Making an employee redundant is one of the hardest decisions for a small business owner — and one of the most legally complex. Getting it wrong can result in unfair dismissal claims, underpayment penalties, and costly tribunal hearings. Here's what you need to know in 2026.
1. What Is a Genuine Redundancy?
A redundancy is genuine when the employer no longer requires the employee's job to be done by anyone. Common triggers:
- Business restructure or downsizing.
- Technology replacing a role (automation).
- Business closure or relocation.
- Outsourcing a function previously done in-house.
It is not a genuine redundancy if you replace the employee with someone else in the same role, or if you could have reasonably redeployed them to another position within the business.
2. Notice Periods
| Length of Service | Minimum Notice |
|---|---|
| Up to 1 year | 1 week |
| 1–3 years | 2 weeks |
| 3–5 years | 3 weeks |
| 5+ years | 4 weeks |
Employees over 45 with 2+ years of service get an additional week. You can pay in lieu of notice (payment instead of working the notice period).
3. Redundancy (Severance) Pay
Under the National Employment Standards (NES), redundancy pay applies to employees with 1+ years of continuous service:
| Years of Service | Severance Pay |
|---|---|
| 1–2 years | 4 weeks |
| 2–3 years | 6 weeks |
| 3–4 years | 7 weeks |
| 4–5 years | 8 weeks |
| 5–6 years | 10 weeks |
| 6–7 years | 11 weeks |
| 7–8 years | 13 weeks |
| 8–9 years | 14 weeks |
| 9–10 years | 16 weeks |
| 10+ years | 12 weeks |
4. Small Business Exemption
Businesses with fewer than 15 employees are exempt from paying redundancy (severance) pay under the NES. However, you must still provide the correct notice period and pay out all accrued leave entitlements (annual leave, long service leave if applicable).
5. Tax Treatment of Redundancy Payments
Genuine redundancy payments receive concessional tax treatment:
- A tax-free component (based on years of service — indexed annually by the ATO).
- The remaining amount is taxed at concessional rates (not your full marginal rate).
- If the redundancy is not genuine (e.g., you're replaced), the entire payment is taxed as ordinary income with no concession.
Key Takeaways
- A genuine redundancy means the job is no longer needed — not that the person is being replaced.
- Notice periods range from 1–5 weeks depending on service length and age.
- Severance pay ranges from 4–16 weeks based on years of service.
- Small businesses (under 15 employees) are exempt from severance pay.
- Genuine redundancy payments receive concessional tax treatment.