Settlement and exit agreements in Australia
Reviewed by Mellow Editorial Team, HR & payroll content team
Settlement and exit agreements in Australia are legally binding contracts that resolve a dispute or end an employment relationship on agreed terms, typically in exchange for a financial payment. They are common, enforceable, and worth understanding properly before you sign or offer one.
What these agreements actually do
A settlement or exit agreement (sometimes called a deed of release, separation agreement or terms of settlement) sets out what each party agrees to do — and not do — when employment ends. The employer typically pays a sum of money. The employee typically releases their right to bring certain legal claims.
Common claims covered include unfair dismissal, general protections (adverse action), unlawful termination, breach of contract and unpaid entitlements. The agreement can also address restraint of trade, confidentiality, return of property and agreed references.
What the agreement cannot do is extinguish statutory minimum entitlements that cannot be contracted out of. Final pay must still include accrued annual leave, any owed wages and applicable redundancy pay under the National Employment Standards. You cannot use a deed of release to avoid paying what the law already requires.
When employers typically use them
Settlement agreements arise in a few distinct situations:
Active dispute resolution. An employee has lodged an unfair dismissal or general protections application with the Fair Work Commission. Many of these matters resolve at conciliation — a confidential, informal process facilitated by the Commission — before they reach a formal hearing. A deed of release formalises whatever the parties agree in conciliation.
Managed exits. The employer and employee agree together that the employment relationship is not working. Rather than go through a performance management process that neither side wants, they negotiate a clean exit with a financial payment in exchange for a mutual release.
Redundancy disputes. Where there is genuine ambiguity about whether a role is truly redundant, or whether redeployment was considered, a negotiated settlement can resolve the matter without formal proceedings.
Key terms to include and understand
A well-drafted agreement should clearly address:
- Payment amount and composition. Is the payment genuine redundancy pay, an ex gratia amount, or a combination? The tax treatment differs. Genuine redundancy payments up to the tax-free threshold are not subject to PAYG withholding in the same way as ordinary wages; ex gratia amounts above that threshold generally are. Get advice on how to classify and withhold correctly before you process the payment.
- Release scope. What claims are being released? A broad release covering "all claims arising out of the employment" is common but should be read carefully. Neither party should assume it covers everything — certain discrimination claims under state or territory law may require specific wording.
- Confidentiality. Who can the employee tell, and about what? Standard carve-outs allow disclosure to legal advisers, immediate family, and as required by law. Consider whether the confidentiality obligation is mutual.
- Non-disparagement. Similar to confidentiality but focused on reputation. Both parties agree not to make negative statements about the other. Practical enforcement is limited, but the clause still carries weight.
- Reference. Agree the wording in writing. An oral commitment to give a "good reference" is difficult to rely on later.
- Return of property and systems access. Specify dates, what is to be returned, and when IT access is revoked.
Independent legal advice and the cooling-off question
Employees should get independent legal advice before signing. Practically speaking, employers often offer to contribute to the cost — a modest amount that reduces the chance of a later challenge on the basis that the employee did not understand what they were agreeing to.
There is no statutory cooling-off period for private settlement agreements in Australia the way there is in some other jurisdictions. Once a deed is executed, it is generally binding. That makes it important for both parties to be clear before signing, not after.
If the matter has been through Fair Work Commission conciliation and a formal instrument is issued (a "terms of settlement" approved by the Commission), the enforceability and enforcement mechanism may differ from a purely private deed. A lawyer familiar with Fair Work matters can advise on the distinction.
Payroll and tax obligations after settlement
The payment itself does not end your payroll obligations. You still need to:
- Withhold PAYG correctly based on the nature and classification of each component
- Report the payment through Single Touch Payroll at the time of payment
- Include the employee in your STP finalisation by 14 July following the end of the tax year
- Pay any superannuation owed on ordinary time earnings up to the date of termination — the Superannuation Guarantee (12% from 2026) applies to the ordinary earnings component, not to genuine redundancy or ex gratia amounts
Keep records of how you classified each payment component. The ATO may ask, and clear documentation is your best protection.
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This article is general information only and does not constitute legal advice. Employment law is complex and fact-specific. Seek advice from a qualified employment lawyer for your particular situation.
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