How Redundancy Pay Works in Australia: Entitlements, Calculations and Tax

Making an employee redundant is one of the more legally complex things a business has to do in Australia. The process involves Fair Work obligations, correct calculation of entitlements, specific tax treatment, and notice period requirements that all need to be right at the same time.

Get one of those wrong and the cost of the error often exceeds the cost of getting proper advice in the first place.

This guide covers everything Australian employers need to know about redundancy payments: who qualifies, how to calculate what is owed, what the current tax-free thresholds are for 2025-26, and what happens in less straightforward situations.

A redundancy payment (also called severance pay) is money paid to an employee when their job no longer needs to be done by anyone, or when the business is shutting down.

The key point here is that redundancy is about the role, not the person. A redundancy is not a dismissal for performance or conduct reasons. It is not a resignation. And it is not a fixed-term contract ending as planned.

Redundancy typically occurs when:

• A business restructures and certain roles are no longer required
• The business downsizes due to financial pressure
• Technology or automation replaces a particular function
• The business closes entirely or becomes insolvent
• Two companies merge and duplicate roles are removed

Genuine versus non-genuine redundancy

Whether a redundancy is "genuine" under the Fair Work Act matters significantly, particularly for how the payment is taxed.

A redundancy is genuine when:

• The job no longer exists
• The employer does not hire anyone else to perform the same role
• The employer has followed any consultation requirements in the applicable modern award or enterprise agreement
• The employee is under age pension age (currently 67) at the date of termination

A redundancy is non-genuine when:

• The employer fills the role again after making it redundant
• The required consultation process is skipped
• The employee is let go for performance, conduct, or other personal reasons and redundancy is used as cover

Non-genuine redundancies do not qualify for the same tax concessions as genuine ones. They are taxed as an employment termination payment (ETP) from dollar one, with no tax-free component.

This distinction matters. Getting it wrong means the employee receives incorrect tax treatment, the employer reports it incorrectly, and both parties face potential liability down the track.

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Under the National Employment Standards (NES), redundancy pay applies to:

• Permanent (full-time or part-time) employees
• Employees who have completed at least one year of continuous service
• Employees of businesses with 15 or more employees

The following employees are generally not entitled to NES redundancy pay:

• Casual employees
• Employees who have been employed for less than one year
• Employees of small businesses (fewer than 15 employees)
• Apprentices and trainees employed under a training agreement
• Employees on fixed-term contracts where the contract ends as agreed

Note that modern awards and enterprise agreements can provide redundancy entitlements that are different from the NES. Some awards contain industry-specific redundancy schemes that apply instead of, or in addition to, the NES minimums. Always check the applicable award or agreement before processing a redundancy.

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Redundancy pay under the NES is based on the employee's continuous period of service. The longer the service, the higher the entitlement, with one notable drop at the 10-year mark that regularly surprises employers.

The drop from 16 to 12 weeks at the 10-year mark is correct and intentional under the NES. It is not a typo. Long-serving employees at that threshold also have access to long service leave entitlements, which informs the calculation.

What counts as base rate of pay?

Redundancy pay is calculated using the employee's base rate of pay for their ordinary hours of work. It does not include:

• Bonuses or incentive-based payments.
• Overtime or penalty rates.
• Loadings or allowances.
  
  

Notice periods and payment in lieu

Separate from redundancy pay, employees are also entitled to a minimum notice period (or payment in lieu of notice) when their role is made redundant.

Employees aged 45 or over who have completed at least two years of continuous service are entitled to an additional week's notice on top of these minimums.

Payment in lieu of notice means the employer pays the employee for the notice period rather than requiring them to work through it. This payment is an employment termination payment (ETP) for tax purposes, which affects how it is reported and taxed. If the employee works out their notice period instead, those wages are treated as ordinary income.

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The tax treatment of a redundancy payment depends on whether it qualifies as a genuine redundancy and how much is paid. Getting this right is one of the more complex parts of processing a termination.

Tax-free component (genuine redundancy only)

If the redundancy is genuine and the employee is under age 67 at the date of termination, part of the payment is tax-free.

For 2025-26, the tax-free amount is:

Anything paid within that threshold is reported as a Lump Sum D on the income statement and is not subject to income tax. The amounts are indexed annually to average weekly ordinary time earnings (AWOTE) and are typically updated each February by the ATO.

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The amount of the genuine redundancy payment above the tax-free threshold is treated as anemployment termination payment (ETP). The entire payment is also an ETP in the case of a non-genuine redundancy.

For 2025-26, the ETP cap is $260,000 (increasing to $270,000 in 2026-27). The tax rates that apply to the taxable component depend on the employee's age:

For most employees born on or after 1 July 1964, preservation age is 60. If you are unsure which rate applies, confirm the employee's date of birth against the ATO's preservation age table before processing.

Other payments made at termination

Unused annual leave and long service leave paid at termination are not part of the redundancy payment. They are separate entitlements, reported differently on the income statement, and taxed differently depending on when the leave accrued.

Payment in lieu of notice is an ETP and should be reported and taxed accordingly, including attracting the 12% superannuation guarantee (SG) rate for 2025-26. The redundancy pay component itself does not attract SG.

Incorrect reporting of these components is one of the more common payroll errors we see when businesses process terminations without specialist support. If you are working through a redundancy that involves multiple payment components, it is worth double-checking the reporting treatment for each one separately.

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In some circumstances, an employer can apply to the Fair Work Commission to have the required redundancy amount reduced. This is only available where:

• The employer finds the employee suitable alternative employment within the same business or a related entity, and the employee unreasonably refuses it
• The employer genuinely cannot afford to pay the full redundancy entitlement

This application process only applies where the redundancy entitlement comes from the NES. Employers cannot apply for a reduction if the entitlement is set by a modern award or enterprise agreement.

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Businesses with fewer than 15 employees are generally exempt from paying redundancy under the NES, regardless of how long an employee has been with the business.

However, small business employers should check whether the applicable modern award or any enterprise agreement in place provides redundancy entitlements that apply regardless of business size. Some industry awards contain their own redundancy schemes, and the NES small business exemption does not automatically override those.

Small businesses are still required to provide the correct notice period (or payment in lieu of notice) when making someone redundant, even where the redundancy pay exemption applies.

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If a business becomes insolvent or bankrupt and cannot meet its redundancy obligations, employees may still be able to access their entitlements through the Fair Entitlements Guarantee (FEG).

FEG is a government-funded scheme that covers unpaid entitlements including redundancy pay, wages, annual leave, long service leave, and payment in lieu of notice, up to prescribed limits. Employees in this situation should contact Services Australia to make a claim.

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• Redundancy applies when a job no longer exists, not when an employee is dismissed for performance or conduct reasons
• NES redundancy pay applies to permanent employees with at least one year of service at businesses with 15 or more employees
• Entitlements are calculated based on continuous service using the employee's base rate of pay for ordinary hours
• The 2025-26 tax-free threshold for genuine redundancy is $13,100 plus $6,552 for each completed year of service
• Amounts above the threshold are taxed as an ETP at concessional rates up to the $260,000 cap for 2025-26
• Notice period entitlements are separate from redundancy pay and are taxed as an ETP
• Modern awards and enterprise agreements can provide different or additional entitlements to the NES minimums
• Small businesses (fewer than 15 employees) are generally exempt from NES redundancy pay but should check their applicable award

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Is redundancy pay tax-free in Australia?

Part of it can be. For a genuine redundancy, payments up to the ATO's annual threshold are tax-free. For 2025-26, that threshold is $13,100 plus $6,552 for each completed year of service. Anything above that threshold is taxed as an employment termination payment at concessional rates. Non-genuine redundancies receive no tax-free treatment.

How is redundancy pay calculated in Australia?

Redundancy pay under the NES is based on the employee's years of continuous service and their base rate of pay for ordinary hours. The entitlement ranges from 4 weeks for employees with 1 to 2 years of service up to 16 weeks for those with 9 to 10 years. Employees with 10 or more years of service receive 12 weeks, which is lower than the 9 to 10 year band. Bonuses, allowances, overtime, and penalty rates are not included in the base rate calculation.

How much redundancy pay is an employee entitled to after 10 years?

Under the NES, an employee with 10 or more years of continuous service is entitled to 12 weeks of redundancy pay. This is less than the 16 weeks payable for employees in the 9 to 10 year band. The reduction reflects that long-serving employees also have access to long service leave entitlements.

Do small businesses have to pay redundancy?

Generally, no. Businesses with fewer than 15 employees are exempt from NES redundancy pay obligations, regardless of how long the employee has been employed. However, small businesses should check whether their applicable modern award contains redundancy provisions that override this exemption. Small businesses are still required to give correct notice of termination.

What is the difference between genuine and non-genuine redundancy?

A genuine redundancy is one where the job no longer exists, no replacement is hired to do the same work, the required consultation obligations under the applicable award or agreement have been met, and the employee is under age pension age (67). A non-genuine redundancy is one where any of those conditions are not satisfied. The distinction matters because genuine redundancies qualify for a tax-free component and concessional ETP tax rates. Non-genuine redundancies are taxed as ETPs from the first dollar.

Does redundancy pay attract superannuation?

The redundancy payment itself (the severance component) is not subject to the superannuation guarantee. However, payment in lieu of notice is treated as ordinary time earnings and does attract superannuation at the current SG rate, which is 12% for 2025-26.

What happens if an employer cannot afford to pay redundancy?

If an employer becomes insolvent or bankrupt and cannot meet its obligations, employees may be able to claim through the Fair Entitlements Guarantee (FEG). This government scheme covers unpaid entitlements including redundancy pay up to certain limits. Claims are made through Services Australia.

Is unused annual leave part of the redundancy payment?

No. Unused annual leave is a separate entitlement paid out at termination. It is not included in the redundancy pay calculation and is taxed differently, reported as Lump Sum A on the income statement. Similarly, long service leave is a separate payment with its own tax treatment.

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Need help calculating a redundancy?

Download our free Redundancy Payment Calculator with 2025-26 ATO figures pre-loaded.

Who is Pay Cat?

Simplify Payroll. Stay Compliant.

 Pay Cat is Australian payroll software built for modern award compliance. We help businesses stay on top of their payroll obligations, including the correct calculation and reporting of termination payments. If you are working through a redundancy and want to make sure the numbers are right before you process, we are here to help. 

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