When a business is suffering financially or no longer need the services of an employee, it may dismiss the employee by making them redundant. When this happens, employers can calculate compensation payment and benefits, known as a redundancy payment. Understanding how redundancy payments are calculated can help you determine if you're receiving what you're entitled to when made redundant. In this article, we explain how redundancy payments are calculated, what redundancy is and outline common reasons for redundancy.
How are redundancy payments calculated?
The most relevant question for people who've been made redundant is "how are redundancy payments calculated?". Employers consider the length of continuous service of employees and their base rate of pay when calculating payment. This is true for full-time employees who've worked at a company for over a year. Casual employees and staff that have worked for less than a year at a company aren't entitled to the same benefits.
Redundancy payment calculation
The formula for calculating your redundancy payments is:
Base rate of pay x redundancy pay period = redundancy pay
Your redundancy pay period is a formally assigned period of time reflecting your years of continuous service at the company. Fair Work explains what the years of service below entitle you to:
- One to two years: four weeks redundancy pay period
- Two to three years: six weeks redundancy pay period
- Three to four years: seven weeks redundancy pay period
- Four to five years: Eight weeks redundancy pay period
- Five to six years: 10 weeks redundancy pay period
- Six to seven years: 11 weeks redundancy pay period
- Seven to eight years: 13 weeks redundancy pay period
- Eight to nine years: 14 weeks redundancy pay period
- Nine to 10 years: 16 weeks redundancy pay period
- Over 10 years: 12 weeks redundancy pay period (the decline in redundancy pay period for this group is because they're also entitled to long service leave benefits).
To understand how to calculate redundancy payment, it can be helpful to use an example. Consider a drama teacher who currently earns $91,000 and has worked eight and a half continuous years at a school that is now closing its drama department. The teacher's redundancy pay period is 14 weeks which means they are entitled to a payment or 14 weeks of their yearly salary.
Their redundancy payment would be:
1**4/52 = 0.269 x $91,000 = $24,500**
Exceptions to the rule
There are specific situations that make employees exempt from redundancy payment. We've already mentioned it doesn't apply to casual employees or staff that have worked less than a year at a company. Some situations make employers exempt from this calculation, too. Below are four situations that require different processes:
An employer could offer an employee another opportunity within their business on similar terms instead of making them redundant. The employee has a right to accept or reject the offer depending on its suitability to them. If the employee accepts, the company won't terminate their employment and the employee won't be entitled to redundancy pay.
For example, a warehouse company may close down one location. The company could offer staff at this location a position at another warehouse within their business, working the same hours. If the employees accept, they will continue working for the company at the new site. If employees don't accept, they can take the redundancy payment that matches their tenure.
When a business is sold or transferred to a new owner, it may no longer require the services of its staff. The seller and the buyer can agree on the employment of the employees. If the buyer doesn't wish to retain the employees, the seller is usually responsible for their redundancy payments. An employee agreement can factor into the business selling price as sellers can save on paying redundancy if the buyer retains the staff.
For example, consider a supermarket owner sells their business to a buyer who wants to install self check-outs. The buyer may wish to retain half of the staff, while the check-out machines replace the other employees. The seller is responsible for paying the redundancy entitlement to the employees that aren't retained.
Small business employers are exempt from paying redundancy entitlements. A small business is a company with fewer than 15 employees. This number includes employees that are being made redundant but doesn't include casual employees.
For example, if an employer has 22 staff members and makes 12 redundant, the company isn't classified as a small business and it isn't exempt from paying redundancy entitlements. However, if an employer has 22 staff and eight are casual employees, it is a small business. If this business made three full-time staff redundant, the employer isn't required to issue redundancy payments.
Unable to pay
When businesses are in a poor financial state, it may be unable to pay redundancy entitlements. Employers can apply to reduce the amount of redundancy owed. The Fair Work Commission can review this application and determine whether employers can pay a reduced amount. If the commission approves the application, how are redundancy payments calculated in this situation? Fair Work can apply a percentage reduction to the payments, and then the original formula will calculate the remaining percentage.
For example, a retail business that has had to close its stores due to a lack of sales may generate less profits and make its employees redundant. If the business's funds are below what it can pay for redundancy payments, it may receive approval for exemption.
What is redundancy?
Redundancy is when an employer dismisses an employee because the employer no longer requires their services. It's not the same as being fired due to an employee's poor performance or workplace faults. The employee has no control over the factors that cause their redundancy. As losing a job can cause financial and mental difficulties, they're entitled to fair compensation.
Businesses have a responsibility to their employees when they make employees redundant. Many people have financial obligations, and it can take some time to find another job. A redundancy payment is designed to financially support redundant employees while they look for a new position.
Common reasons for redundancy
Employers commonly issue redundancy in the following circumstances:
Reduced revenue of a business
When a business has a significantly reduced amount of revenue, it may need to make staff redundant.
For example, a business that sells paper may make fewer sales as global communications move to digital platforms. This can mean the business has to streamline its operations and make some people redundant to continue being operational.
New technologies replacing the work of an employee
As technology evolves to perform more human tasks, it can be a better financial investment for businesses in some situations.
For example, a car wash business may wish to change the manual washing operations to a machine car wash. It will no longer require the services of their washing team and have to make them redundant.
Changing operations of a business
Businesses adapt their operations and functionality as they evolve. This can mean some areas of the company are no longer required while new ones take over.
For example, a furniture company may transition from selling items in a physical shop to an online store. The company may close the physical store and no longer require the in-store team's services, resulting in the employer making the employees redundant.
Frequently asked questions about redundancy payments
Below we answer some of the frequently asked questions about redundancy payments:
When should I get my redundancy pay?
There is no general rule for when you should receive your redundancy payment. However, payments are typically issued on the next regular payday after you finish work. Employers can tell you the amount you'll be receiving before leaving. If it doesn't equal the amount calculated from the formula, you can check with your employer.
Do I pay tax on my redundancy payment?
Whether you pay tax on your redundancy payment depends on a couple of factors. It will be tax-free up to a specific limit based on how many years you worked for the company. The limit is a fixed dollar amount plus an additional amount for each year you served there. You may be eligible to pay tax on any amount above this tax-free threshold.
Can I get more than the minimum amount?
It is possible to be granted above-minimum redundancy compensation by your employer. Employers that are in a good financial position can offer a generous redundancy payment to loyal employees. This can enhance their reputation and be an incentive for other employees within their business, too.