Redundancy Traps and How to Avoid Them
Employers can easily fall into dispute with their employees by failing to properly handle redundancies. There is often uncertainty surrounding redundancy, in terms of handling it within the law, as well as cost.
A redundancy occurs when an employee’s job is no longer required for the business.
There are many reasons why redundancy may occur including new technology fulfilling the job obligations, when a business undertakes a restructure, becomes insolvent or bankrupt or when a business is sold and a new owner offers jobs to the vendor's existing workforce. Some employees decline the offer of employment by the new owner. In this context, an issue can arise as to whether or not redundancy payments need to be made to an employee who rejects an offer of employment by the new owner.
An employer must meet any requirements under a relevant award or enterprise agreement regarding redundancy. This includes discussions with the employee about the prospect of redundancy in view of operational changes or restructuring.
Employers need to be aware that a redundancy which does not meet the above criteria may expose them to an unfair dismissal claim. It should also be appreciated that a redundancy does not remove the need for notice or payment in lieu of notice.
Redundancy pay or what is sometimes describes as severance pay, may be payable either under a contract with the employee, pursuant to an award or industrial instrument or under the safety net provisions of the Fair Work Act 2009 (Cth) (the Act).
Some employers fall into the trap of going through a ‘redundancy’ and then immediately afterwards advertising the same position. From an employer’s perspective it is prudent to assume the former employee will check your advertised positions.
It is not uncommon for an employer to seek to portray what may in fact be, a wrongful termination of an employee, as a “redundancy”.
The employer needs to ensure that, on examination of the facts, whilst the employee may have no legal claim to a severance payment, there is no basis of a common law claim.
What is a ‘genuine redundancy’?
If an employee has been made redundant and that redundancy is a "genuine redundancy" as defined by S 389 of the Act then the employer will be able to defend a claim for unfair dismissal.
Under the Act, it is a "genuine redundancy" if:
• the person's employer no longer required the person’s job to be performed by anyone because of changes in the operational requirements of the employer's enterprise; and
• the employer has complied with any obligation in a modern award or enterprise agreement that applied to the employment to consult about the redundancy; and
• it is not reasonable for the employer to redeploy the person in the employer's enterprise or an associated entity of the employer's enterprise.
It is important that the employer who is making an employee redundant, not only complies with the consultation provisions of any applicable award or enterprise agreement, but also makes enquiries to make sure that there is not a suitable alternative position available within the employer’s business or any other "associated entity" of the employer.
When should a redundancy payment be made?
When an employee is made redundant then usually a redundancy payment will be required by the employer and this is often called severance pay.
However, the employee is not entitled to redundancy pay under the Fair Work Act if the employee:
• is terminated other than due to redundancy, e.g. misconduct or performance issues;
• has been employed for less than 12 months;
• was employed for a fixed term and that term has ended; or
• is a casual employee.
In addition to the above, some small businesses will not have to pay redundancy pay when making an employee redundant however this is dependent on the industry and whether the employee is covered by an Award or Enterprise Agreement.
The amount of any redundancy payment is calculated by reference to the employee's years of service.
Here is a table of how to calculate redundancy pay amounts under the Act.
Redundancy pay period
Employee’s period of continuous service
with the employer on termination Redundancy pay period
1 At least 1 year but less than 2 years 4 weeks
2 At least 2 years but less than 3 years 6 weeks
3 At least 3 years but less than 4 years 7 weeks
4 At least 4 years but less than 5 years 8 weeks
5 At least 5 years but less than 6 years 10 weeks
6 At least 6 years but less than 7 years 11 weeks
7 At least 7 years but less than 8 years 13 weeks
8 At least 8 years but less than 9 years 14 weeks
9 At least 9 years but less than 10 years 16 weeks
10 At least 10 years 12 weeks*
*There is a reduction in redundancy pay from 16 weeks to 12 weeks for employees
with at least 10 years continuous service.
This is consistent with the 2004 Redundancy Case decision made by the
Australian Industrial Relations Commission.
Upon a redundancy, an employee will also be entitled to notice or payment in lieu, in addition to any redundancy payments. Employees may also be entitled to long service leave, annual leave, and other payments.
An employer may not be required to pay the redundancy for the full length of service if the employee did not have any redundancy entitlements with the employer in question, prior to 1 January 2010 when the amendments contained in the Act commenced. In those circumstances the period from which redundancy payments are calculated is 1 January 2010 rather than the full length of service.
Notice and Severance distinguished
Notice and severance payments should not to be confused. The period of notice provides the employee with a chance to seek other employment while a severance payment is intended as compensation for the loss of future entitlements to long service leave and accrued sick leave.
In conclusion - take care
It is easy to fall into one of these employment law traps and employers should be satisfied as to the circumstances that constitute a redundancy, carefully review payments to be made and comply with the Act's requirements in relation to a "genuine redundancy".
Regardless if you are an employer or employee, if you feel you need assistance call us on 61 2 9212 1099 or email firstname.lastname@example.org.