of notice depends on service and age-check your notice periods carefully before confirming figures.

Unused Annual Leave And Long Service Leave

Accrued but unused annual leave must be paid out. The same applies to long service leave where applicable, noting state and territory differences. If you’re unsure how to treat leave at termination, these guides on annual leave payout and final pay are helpful reference points.

Superannuation On Termination Payments

Whether superannuation is payable on particular termination components can vary. For example, ordinary time earnings rules apply differently to leave payouts and notice. Review your obligations around super on termination so your payroll is processed correctly.

Other Amounts

• Outstanding wages or commissions.
• Time off in lieu (TOIL) balances, if your policy or agreement requires payout.
• Any contractual entitlements (for example, a redundancy enhancement under a company policy or enterprise agreement).

Who Is Excluded From Redundancy Pay Or May Receive Different Treatment?

Not every employee is eligible for redundancy pay under the NES. It’s important to confirm eligibility before making commitments.

Small Business Employers

Employers with fewer than 15 employees (counted across the business, including some casuals who are regular and systematic) are exempt from NES redundancy pay. However, notice and other entitlements still apply, and any enhanced redundancy rights in a contract or enterprise agreement must still be honoured.

Casuals, Short-Term And Fixed-Term Employees

• Casual employees: Generally not entitled to redundancy pay.
• Fixed-term employees: No redundancy pay when the contract ends at the agreed time (unless a contract or policy says otherwise).
• Short-term employees: Under the NES, employees with less than 12 months’ service are not entitled to redundancy pay (but check any applicable instrument that could provide more generous entitlements).

Redeployment Offer

If it’s reasonable to redeploy the employee within your business or an associated entity, the redundancy may not be “genuine.” Always explore redeployment options and keep records of the roles considered, the employee’s suitability, and why any option wasn’t reasonably available.

Consultation Requirements

Many modern awards and enterprise agreements require employers to consult with affected employees and their representatives before making the final decision. Consultation typically includes explaining the change, discussing measures to reduce adverse effects, and considering feedback.

Interaction With Leave And Absences

Redundancy can intersect with leave entitlements. For example, questions often arise about employees on sick or personal leave at the time of a restructure. For context on these scenarios, see this practical overview of redundancy and sick leave.

Step-By-Step: Managing A Redundancy Process Lawfully

Getting the process right reduces legal risk and supports your people through a difficult change. Here’s a clear roadmap.

1) Plan Your Business Case

Define why the role is no longer required (restructure, new system, cost control). Confirm that the duties will genuinely cease or be redistributed among existing roles rather than replaced like-for-like.

2) Identify The Affected Positions (Not People)

Start with roles and functions. If you have multiple employees in similar roles, develop fair and non-discriminatory selection criteria (skills, qualifications, performance, operational needs). Apply criteria consistently and document the process.

3) Check Instruments And Contracts

Review any applicable modern award, enterprise agreement, policy or contract that might impose extra steps or provide enhanced redundancy benefits. Some agreements go beyond the NES-respect the most beneficial applicable term.

4) Consult Properly

Where required, consult before making final decisions. Share information about the proposed changes, invite feedback, and genuinely consider alternatives (including redeployment). Give reasonable time for the consultation to occur.

5) Explore Redeployment

List suitable roles across the business and any associated entities, the key requirements, and whether training could make a move viable. Keep clear records of these efforts.

6) Provide Written Notice

Issue a termination letter stating the reason (genuine redundancy), notice period, last day of work, and what will be paid on termination. If you’re not requiring them to work the notice period, confirm any payment in lieu of notice and how benefits will be handled.

7) Calculate The Final Payout

Calculate redundancy pay (if applicable), notice or payment in lieu, unused annual leave and long service leave, and other amounts owing. Double-check payroll categories for superannuation and tax. If needed, refer to your obligations on super on termination and the components included in final pay.

8) Provide Support And Handover

Consider offering outplacement support, references, or time for interviews during notice. Return-of-property and confidentiality reminders should be part of the handover process.

Common Questions About Redundancy Payments

Do I Have To Offer Payment If The Employee Finds Another Job During Notice?

Usually, the obligation is to provide notice (worked) or pay in lieu. If the employee leaves early by choice, you may only need to pay to the last day worked, unless the contract or policy says otherwise. Always check the contract and the applicable award.

Can I Offset A Redundancy Payment With Other Entitlements?

Redundancy pay is separate from notice and accrued leave. It generally can’t be “offset” by above-award wages unless a clear and lawful offset arrangement applies. If you’ve offered enhanced redundancy under a policy, follow your policy terms carefully.

What If The Employee Is On Probation Or A Maximum-Term Contract?

Employees with less than 12 months’ service are not entitled to NES redundancy pay. Maximum-term contracts can be complex-ending early might still involve redundancy considerations depending on the circumstances. It’s wise to get advice before making a call on termination during probation or ending fixed-term arrangements mid-stream.

Is Redundancy Pay Ever Higher Than The NES?

Yes. A contract, policy, enterprise agreement or industry instrument can provide an enhancement. In that case, the higher entitlement applies. Some employers also offer ex gratia (additional) payments to support staff through change.

How Do I Avoid Unfair Dismissal Risks?

Ensure the role is genuinely no longer required, comply with any consultation obligations, and meaningfully consider redeployment. Keep thorough records and handle communications sensitively. If a role remains but the person changes, that’s unlikely to be a genuine redundancy.

Practical Tips To Get Redundancy Right

• Be transparent and humane. Clear, timely communication reduces confusion and builds trust.
• Use a consistent selection process. Document objective criteria and decisions.
• Check every applicable instrument. The NES is the baseline-honour any more generous contract or agreement terms.
• Get the numbers right. Cross-check your figures with a redundancy calculator and the detailed guide to calculate your redundancy payment.
• Tidy up the paperwork. Ensure your Employment Contract, policies and notices reflect your process and entitlements.
• Seek guidance early for complex cases. Seniority, redeployment within a group, or overlapping awards can add complexity-it’s worth a quick check-in before you act.

Key Takeaways

• Redundancy pay compensates eligible employees when a role is genuinely no longer required-separate from notice and leave payouts.
• Eligibility and amounts depend on continuous service, the NES scale, and any more generous contract or instrument that applies.
• Most small businesses (fewer than 15 employees) are exempt from NES redundancy pay, but must still meet notice and other obligations.
• Final payouts often include notice or payment in lieu of notice, unused leave, and other amounts-confirm super on termination and the correct treatment for final pay.
• Consultation and genuine consideration of redeployment are essential to reduce legal risk and support a fair process.
• Well-prepared documents and accurate calculations help prevent disputes-consider tailored redundancy documents and quick calculation tools to streamline the process.

If you’d like a consultation on planning or processing redundancy payments for your team, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.