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, 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. A redundancy is genuine when:
- your employee’s job no longer needs to be done by anyone due to changes in your business’ operational needs and
- you meet your consultation requirements in the award or enterprise agreement (if any).
A redundancy is not genuine if you:
- still need someone to do your employee’s job (for example, you hire someone else to do the job)
- haven’t made a reasonable effort to give your employee another job within your business or explore other alternatives to redundancy or
- haven’t consulted sufficiently with your employee about the redundancy, as required in the relevant award or registered agreement.
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. Even in the event of a compulsory redundancy, you must satisfy your consultation obligations towards your employees.
The redundancy process
Before making an employee redundant, you must follow the mandatory consultation process. All awards and registered agreements set out certain consultation requirements. These include notifying employees about proposed changes; providing information about the changes; discussing ways to avoid or minimise any negative impact on employees; and considering employees’ ideas or suggestions about the changes. Check the award or registered agreement that covers your employee and find out exactly what the consultation requirements are.
When consulting with your employees, best practice is to follow this process:
First, hold an initial meeting with your employee to notify them about the proposed changes in your business and how they could affect their employment. Then, give your employee a letter with details about the proposed redundancy and arrange a second consultation meeting. It’s important to give your employee some time to reflect on the proposed changes, so schedule the second meeting at least 24 hours after the first meeting. You should also ask your employee if they would like a support person to be present at the second meeting.
In the consultation meeting, allow your employee to raise any concerns, give feedback or propose alternatives to the redundancy. For example, if the proposed redundancy is due to a downturn in business, alternative options could include working reduced hours or taking accrued leave until business picks up again. You must also discuss any possibilities to redeploy your employee to another part of your business as an alternative to redundancy. If you redeploy your employee to another role, they will not be terminated and will not be eligible to receive redundancy pay. You should genuinely consider any issues that your employee raises during the consultation.
The last step is to hold a final meeting where you confirm your decision in relation to their redundancy and give them a formal termination letter. This letter should include a confirmation of your employee’s redundancy, the notice period your employee is entitled to and details about any entitlements to payments.
Notifying Services Australia
If you are considering making 15 or more employees redundant, you must give Services Australia a written notification, 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.
Your 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. The amount an employee is entitled to receive depends on the length of their continuous service in your business. 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 your employees are entitled to receive (redundancy pay period) based on their periods of continuous service in your business:
- 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 should be based on your employee’s base rate for the ordinary hours they would have worked over that period. Check the relevant modern award or registered agreement, as they may have other requirements regarding the length of service and amount of redundancy pay.
How to calculate redundancy pay
To work out your employee’s redundancy pay, use this formula:
Base rate of pay x redundancy pay period = redundancy pay.
The base rate of pay is the amount you pay your employee 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
If you run a small business with fewer than 15 employees, you generally do not have to pay redundancy pay. The number of employees includes those who you are making redundant. So, for example, if you have 25 employees and you make 15 redundant, you are not considered a small business, even though you only have 10 employees left.
Redundancy pay exemptions
Regardless of the size of your business, employees are not eligible for a redundancy payment if they:
- have not worked continuously in your business 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 that covers your employees. Some modern awards have industry-specific redundancy schemes, which require you to make 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
You may apply to the Fair Work Commission for a reduction of the redundancy pay amount. You can do this if you cannot afford to pay the full redundancy pay amount or if you find other acceptable employment for your employee. However, you can only apply to the Fair Work Commission if your employee’s entitlement to redundancy pay is based on the NES. You cannot apply if your employee is entitled to redundancy pay under a modern award or registered agreement.
Termination notice period
You are required to give your employees notice when you terminate their employment. The minimum notice periods are set out in the NES and vary according to how long your employee has worked continuously (continuous service) in your business. Here are the minimum notice periods based on continuous service:
- One year or less: one week’s notice
- One to three years: two weeks’ notice
- Three to five years: three weeks’ notice
- Over five years: four weeks’ notice
Your employee can work during the notice period. Or, considering that your employee’s role is no longer required, you may prefer to pay out their notice period by making a payment in lieu of notice. This payment must be included in their final pay in addition to any redundancy pay. Payment in lieu of notice is calculated at the full pay rate that your employee would have received if they had worked through the notice period. So, this can include incentive-based payments and bonuses, loadings, allowance and overtime or penalty rates.
If you need help calculating how much notice and redundancy pay you owe your employee, you can use the Fair Work Ombudsman’s Notice and Redundancy Calculator.
If you are considering making employees redundant, being aware of your obligations will help to maintain positive relationships with your employees and minimise your risk of facing unfair dismissal claims. Make sure that you:
- check the modern award or registered agreement that covers your employees to find out what the consultation requirements are
- find out if you owe your employees a redundancy payment
- find out how much termination notice you are required to give your employees.