Australia: What employers need to know about redundancy and severance pay

Redundancy is a situation where an employee's role is no longer required due to changes in your business operations. This refers to making an employee 'redundant'. For example, this might occur when you dismiss an employee due to a downturn in business, a company restructure, or where you introduce new technology to streamline your operations. An employee may be entitled to severance pay if their employment is terminated due to redundancy. This article provides a general overview of redundancy situations, outlines the process required to lawfully make an employee redundant, and explains when you may be required to make severance payments to an employee.

What is a Genuine Redundancy?

If you dismiss an employee due to a genuine redundancy, your employee does not have the right to bring an unfair dismissal claim against your business. A dismissal will be genuine if you:

• no longer require the employee's job to be performed by anyone because of changes in your business' operational requirements;
• comply with your consultation obligations under the relevant modern award or enterprise agreement (if any); and
• cannot reasonably redeploy the employee in a different role.

The contract termination must be a genuine redundancy. If the redundancy is not genuine, you risk a claim of unfair dismissal.

For example, a recent Fair Work Commission hearing found that an employee's termination was not a 'genuine redundancy.' This is because after the employee's position was made redundant, the employer made a new role with almost identical duties. Here, the employee could reasonably have been redeployed.

Redundancy Process

Where an employee is covered by a modern award you must follow the proper consultation process before making them redundant. You should follow the best practice process of:

• notification;
• consultation; and
• outcome.

These processes are described below:

1. Notification

Initially, you should hold a meeting with your employee to notify them of the proposed changes and how this might impact their employment. This is good practice as an employer. You should then provide a letter outlining the proposed redundancy and invite the employee to a second consultation meeting. Importantly, you should give your employee notice of this meeting, for example, 24 hours. You should also give your employee the opportunity to request that a support person be present.

2. Consultation

During the consultation meeting, you should provide your employee with an opportunity to raise any concerns, feedback, or alternatives to the proposed redundancy. These alternatives might include:

• reducing work hours; or
• taking accrued leave to try and ride out any downturn in the business.

You are also obliged to discuss any reasonable opportunities for redeployment as an alternative to redundancy. For example, you may consider whether you could transfer the employee to another role within your business. If there are no vacancies for redeployment available, you should communicate this to your employee.

Importantly, you should give genuine consideration to any matters your employee raises during the consultation meeting.

3. Outcome

Finally, you should hold a final meeting with your employee to confirm the outcome of the redundancy and issue a formal termination letter. This letter should confirm the redundancy and entitlements to payment upon termination.

Entitlement to Severance Pay

Additionally, the amount of severance pay that an employee is entitled to upon termination depends on their total continuous service with your business. Continuous service is a period of unbroken service with an employer and excludes periods such as unauthorised absences or unpaid leave.

The following table sets out the basic minimum entitlement to redundancy pay under the National Employment Standards (NES):

You would therefore pay the above amounts at your employee's base pay rate for their ordinary hours worked. Likewise, this amount should not include:

• loadings;
• allowances;
• incentive-based payments;
• bonuses;
• overtime; or
• penalty rates.

The NES entitlement to redundancy pay applies to all employees covered by the national workplace relations system.

In addition, a redundant employee is entitled to notice of termination, or payment in lieu of this, as well as any other outstanding entitlements, such as:

• any outstanding wages;
• accumulated annual leave; and
• long service leave.

Exemptions from Redundancy Pay

If your small business has fewer than 15 employees, you will generally be exempt from the obligation to pay redundancy pay. However, this can be affected by a:

• relevant modern award;
• enterprise agreement;
• contract of employment; or
• company policy.

The other general exemptions from redundancy pay include:

• employees with less than 12 months of continuous service with your business;
• employees under fixed-term contracts that have ceased;
• casual employees; and
• apprentices and trainees.

However, some modern awards have industry-specific redundancy schemes which require you to provide redundancy payments despite these general exemptions. Therefore, you should carefully review your obligations before making an employee redundant.

Varying Redundancy Pay

You can apply to the Fair Work Commission to vary the amount of redundancy pay that you owe to an employee in certain circumstances. This may occur where you:

• cannot afford to pay an employee redundancy pay; or
• offered an employee an option for redeployment in your enterprise or an associated entity.

Key Takeaways

You may owe employees severance pay if their employment is made redundant. Their entitlement to redundancy pay will depend on a variety of factors, such as the employee's length of service with your business, the size of your business, and any industry-specific redundancy scheme which may apply under a relevant modern award.