What is redundancy?
Redundancy happens when an employee’s role is no longer required because of changes in your business. For example, someone’s role may become redundant because of a downturn in business, a company restructure, the introduction of new technology to streamline your operations or because your business is insolvent or bankrupt. If you make your employee’s role redundant, you may decide to redeploy them (give them another job) or retrench them (terminate their employment).
It’s important to be aware of your obligations towards your employees when you make them redundant.
What is a genuine redundancy?
Knowing what a genuine redundancy is has legal implications. If you dismiss your employee due to a genuine redundancy, they cannot make an unfair dismissal claim against you. As defined by S.389 of the Fair Work Act 2009, a redundancy is genuine when:
- the employee’s job no longer needs to be done by anyone due to changes in the business’s operational needs and
- the employer has complied with consultation requirements in the award or enterprise agreement (if any).
The same section states that a redundancy is not genuine if it would have been reasonable in all the circumstances for the person to be redeployed within the employer’s enterprise or the enterprise of an associated entity of the employer.
Voluntary versus compulsory redundancy
Sometimes employers offer their employees the option to be made redundant. This is known as a voluntary redundancy. A compulsory redundancy, on the other hand, is when the employer chooses who to make redundant. Consultation obligations still apply.
Redundancy process considerations
Redundancy situations may be affected by the consultation requirements set out in modern awards and registered agreements. These frameworks generally describe how employers and employees may engage when significant workplace changes are proposed.
Consultation provisions may include sharing information about proposed changes, discussing potential impacts on affected employees, and considering feedback or suggestions raised during those discussions. The specific requirements can vary depending on the applicable award or agreement, and are typically outlined within those instruments.
When consulting your employees, here are some considerations.
The process often involves a series of conversations rather than a single decision point. Many employers begin by meeting with the affected employee to explain proposed business changes and outline how those changes may impact their role. Written information is sometimes provided to support clarity, with follow-up discussions held after the employee has had time to reflect. In some cases, employees may choose to have a support person present during later conversations.
Consultation discussions typically give employees an opportunity to share feedback, raise concerns or explore alternatives. Examples of alternatives can include temporary changes to working hours, the use of accrued leave or other arrangements that may reduce the immediate impact of the change. Redeployment to another role within the organisation may be an alternative to redundancy.
Where a decision is ultimately confirmed, organisations often communicate the outcome in a final meeting and provide written confirmation. This communication usually outlines key details such as notice periods and any applicable payments or entitlements, helping ensure employees understand the next steps and timing.
Notifying Services Australia
The Fair Work Act 2009 provides that when making 15 or more employees redundant, written notification is to be provided to Services Australia, outlining the details of the dismissals and reasons. Services Australia can provide a range of support to employers and employees in the event of redundancies.
Redundancy pay
An employee may be entitled to redundancy pay, also known as severance pay. The National Employment Standards (NES) set out the basic minimum entitlements to redundancy pay, but if the employee is covered by an award or entrprise agreement, the provisions may be different.
The amount an employee is entitled to receive usually depends on the length of their continuous service. Continuous service doesn’t include gaps in employment, such as any unpaid authorised absences, unauthorised absences or unpaid leave.
Here is a breakdown of how many weeks of pay employees are entitled to receive (redundancy pay period) under the NES, based on their periods of continuous service:
- one year but less than two years: four weeks of pay
- two years but less than three years: six weeks of pay
- three years but less than four years: seven weeks of pay
- four years but less than five years: eight weeks of pay
- five years but less than six years: 10 weeks of pay
- six years but less than seven years: 11 weeks of pay
- seven years but less than eight years: 13 weeks of pay
- eight years but less than nine years: 14 weeks of pay
- nine years but less than 10 years: 16 weeks of pay
- at least 10 years: 12 weeks of pay.
The redundancy payment is based on the employee’s base rate for the ordinary hours they would have worked over that period. Check the relevant modern award or registered agreement, as this may have other requirements regarding the length of service and amount of redundancy pay.
How to calculate redundancy pay
To work out an employee’s redundancy pay, consider this formula:
Base rate of pay x redundancy pay period = redundancy pay.
The base rate of pay is the amount the employee is paid for their ordinary hours. It does not include incentive-based payments and bonuses, loadings, monetary allowances, overtime or penalty rates.
Redundancy pay and small businesses
Small businesses with fewer than 15 employees generally do not have to pay redundancy pay. The number of employees includes those being made redundant. So, for example, an organisation with 25 employees that is making 15 redundant, is not considered a small business, even though it will only have 10 employees left.
Redundancy pay exemptions
Regardless of the size of the business, employees are generally not eligible for a redundancy payment if they:
- have not worked continuously for at least one year
- were under fixed-term contracts that have ceased
- were employed on a casual basis
- were an apprentice or trainee or
- had their employment terminated due to serious misconduct.
However, it’s important to check the requirements in the modern award or enterprise agreement. Some modern awards have industry-specific redundancy schemes, which require redundancy payments, despite the exemptions listed above. For example, the Building and Construction General On-site Award 2010 has an industry-specific redundancy pay scheme which applies to small businesses.
Reducing redundancy pay
The Fair Work Act 2009 includes provisions that allow the Fair Work Commission to reduce the amount of redundancy pay in certain circumstances. These circumstances may include situations where an employer is unable to pay the full redundancy amount or where alternative employment has been found for the affected employee.
These provisions generally apply where an employee’s redundancy entitlement arises under the National Employment Standards. Where redundancy pay is determined by a modern award or registered agreement, different arrangements may apply.
Termination notice period
If the employee is not covered by an award or enterprise agreement, notice periods for termination are outlined in the National Employment Standards (NES). These minimum notice periods are linked to an employee’s length of continuous service with an employer. As a general reference, the NES sets out the following notice periods based on service length:
- one year or less: one week
- one to three years: two weeks
- three to five years: three weeks
- more than five years: four weeks.
Notice may be worked during the notice period, or the employment may end earlier with a payment made instead of notice. Where payment in lieu of notice is used, it is typically included in the employee’s final pay and calculated based on what the employee would have earned during the notice period. This can include components such as base pay and, in some cases, additional earnings that would ordinarily apply.
Help for calculating how much notice and redundancy pay is owed can be found on the Fair Work Ombudsman’s Notice and Redundancy Calculator.
