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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 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 redundancy payment.

1. What Is a Redundancy?

Making an employee redundant means that you have dismissed them. In contrast to being fired due to the employee’s poor performance or other fault, redundancy is caused by factors out of the employee’s control. This could include:

  • declining economic conditions leading to poor business performance;
  • new technologies or processes replacing the employee;
  • changing initiatives and functions of your business.

For example, if your business transitions from selling goods in a physical shop to an online store, you no longer require in-store salespeople. Here, you can make this position redundant.

Genuine Redundancy

redundancy will be genuine if:

  • you no longer require an employee’s role due to your business’ operational requirements;
  • the employee’s role is covered by an award that requires redundancy pay and you complied with its consultation obligations; and
  • you have considered redeploying the employees within your business or other related entities.

For example, if you are closing your Sydney CBD store but your shop in Bondi will continue to operate, you could ask in-store salespeople to continue working in Bondi.

Defending Unfair Dismissal Claims

If you have satisfied these conditions and you terminate an employee’s position on account of redundancy, you will be in a good position to defend an unfair dismissal claim or a general protections claim

An unfair dismissal claim can arise if you: 

  • do not have a good reason to terminate the employee; 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, with consideration of the factors outlined above. This proof will help protect you if an employee takes legal action.

2. How to Calculate Redundancy Pay Entitlements?

Within the exception of casual employees, any employee with more than one year of continuous service is entitled to redundancy pay. Their payment will depend on the length of their continuous service and their base rate of pay.

The formula for calculating your redundancy payment is:

Base Rate of Pay x Redundancy Pay Period = Redundancy Pay

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 1 year but less than 2 years

4 weeks

At least 2 years but less than 3 years

6 weeks

At least 3 years but less than 4 years

7 weeks

At least 4 years but less than 5 years

8 weeks

At least 5 years but less than 6 years

10 weeks

At least 6 years but less than 7 years

11 weeks

At least 7 years but less than 8 years

13 weeks

At least 8 years but less than 9 years

14 weeks

At least 9 years but less than 10 years

16 weeks

At least 10 years

12 weeks

Notably, the redundancy pay period declines to 12 weeks after 10 years of service because these employees are also entitled to long service leave entitlements.

3. Exceptions


Instead of making an employee redundant, you could offer them a redeployment opportunity within your business or a related entity on similar terms to their current employment. If they accept the redeployment offer, the employee: 

  • will not be terminated; and 
  • is not entitled to redundancy pay.

For example, you could offer a warehouse foreman at one of your closing distribution centres a position at another warehouse that your business operates. 

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.

For example, you might sell your car wash business to a buyer who wishes to replace your hand-wash services with a machine. Your existing employees will become redundant as a result of the sale and you will be responsible for paying their entitlements.

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.

For example, you may sell a fashion retail shop to a buyer who plans to engage a salesperson on substantially the same terms as you offered. This could include similar: 

  • pay, 
  • commission scheme, 
  • in-store discounts and 
  • seniority of position. 

In this situation, the employee has no entitlement to redundancy pay.

This does not apply in circumstances where a shareholder sells their ownership stake to a buyer, as the employing entity remains the same company.

Small Business Employer

If you operate a small business, you are exempt from paying redundancy entitlements. A small business is any company with fewer than 15 employees at the time of the redundancy. This means the total number of employees includes those that you are making redundant.

For example, if you have 30 employees but you are making 20 of them redundant, you are not classified as a small business even though you only have 10 employees left.

Additionally, casual employees are not included in the total number of employees unless you employ them on a regular and systematic basis.

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 owed. The Fair Work Commission may determine whether to reduce the amount, including by up to 100% of the entitlement.

Key Takeaways 

If you choose to make employees redundant, it is key to consider the amount of redundancy pay that you owe to: 

  • avoid an employee claim; and 
  • 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. You should also review any applicable exceptions which could release or reduce the redundancy entitlement payable. If you need advice about conducting a redundancy including employees’ redundancy pay entitlements, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions about Redundancy Entitlements

When should I get my redundancy pay?

In situations where you are entitled to receive severance pay (or a redundancy entitlement), you should generally be paid when you finish work or on the next regular payday. This will depend on the pay cycle of your employer.

How much tax do I pay on redundancy?

The tax you pay on redundancy depends on a number of factors. Your 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’ service you have served with your employer. This limit is a dollar amount plus an amount for each additional year of completed service in your period of employment.

How is a redundancy payment calculated?

Your redundancy payment is calculated according to any relevant award or under the National Employment Standards (NES). Generally, the pay will depend on the employee’s period of continuous service.

How many weeks per year do you get for redundancy?

The number of weeks you receive for a redundancy will depend on how many years of continuous service. For example, you may receive four weeks of pay if you have worked for at least one year but less than two years.

Does a redundancy payment count as income?

A genuine redundancy payment is considered tax-free up to a certain limit. This is calculated based on the number of whole years of service. Unlike severance payments, the tax-free limit on genuine redundancy payments is not calculated on a pro-rata basis for years of service.


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