Redundancy Pay in Australia: Calculating Severance Entitlements Under the NES

What Is a “Genuine Redundancy”?

Redundancies are a fact of business life – roles change or become unnecessary, leading employers to let employees go for operational reasons. In Australia, when an employee is dismissed due to a genuine redundancy, they are often entitled to a severance payment known as redundancy pay. A genuine redundancy has a specific meaning under the Fair Work Act: it’s when the employer no longer needs the job to be done by anyone (for example, due to restructuring, downturn, or closure), and the employer has met any consultation obligations in an award/enterprise agreement, and there’s no reasonable opportunity to redeploy the employee elsewhere in the businesslawhandbook.sa.gov.au. If those conditions are met, the dismissal is a genuine redundancy (and thus not an unfair dismissal).

For Australian employers, it’s crucial to understand redundancy obligations under the National Employment Standards (NES), which set out minimum redundancy pay entitlements for eligible employees. This article will explain redundancy pay calculation in Australia (primary keyword), including how many weeks’ pay is due based on years of service (the NES scale), who is entitled vs. exempt (like the small business exemption), how to calculate the payment correctly (base rate of pay considerations), and the important tax treatment rules (tax-free thresholds for genuine redundancy payments). We’ll also touch on other termination entitlements that go hand-in-hand with redundancy, such as notice, unused leave, and any JobSeeker support implications.

Let’s start by outlining the NES redundancy pay scale – the foundation for calculating severance.

NES Redundancy Pay Scale: Weeks of Pay by Years of Service

The National Employment Standards provide a sliding scale of redundancy pay for employees based on their length of “continuous service” with the employer (assuming the employer is not a small business – more on that shortly). The redundancy pay entitlement is expressed in weeks of the employee’s ordinary pay. Here is the NES redundancy pay scale fairwork.gov.aufairwork.gov.au:

• 1 year (but < 2 years) of service – 4 weeks’ pay
• 2 years (but < 3 years) – 6 weeks’ pay
• 3 years (but < 4 years) – 7 weeks’ pay
• 4 years (but < 5 years) – 8 weeks’ pay
• 5 years (but < 6 years) – 10 weeks’ pay
• 6 years (but < 7 years) – 11 weeks’ pay
• 7 years (but < 8 years) – 13 weeks’ pay
• 8 years (but < 9 years) – 14 weeks’ pay
• 9 years (but < 10 years) – 16 weeks’ pay
• 10 years or more – 12 weeks’ pay (Yes, the entitlement actually decreases at 10+ years; more on this quirk below)

This scale means, for example, an employee with 4.5 years service gets 8 weeks; 7.2 years service gets 13 weeks; 10 or more years gets 12 weeks. You might notice it goes up to 16 weeks at 9+ years, then drops to 12 at 10. That’s not a typo – under the NES, once an employee hits 10 years, they often qualify for long service leave, and the redundancy pay entitlement reduces (from 16 back down to 12 weeks) fairwork.gov.aulawhandbook.sa.gov.au.

A helpful way to think of it: the maximum NES redundancy pay is 16 weeks, applicable to someone just under 10 years service. At 10+ years, it’s capped at 12 weeks. In practice, some employers still voluntarily pay more for long-tenured staff, but the legal minimum is as above.

It’s important to note that these are minimum entitlements. If an employee’s contract or an enterprise agreement provides a more generous redundancy scheme, that would apply. Also, a few specific modern awards contain their own redundancy pay provisions (though most simply defer to the NES). Always check if an industry-specific redundancy scheme exists in an award covering your staff, but for most employers, NES is the guide.

Continuous service: Only service with the employer counts, but it includes authorized leave (e.g. annual leave, personal leave) and excludes periods of unpaid leave (which don’t break continuity but don’t count towards length either) fairwork.gov.au. If the business has had transfers of employment or corporate restructures, be aware of transmission of business rules – an employee’s service may carry over to the new employer for redundancy calculations if they were transferred and the businesses are associated.

Finally, note that casual employees do not get redundancy pay under the NES (nor do apprentices, or employees on fixed-term contracts that ended at term, etc., as per Fair Work Act exclusions). Redundancy pay mainly applies to permanent full-time or part-time employees who are being let go due to their role being abolished.

Who Is Entitled to Redundancy Pay? (And Who Isn’t)

Not every terminated employee is entitled to redundancy pay. Let’s clarify who gets redundancy pay under Australian law, focusing on two main factors: size of the employer (small business exemption) and length of service.

• Length of continuous service: Employees must have at least 12 months continuous service with the employer to qualify for any redundancy pay fairwork.gov.aufairwork.gov.au. If someone has worked less than a year, they do not get redundancy pay (though they should still receive notice and final pay for any unused leave, etc.). Once they hit 1 year, the scale above starts at 4 weeks’ pay. (Also, as mentioned earlier, if they reach 10 years, the entitlement exists but at the lower 12-week cap.)
• Employer is not a “small business”: The Fair Work Act defines a Small Business Employer as one with fewer than 15 employees at the time of the redundancy (including associated entities and the employee being terminated). Small business employers are exempt from the requirement to pay redundancy under the NES lawhandbook.sa.gov.au. In other words, if you have 14 or fewer employees, you legally don’t have to pay redundancy pay under the NES (though any applicable award or contract could still stipulate something, so double-check those). The rationale is that small businesses might struggle with severance costs, so they’re excluded. However, be cautious: if you recently had a larger workforce and reduced below 15 through layoffs, there are anti-avoidance provisions (e.g., redundancies due to insolvency or bankruptcy of a small business might still incur some entitlement, and if multiple small-scale redundancies happened within 6 months that result in dropping below 15, the law has some safeguards lawhandbook.sa.gov.au).
• Casual, seasonal, and certain fixed-term employees: Generally not entitled. Casuals are excluded from redundancy pay (because their employment is not considered continuous in the same way, and they already receive loading in lieu of such benefits) lawhandbook.sa.gov.au. An employee on a fixed-term contract that comes to its natural end is usually not entitled to redundancy pay (that’s an expected end of employment), unless perhaps the contract was ended early by the employer. Employees terminated for misconduct or performance reasons (not genuine redundancy) also don’t get redundancy pay – it only applies when the job itself is abolished.
• Cases of redeployment: If you offer the employee a suitable redeployment in your business or an associated entity and they accept, then they aren’t truly redundant (they continue employment). If they reject a reasonable redeployment offer, you may not have to pay redundancy because arguably the redundancy was avoidable. The Fair Work Commission can also reduce redundancy pay if an employer finds other acceptable employment for the employee or cannot pay due to financial difficulty (you’d need to apply for such reduction under Fair Work Act s.120).

In summary, an entitled employee is typically a permanent employee with 1+ years service, working for an employer with 15+ employees, whose job is being genuinely cut. If those criteria aren’t met, redundancy pay might not be mandated. For instance, a company of 50 employees laying off a 8-year veteran must pay redundancy; a company of 10 employees laying off an 8-year veteran does not (under NES). Always double-check the particular situation against the Fair Work Act’s “Who doesn’t get redundancy pay” section fairwork.gov.aufairwork.gov.au and any applicable award clauses.

Now, let’s consider how to calculate the actual payment once we know someone is entitled – specifically, what “weeks of pay” means in practice.

Small Business Exemption: No Redundancy Pay for <15 Employees

As noted, the small business exemption is a crucial aspect of redundancy rules. If you are a small business employer (fewer than 15 employees), you do not have to pay redundancy pay under the National Employment Standards fairwork.gov.aulawhandbook.sa.gov.au. This is a straightforward exemption – an employee of a small business simply isn’t entitled to the NES redundancy scale we listed, regardless of their tenure. They would still receive other termination entitlements (like notice and leave payouts), but no severance pay.

Counting employees: When determining if you have fewer than 15 employees, include all full-time, part-time, and regular casual employees (casuals who are employed on a systematic regular basis). Also include any employees of associated entities (like subsidiaries) – you can’t split companies to dodge the count. Don’t include the dismissed employee themselves in the count (the law says count at the time notice is given). For example, if you have 14 employees total and you are making one redundant, you’re a small business and exempt. If you have 15, you’re not exempt for that redundancy.

Important: Some small business owners still opt to provide some redundancy payment as a gesture or as per individual contract terms, even if not legally required. That’s fine (you can pay above the minimum), but legally you wouldn’t be compelled by FWO to pay if you fall under the exemption.

There is one notable scenario: if a small business goes bankrupt or insolvent, employees might access the government’s Fair Entitlements Guarantee (FEG) for unpaid redundancy (but that’s outside the direct employer obligation scenario). Also, if a small business employer had an enterprise agreement that promises redundancy pay, that agreement overrides the exemption – you’d have to pay as per the agreement despite being small.

For all other employers (15+ employees), the NES redundancy pay rules apply. So let’s proceed assuming the employer is not exempt and now focus on correctly calculating redundancy pay.

Calculating Redundancy Pay: Using the Base Rate of Pay

Once you’ve determined how many weeks of redundancy pay are due based on the employee’s service (from the NES scale), the next step is to calculate the monetary amount. The NES specifies that redundancy pay is paid at the employee’s base rate of pay for their ordinary hours of work fairwork.gov.au. Let’s unpack that:

• Base rate of pay means the rate for the employee’s ordinary hours, not including extras like incentives, bonuses, loadings, overtime, penalties, or allowances fairwork.gov.au. It’s basically their normal hourly or weekly wage for standard hours. For a salaried employee, you could use their annual salary divided by 52 (weeks) to get the weekly base pay.
• Ordinary hours of work typically means the hours an employee normally works in a week (for a full-timer, usually 38 or whatever their contract says; for a part-timer, their regular weekly hours). If the person’s hours fluctuated, use their contracted hours or average ordinary hours.

So, redundancy pay = (base weekly pay) × (number of weeks entitlement).

Example 1: John has 6 years continuous service and earns $1,000 per week base pay. According to the NES scale, 6<7 years = 11 weeks’ pay fairwork.gov.au. His redundancy pay is 11 × $1,000 = $11,000 (tax-free up to a limit, which we’ll cover in Tax Treatment section). Note we do not include John’s usual $100/week shift allowance or his occasional overtime in that calculation – only the base $1,000.

Example 2: Sarah (from earlier) has 3 years service, base salary $52k/year (which is $1,000/week). 3<4 years = 7 weeks’ pay, so $7,000 redundancy. If Sarah regularly got a bonus or commissions, those aren’t counted in the “base rate” for calculating the redundancy pay amount – base means base.

Keep in mind:

• If the employee’s hours were permanently changed during their service (e.g., went from full-time to part-time), their base rate now is based on their current status. Redundancy pay doesn’t average the hours; it uses current ordinary hours. This can sometimes disadvantage employees who reduced hours late in their tenure. Some employers in such cases may choose to provide a bit extra, but legally it’s current base rate.
• If the employee is paid above-award, their actual base pay (higher rate) is used. If they’re paid an annualised salary that was meant to cover penalties, you might need to break down what the base ordinary rate equates to. However, in a recent Federal Court case involving managers at Coles/Woolworths, the court highlighted the importance of having proper records of base and overtime; for redundancy, generally use the salary as base (since that’s their ordinary pay arrangement).

Pro tip: Use the FWO’s Notice and Redundancy Calculator fairwork.gov.au – it’s a handy online tool where you input the employee’s start date, end date, age, etc., and it computes the required notice and redundancy pay.

Also, document your calculation. The employee should ideally be given a letter explaining: “As you have X years and Y months of continuous service, you are entitled to Z weeks redundancy pay under the NES. Your base weekly pay is $W, so redundancy pay equals Z × $W = $[amount].” This clarity can help avoid confusion.

Tax Treatment of Redundancy Pay: Tax-Free Limits and ETP

One big advantage of a payment being a genuine redundancy (as defined by the ATO and Fair Work) is preferential tax treatment. In Australia, genuine redundancy payments are tax-free up to a certain limit, and amounts beyond that become concessionally taxed as an Employment Termination Payment (ETP).

For the termination to qualify as “genuine redundancy” for tax:

• The employee must be dismissed because the job is genuinely no longer required (which aligns with our definition).
• They must be under age pension age (if they’re older, different tax rules apply).
• The payment must genuinely be severance (not for something else like unused leave or bonus – those are taxed normally).

Assuming it’s genuine, here’s how tax on redundancy pay works:

• Tax-free portion: Each financial year, the ATO sets a base amount and a per-year-of-service amount that are tax-free for genuine redundancy payouts. For example, for the 2023–24 year the tax-free limit was a base of $11,985 + $5,994 for each completed year of service ato.gov.au. For 2025–26, it has been indexed to a base of $13,100 plus $6,552 per year of service firstsuper.com.au. (These figures adjust annually for inflation – always check the current year’s threshold on the ATO website.)

  • So if someone worked 5 full years, and the base is $13,100 + $6,552×5 = $13,100 + $32,760 = $45,860 tax-free.

  • If their redundancy pay (plus payment in lieu of notice, and any ‘golden handshake’ type extra) is at or below that, the whole amount could be tax-free.

• Excess as ETP: Any portion of the redundancy/severance that exceeds the tax-free cap becomes an Employment Termination Payment. ETPs are taxed at special rates, usually much lower than normal income tax up to certain caps. The tax depends on the person’s age and the caps:

  • For 2024–25, the ETP cap is $245,000 (indexed) ato.gov.au. Within the cap, if the person is below preservation age (generally under 60), the taxable part is taxed at 32% (including Medicare) firstsuper.com.au. If they’re above preservation age (e.g. 60+), it’s 17% including Medicare firstsuper.com.au. Amounts above the cap are taxed at the top marginal rate (~47%).

  • Note: These ETP rates apply to genuine redundancy excess and other ETP components like ex gratia severance. (Unused leave payments are not ETP; they’re taxed separately at special flat rates – more on that in Other Entitlements section.)

• The employer will give the employee a PAYG Payment Summary – Employment Termination listing the tax-free amount and ETP taxable amount.

Example: Karen is made genuinely redundant after 10 years service. She’s 45 years old. Her redundancy pay under NES is 12 weeks at $1,200/week = $14,400. She also gets pay in lieu of 4 weeks’ notice $4,800. Total severance type payments $19,200. The tax-free base (2025–26) is $13,100 + $6,552×10 = $13,100 + $65,520 = $78,620. Karen’s $19,200 is well under this, so the entire $19,200 would be tax-free – meaning she pays no tax on it. (Her separate payouts for annual leave would be taxed at 30% max, as discussed later.)

Another Example: Brian is 50, with 20 years service, made redundant. He gets the max NES redundancy of 12 weeks at $2,000 = $24,000, plus the company gives an extra “thank you” payout of $10,000. Total $34,000. Tax-free cap for 20 years = $13,100 + $6,552×20 = $13,100 + $131,040 = $144,140 – so all $34k is tax-free as well (all under cap). The extra doesn’t change genuine nature since it’s still labeled a redundancy ETP and under the cap.

If someone had a very large redundancy payout, say $200k for a long tenure high-paid role, the portion above the cap would be taxed. E.g., if cap was ~$80k and they got $200k, then ~$120k gets taxed at 17% or 32% depending on age.

Remember: To qualify for tax-free status, it must be a genuine redundancy. If an employee is let go but it wasn’t genuine (e.g., performance issues disguised as redundancy), or they’re offered a role and refuse (thus not genuine), the ATO may not grant the tax-free treatment. Then the whole amount might be taxed as a normal ETP (less favorable).

It’s good practice for employers to specify in writing “this payment is made in relation to a genuine redundancy” and ensure their accounting/payroll treats it with the correct withholding (often $0 withholding up to the cap).

Other Entitlements on Redundancy: Leave Payouts, Notice and Jobseeker Support

In a redundancy situation, redundancy pay is just one part of the total separation package. Employers must also attend to several other entitlements and tasks:

• Notice of termination: Being redundant doesn’t eliminate the requirement to give notice or pay in lieu. You must still either have the employee work their notice period or pay it out. This is on top of redundancy pay fairwork.gov.au. Typically, employees with <1 year get 1 week notice, 1–3 years get 2 weeks, 3–5 years 3 weeks, 5+ years 4 weeks (plus one extra week if over 45 with 2+ years service). It’s common to pay this out along with the redundancy pay so the termination can take effect immediately, but some employers have the employee serve the notice performing handover or job search. Note: If the employee works through the notice while knowing they’re redundant, the NES gives them the right to take time off to attend job interviews. While not explicitly detailed in the FWA like UK law, many awards allow a redundant employee a day off to seek new work. As a best practice, you should accommodate reasonable time for them to go to interviews during the notice period.
• Unused annual leave and long service leave: All accumulated annual leave must be paid out as usual (with leave loading if applicable) – redundancy doesn’t change this fairwork.gov.au. Likewise, any unused long service leave gets paid out. For example, if the redundant employee has, say, 13 years service and hasn’t taken their LSL, you’d pay their full LSL entitlement (and any pro-rata beyond) in cash. These payments for leave are separate from redundancy pay but will typically be processed in the same final payout. The tax on unused leave on genuine redundancy is at special withholding rates (per the ATO: unused annual leave and LSL are taxed at a maximum of 30% plus Medicare firstsuper.com.au).
• JobSeeker/Services Support: Redundant employees may be entitled to support from Centrelink, such as income support (JobSeeker Payment) once their redundancy payout period elapses. As an employer, your role is to provide them with an Employment Separation Certificate (if requested) and accurate details of the payout. Centrelink will impose an “income maintenance period” equal to the redundancy pay – meaning the employee generally can’t get JobSeeker for a period that the payout covers guides.dss.gov.au. While this isn’t your direct responsibility, being aware of it helps you answer any questions. Also, some employees might ask if you can spread payments or attribute some to “pay in lieu of notice” vs redundancy because the treatment differs; it’s best to stick to truth and legal requirements.
• Job Search Support: Although not a legal obligation, many employers offer outplacement services or counseling to redundant employees. This can include help with resume writing, time off during notice to attend career workshops, or access to an Employee Assistance Program (EAP) for counseling. Such support isn’t mandated, but it’s a beneficial practice for morale and reputation.
• Juniper Security Support Payment (JSSP)? (Clarification: The term “JSSP” isn’t commonly known in redundancy context; possibly a reference to some support program). In general, if there are any redundancy support programs by the government (like in some cases, workers in certain industries might get retraining assistance or “job transition” services funded by government), ensure employees are informed. For instance, sometimes industries have a fund (e.g., construction industry redundancy funds) or state government initiatives for retrenched workers.
• Superannuation: Note that redundancy pay is not counted as ordinary time earnings, so you generally do not owe superannuation on the redundancy pay component safeguardglobal.com. However, you still need to pay super on any wages and notice that are part of their final pay (since those are for work or a pay in lieu of work). Some employers choose to contribute a portion of the redundancy into the employee’s super as a gesture or per policy, but compulsory SG doesn’t apply to the severance component.
• Documentation: Provide the employee with written notice of redundancy, outlining the reason (job no longer required) and their last day. Also, a letter breaking down their final pay components (notice, redundancy, leave, etc.) helps. As mentioned, complete a Separation Certificate for Centrelink if asked, and the PAYG summary for ETP.

In essence, a redundancy termination involves all normal end-of-employment processes (notice, final pay, certificate) plus the additional severance payment. It’s a more expensive and somewhat more administratively heavy termination for the employer, but handling it correctly ensures you meet legal obligations and treat the employee fairly during a difficult time.

Lastly, let’s mention the government’s tax-free limit again in simple terms: if you’re offering a redundancy package, it can soften the blow for the employee to know that (for example) “the first $80,000 of your payout is tax-free.” Encourage them to seek financial advice if needed, and ensure you categorize the payments correctly in payroll so they get the right tax treatment.

Key Takeaways on Redundancy Pay

Redundancy situations are challenging, but understanding your obligations makes the process smoother. Here are the main points Australian employers should remember about redundancy pay and entitlements:

• Ensure it’s a genuine redundancy: Redundancy pay is only required when a role is genuinely eliminated. Always check if redeployment is possible and follow any consultation rules in awards to meet the definition of genuine redundancy lawhandbook.sa.gov.au.
• Know the NES scale: Redundancy pay under the NES ranges from 4 weeks to 16 weeks’ pay based on years of service lawhandbook.sa.gov.aulawhandbook.sa.gov.au, then 12 weeks for 10+ years. Use the employee’s continuous service length to find the correct weeks and multiply by their base weekly pay.
• Small businesses are exempt: If you have fewer than 15 employees, NES redundancy pay typically doesn’t apply lawhandbook.sa.gov.au. (Be sure to count headcount correctly and check any other agreements before assuming exemption.)
• Calculate using base pay only: Remember that redundancy is paid at the base rate for ordinary hours – exclude overtime, bonuses, etc., in the calculation fairwork.gov.au. This ensures consistency and compliance with the Fair Work Act definition.
• Tax benefits of genuine redundancy: A portion of genuine redundancy payments is tax-free up to a generous limit, which increases with each year of service firstsuper.com.au. Amounts above the limit are taxed concessionally as ETP. This means employees keep more of their payout.
• Don’t forget other payouts: Redundancy pay is in addition to notice (or notice pay) and unused leave payouts. Employees still must get their annual leave and long service leave entitlements paid out, and notice of termination given or paid. All these should be handled together during the process.
• Plan the process: Provide written notice of redundancy, and if the employee will work through their notice period, allow time off for job hunting as appropriate. If you pay in lieu of notice, clarify that in the final payment. Give the employee any resources available (outplacement, separation certificate for Centrelink, etc.) to support their transition.

By handling redundancies transparently and lawfully, you mitigate risk of claims and help the affected employee move forward. For more detailed guidance or if you’re unsure about any aspect (like calculating complex entitlements), don’t hesitate to consult the Fair Work Ombudsman’s tools or get professional HR/legal advice.

Need assistance calculating redundancy and other termination pay correctly? WorkStem’s all-in-one HR platform can help automate these calculations in line with Australian law, ensuring you stay compliant. Book a consultation with us to learn how we can streamline your HR and payroll processes – especially useful during challenging events like redundancies. You can also download our free Redundancy Checklist for Employers, covering all steps from consultation to final payments.