In Short
- Redundancy pay is based on the employee’s years of service and the National Employment Standards (NES).
- Not all employees are eligible for redundancy pay under the NES.
- Employers can seek a reduction in redundancy pay if they cannot afford the full amount or find other suitable employment.
Tips for Businesses
Ensure you understand the redundancy pay obligations set out in the NES, especially which employees are eligible. If you are facing financial difficulties, you may apply for a reduction in redundancy pay. Always seek legal advice to ensure compliance and avoid potential disputes.
If your business is suffering financially or no longer requires the services of a particular role or team, you might consider dismissing these employees by making them redundant. In this circumstance, you must calculate the redundancy pay that each person is entitled to. Notably, the total amount you need to pay could be a high cost to your business. You could also become vulnerable to legal claims if the redundancy is not genuine or if you incorrectly calculate a worker’s payment. This article explains:
- what redundancy is;
- how to calculate redundancy pay; and
- the circumstances where employees are not entitled to a redundancy payment.
1. What is a Redundancy?
Making an employee’s role redundant means you no longer require it. This contrasts with termination due to the employee’s poor performance or another fault. Redundancy happens because of factors out of your employee’s control. This could include:
- declining economic conditions leading to poor business performance;
- new technologies or processes replacing the employee; and
- changing initiatives and functions of your business.
You need to provide your employee with at least the minimum notice period of termination. As your employee’s role is no longer required, it is common to pay them in lieu of their notice period.
Genuine Redundancy
Redundancy will be genuine if:
- you no longer require an employee’s role to be performed by anyone due to your business’ operational requirements;
- you have complied with the consultation obligations in any modern award or enterprise agreement that covers your employee (if any); and
- you have considered redeploying the employees within your business or other related entities.
Consultation Obligations Under Genuine Redundancy
As an employer, you are required to consult potentially affected employees when making changes that impact the business and can result in redundancies. This will apply if a modern award or enterprise agreement covers the employees. To ensure you are meaningfully consulting with affected employees and discharging your obligations at law, you should:
- notify employees directly;
- provide them with information on the changes; and
- outline how the changes will affect them.
Additionally, you must allow the affected employees to voice their opinions and consider their ideas or suggestions. This requirement forms part of the consultation process. While you are not obligated to act on their recommendations, you must consider how to avoid any negative impacts from the restructuring on them.
As a final step in the process, you should consider any and all redeployment opportunities available within your business (or associated businesses), and offer these to the affected employees who have the appropriate skill set and capabilities.
Defending Fair Work Claims
You will be in a good position to defend an unfair dismissal claim or a general protections claim if you have satisfied the conditions of genuine redundancy.
An unfair dismissal claim can arise if you:
- do not have a good reason to terminate the employee (i.e. if the redundancy was not genuine); and
- have not treated them fairly in the process of dismissal.
Alternatively, an employee might make a general protections claim if you take adverse action against them because they exercised a workplace right, such as making a complaint at work.
You should keep a written record of the steps you take to make an employee redundant, considering the factors outlined above. This proof will help protect you if an employee takes legal action.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
2. How to Calculate Redundancy Pay Entitlements
Under the National Employment Standards, employees (other than casual employees) with more than one year of continuous service are entitled to redundancy pay. Their payment will depend on the length of their continuous service and their base rate of pay. A modern award, enterprise agreement, employment contract or workplace policy may entitle the employee to a higher redundancy pay than the National Employment Standards.
The formula for calculating your employee’s redundancy payment is Base Rate of Pay x Redundancy Pay Period = Redundancy Pay.
The base rate of pay is the rate payable to your employee for their ordinary hours of work but does not include:
- incentive-based payments and bonuses;
- loadings;
- monetary allowances; or
- overtime or penalty rates.
Importantly, continuous service is the period during which you employ the worker, excluding any period of:
- unauthorised absence;
- unpaid leave; or
- unpaid authorised absence.
| Period of Continuous Service | Redundancy Pay Period |
| At least one year but less than two years | Four weeks |
| At least two years but less than three years | Six weeks |
| At least three years but less than four years | Seven weeks |
| At least four years but less than five years | Eight weeks |
| At least five years but less than six years | 10 weeks |
| At least six years but less than seven years | 11 weeks |
| At least seven years but less than eight years | 13 weeks |
| At least eight years but less than nine years | 14 weeks |
| At least nine years but less than ten years | 16 weeks |
| At least ten years | 12 weeks – note that the redundancy pay period declines to 12 weeks after ten years of service because these employees are also entitled to long service leave entitlements. |
Employment Type
Employees who are not entitled to redundancy pay include:
- casual employees;
- employees employed by a small business employer (with less than 15 employees);
- an employee employed for a specified period, a specified task, or for the duration of a specified season; and
- an employee whose employment you terminate due to serious misconduct.
Redeployment
If the employee accepts an offer of redeployment to another role in the business or its related entities, then your employee:
- will not be terminated; and
- is not entitled to redundancy pay.
Business Transfer
Your business may no longer require the performance of a job because you are selling the business and transferring it to a new owner. In these circumstances, you and the buyer must come to an arrangement relating to the employees.
If the new buyer does not want to hire one of your existing employees, you may have to cover their redundancy pay entitlement.
In contrast, your employees will not be entitled to a redundancy payment if the:
- buyer wishes to continue engaging them; and
- terms of the new employment are mostly the same.
This is the case even if the employees refuse to accept the new role. However, if the buyer’s new terms of employment are not substantially the same as what you offered, you may be required to pay the employees’ redundancy pay entitlement.
Small Business Employer
If you operate a small business, you are exempt from paying redundancy entitlements. A small business has fewer than 15 employees at the time of the redundancy. This means the total number of employees includes those you are making redundant.
Inability to Pay
If you are unable to pay the redundancy pay entitlement because of your business’ poor financial performance, you can make an application to the Fair Work Commission to reduce the amount of redundancy pay you owe. The Fair Work Commission may determine whether to reduce the amount, including up to 100% of the entitlement.
Continue reading this article below the formKey Takeaways
If you choose to make employees redundant, it is key to consider the amount of redundancy pay you owe to avoid an employee claim and to anticipate the cost to your business. Once you determine the redundancy to be genuine, you should review each of the redundant employee’s continuous service against the table of entitlements. Ensure compliance with consultation obligations under relevant awards or agreements and explore redeployment opportunities within your business or related entities. Additionally, understand the exceptions where redundancy payments are not applicable, such as for casual employees or those terminated for serious misconduct, to manage your financial liabilities effectively.
If you need help with conducting a redundancy, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Most awards say that employers need to pay employees their final payment (including redundancy pay) within seven days of the employment ending. If your employee is not award-covered, it will still be best practice to pay them within seven days, or in line with their usual pay cycle.
The tax your employee pays on redundancy depends on several factors. Their redundancy pay, which must be considered a genuine redundancy payment according to the Australian Tax Office, is tax-free up to a limit based on how many years of service they have served with you. This limit is a dollar amount plus an amount for each additional year of completed service in their period of employment.
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