Severance payments

Severance payments may be made by an employer as part of a severance agreement to help resolve an unsatisfactory employment situation by ending the employment relationship. They are over and above what a person is entitled to under their employment agreement.

The term severance is often used in place of redundancy, however redundancy payments and severance payments are different.

A severance agreement is usually made when there is no suitable solution to a problem, such as when there are no valid grounds for the employer to end the person's employment or doing so would require a lengthy formal process. A severance agreement may also be made when the employer faces risky and costly adverse action from the employee, such as a personal grievance claim or legal action.

Common situations that lead to a severance agreement include:

• the employer isn't satisfied with the employee's performance
• the employee is facing a disciplinary process
• the employee makes a personal grievance or constructive dismissal claim
• a dispute over renegotiation of position description, remuneration, or terms of employment
• claims of bullying, harassment or stress
• a dispute about the process or outcome of a restructure
• a personality clash between an employee and their manager, or between managers

Depending on the circumstances, a severance agreement can include payments for more than one reason. Payments may include:

• an extension of the required period of notice in the employment agreement
• contractual entitlements that have not yet accrued such as long service leave
• compensation for loss of future earnings for a specified period
• compensation for hurt and humiliation
• a contribution towards legal fees
• reimbursement for other costs incurred such as medical costs, relocation, career services, retraining

The make-up of a severance agreement is usually specified in the terms of settlement or other formal severance agreement documentation.

However, some agreements are subject to a confidentiality or non-disclosure clause which means the client will not be able to tell us about the details of their severance package.

It is important to distinguish between the different types of payments a person gets when their employment ends to know how they affect benefit entitlement.

Any payment the person is entitled to under their employment agreement is not a severance payment.

These include:

• holiday pay
• pay in lieu of notice
• pay in lieu of accumulated leave e.g. sick leave
• pay in lieu of completing a fixed-term contract (if it is ended early)
• redundancy payments
• retirement payments
• benefits the person became entitled to before they left e.g. bonus or incentive payments

Note some of these payments may affect the date employment ceased and may be included in the income assessment when calculating the length of the initial stand-down.

Payment received before a benefit is granted

Severance payments are included in the assessment of a person's last 26 or 52 weeks' income to determine the length of their initial stand-down.

Severance payments do not affect the date employment ceased.

Payment received after a benefit is granted

Severance payments are charged as income except for the following payments:

• compensation for hurt and humiliation
• contribution towards legal fees
• reimbursement for other costs incurred e.g. medical costs, relocation, career services, retraining

These payments must not be treated as income.